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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1999
COMMISSION FILE NO. 33360405
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________
AMENDMENT NO 3.
TO FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
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FLORIDA 3845 22-2671269
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<S> <C> <C>
(State of Incorporation) (Primary Standard Industrial IRS Employer I.D. Number)
Classification Code Number)
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6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
-----------------------------------
(Address, including zip code, and telephone number,
including area code of registrant's principal executive offices)
LINDA B. GRABLE, PRESIDENT
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
(Name, address and telephone number of Agent for Service)
Please send a copy of all communications to:
REBECCA J. DEL MEDICO, ESQ.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholders after the effective date of
this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest annual report to Security Holders
or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this
Form, check the following box. [___]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE REGISTRATION FEE
SHARE (1) OFFERING PRICE(1)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
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COMMON STOCK, NO PAR VALUE 5,452,242 $.53 $2,889,688.20 $ 875.66
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES B PREFERRED 8,973,769 $.53 $4,756,097.50 $1,441.24
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES G PREFERRED 955,975 $.53 $ 506,666.75 $ 153.54
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES H PREFERRED 2,591,196 $.53 $1,373,333.30 $ 416.16
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES I PREFERRED 3,471,698 $.53 $1,839,999.90 $ 557.98
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE CONVERTIBLE 2,767,296 $.53 $1,466,666.80 $ 444.44
DEBENTURE(2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR VALUE, ISSUABLE 190,625 $.53 $ 101,031.25 $ 30.60
UPON EXERCISE OF WARRANTS (2)(3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
TOTAL (4) (5) 24,402,801 $.53 $ 12,933,484 $3,919.624
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the
average high ask and low bid prices of the Registrant's Common Stock on the
NASDAQ Electronic Bulletin Board on May 14, 1999.
(2) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, this Registration Statement also covers such indeterminable additional
shares of Common Stock as may be issuable, as a result of any future
anti-dilution adjustments made in accordance with the terms of the Company's
Series B, G, H and I Convertible Preferred Stock and the Warrants. In the event
that the shares registered hereunder are insufficient to meet the conversion
requirement at the actual time of conversion, the Company will file a new
registration statement to register the additional shares.
(3) Pursuant to the amended terms of the Registration Rights Agreement between
the Company and the Series H holder, and the Registration Rights Agreements with
the Series B, G, I and the Debenture holders, the amount being registered is
100% of the number of shares that would be required to be issued if the
Preferred Stock and Debentures were converted on the day before the filing of
the Registration Statement.
(4) All of the shares of common stock registered herein will be sold by the
Selling Security Holders. In the event that the shares registered hereunder are
insufficient to meet the conversion requirement at the actual time of
conversion, the Company will file a new registration statement to register the
additional shares.
(5) A filing fee of $4,283.70 was paid in connection with the initial filing of
the Registration Statement and Amendment No. 2.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
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IMAGING DIAGNOSTIC SYSTEMS, INC.
CROSS REFERENCE SHEET
FORM S-2 ITEM NUMBERS AND CAPTION HEADING IN PROSPECTUS
- --------------------------------- ---------------------
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1. FOREPART OF THE REGISTRATION STATEMENT AND
OUTSIDE FRONT COVER OF PROSPECTUS....................................OUTSIDE FRONT COVER PAGE
2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF
PROSPECTUS...........................................................INSIDE FRONT AND OUTSIDE BACK
COVER PAGES OF PROSPECTUS
3. SUMMARY INFORMATION AND RISK FACTORS...................................PROSPECTUS SUMMARY; RISK FACTORS
4. USE OF PROCEEDS........................................................NOT APPLICABLE
5. DETERMINATION OF OFFERING PRICE........................................PLAN OF DISTRIBUTION
6. DILUTION...............................................................NOT APPLICABLE
7. SELLING SECURITY HOLDERS...............................................SELLING SECURITY HOLDERS
8. PLAN OF DISTRIBUTION...................................................FRONT COVER PAGE; PLAN OF
DISTRIBUTION
9. DESCRIPTION OF SECURITIES TO BE REGISTERED.............................DIVIDEND POLICY, DESCRIPTION OF
SECURITIES
10. INTEREST OF NAMED EXPERTS AND COUNSEL..................................LEGAL MATTERS AND FINANCIAL
STATEMENTS
11. INFORMATION WITH RESPECT TO THE REGISTRANT.............................PROSPECTUS SUMMARY, RISK FACTORS,
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION, BUSINESS, MANAGEMENT,
CERTAIN TRANSACTIONS, MARKET PRICE OF
SECURITIES AND OTHER RELATED
STOCKHOLDER MATTERS, SALES OF
UNREGISTERED SECURITIES, PRINCIPAL
STOCKHOLDERS, DESCRIPTION OF CAPITAL
STOCK, FINANCIAL STATEMENTS
12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................DOCUMENTS INCORPORATED BY REFERENCE
13 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES...........................................INDEMNIFICATION OF OFFICERS AND
DIRECTORS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION............................PART II
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS..............................PART II
16. EXHIBITS...............................................................PART II
17. UNDERTAKINGS...........................................................PART II
18. FINANCIAL STATEMENTS AND SCHEDULES.....................................FINANCIAL STATEMENTS AND SCHEDULES
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iii
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SUBJECT TO COMPLETION, DATED ________________1999.
PROSPECTUS
24,402,801 SHARES
IMAGING DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
This prospectus ("Prospectus") relates to an aggregate of 24,402,801 shares (the
"Shares") of common stock, no par value (the "Common Stock"), of Imaging
Diagnostic Systems, Inc., a Florida corporation (the "Company"). Of
the24,402,801 shares of common stock, no par value (the "Common Stock") offered
hereby, all are being sold by the Selling Security Holders. See "Selling
Security Holders". The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Security Holders.
The Common Stock is traded on the OTC Bulletin Board under the symbol "IMDS". On
May 14, 1999, the closing bid price of the Common Stock as reported on the OTC
Bulletin Board was $.53.
The Shares are held or will be acquired by certain persons ("Selling Security
Holders") named in this Prospectus. The Shares covered hereby include (i)
8,973,769 shares of Common Stock underlying the Series B Preferred; (ii) 955,975
shares of Common Stock underlying the Series G Preferred; (iii) 2,591,195 shares
of Common Stock Underlying the Series H Preferred Stock; (iv) 3,471,698 shares
of Common Stock underlying the Series I Preferred Stock; (v) 2,767,296 shares of
Common Stock underlying the Convertible Debentures; (vi) 4,426,242 Shares of
Common Stock that were issued upon conversion of previously-issued shares of
Series F, G and I Convertible Preferred Stock and (vii) 1,026,000 shares of
common stock that were issued pursuant to private placements (iv) 190,625 Shares
of Common Stock which may be issued in connection with the exercise of the
Warrants. The number of Common Stock underlying the Preferred Shares and
Convertible Debenture were calculated as if the Preferred Shares and Debenture
were converted on the day before the filing of the Registration Statement of
which this Prospectus is a part (the "Registration Statement") See "Risk
Factors" and "Selling Security Holders".
The Common Stock, Preferred Shares, Debentures and Warrants, including the
underlying common stock were acquired or will be acquired by the Selling
Security Holders in various transactions, all of which were or will be exempt
from the registration provisions of the Securities Act of 1933, as amended (the
"1933 Act"), including sales by the Company in private placements and Regulation
S transactions, the exercise of warrants by certain of the Selling Security
Holders and the conversion of convertible Preferred Stock held by certain of the
Selling Security Holders.
The Selling Security Holders may, from time to time, sell the Shares on the OTC
Bulletin Board, or on any other national securities exchange or automated
quotation system on which the Common Stock may be listed or traded, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then current market price or at negotiated prices. The Shares may be sold
directly or through brokers, or dealers. See "Plan of Distribution."
The Company will receive no part of the proceeds of any sales made by the
Selling Security Holders hereunder. All expenses of registration incurred in
connection with this offering are being borne by the Company, but all selling
and other expenses incurred by the Selling Security Holders will be borne by the
Selling Security Holders. See "Selling Security Holders."
The Selling Security Holders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the 1933 Act, and any commissions or discounts paid or given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
1933 Act.
The Shares have not been registered for sale by the Company or by the Selling
Security Holders under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration thereof under the securities laws of the States in
which transactions occur or the existence of any exemption from registration.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
THE DATE OF THIS PROSPECTUS IS MAY_, 1999
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The Shares are being offered on a continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the "Securities Act"). See "Selling
Security Holders," "Plan of Distribution" and "Description of Capital Stock".
The Company will not be responsible for the payment of any underwriting
discounts, commissions or expenses that may be payable or applicable in
connection with the sale of such Shares by the Selling Security Holders. The
Shares offered hereby will be sold from time to time at the then prevailing
market prices, at prices relating to prevailing market prices or at negotiated
prices.
This Prospectus may be used by the Selling Security Holders, or any
broker-dealer who may participate in sales of the Common Stock covered hereby.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD BE PREPARED TO SUSTAIN A LOSS OF THEIR ENTIRE
INVESTMENT. INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT
SHOULD NOT PURCHASE THESE SECURITIES. SEE "RISK FACTORS " BEGINNING ON PAGE 5 OF
THIS PROSPECTUS FOR A DISCUSSION OF MATTERS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THESE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus, which is Part I of the Registration Statement,
constitutes a part of the Registration Statement and does not contain all of the
information set forth therein. Any statements contained herein concerning the
provisions of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, with exhibits, may be obtained from the Commission's
office in Washington, DC (at the above address) upon payment of the fees
prescribed by the rules and regulations of the Commission, or examined there
without charge.
The Company is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed with the Commission can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, NW, Washington, DC 20549. Copies of this material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal office at 450 Fifth Street, NW., Washington, DC 20549. The
Commission maintains a World Wide Web site that contains reports, proxy and
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information statements and other information regarding issuers that file
electronically with the Commission, such as the Company. The address of such
site is http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents filed with
the Commission pursuant to the Exchange Act (the "34 Act"):
1. The Company's Quarterly Reports on Form 10-QSB/A for the
fiscal quarter ended December 31, 1998.
2. In addition, all documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14, or 15(d) of the
Exchange Act prior to the termination of the offering made by
this Prospectus shall be deemed to be incorporated by
reference into this Prospectus. Any statement contained in a
document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that
a statement contained in this Prospectus or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference in this Prospectus or in a
supplement hereto modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of
this Prospectus.
This Prospectus is accompanied by a copy of the Company's latest Form 10-QSB.
The Company will provide upon request, without charge, to each person to whom a
prospectus is delivered a copy of the additional documents listed above, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Such requests should be made to:
General Counsel, Imaging Diagnostic Systems, Inc., 6531 NW 18th Court,
Plantation, Florida 33313. Telephone number (954) 581-9800.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE INCORPORATED
BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED FOR PURPOSES OF
THIS PROSPECTUS TO THE EXTENT THAT A STATEMENT CONTAINED HEREIN MODIFIES OR
SUPERSEDES SUCH STATEMENT. ANY SUCH STATEMENT SO MODIFIED OR SUPERSEDED SHALL
NOT BE DEEMED, EXCEPT AS SO MODIFIED OR SUPERSEDED, TO CONSTITUTE A PART OF THIS
PROSPECTUS.
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. THESE FORWARD LOOKING
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN
THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS
INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN
THE COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY; (2) DELAYS, COSTS OR
DIFFICULTIES RELATED TO OBTAINING THE APPROVAL OF THE FOOD AND DRUG
ADMINISTRATION ("FDA") FOR THE SALE AND MARKETING OF THE COMPANIES COMPUTED
TOMOGRAPHY LASER MAMMOGRAPHY (CTLM(TM)) DEVICE ARE GREATER THAN EXPECTED; (3)
MARKET ACCEPTANCE OF THE CTLM(TM); AND (4) GENERAL ECONOMIC CONDITIONS ARE LESS
FAVORABLE THAN EXPECTED. FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT
THE FINANCIAL CONDITION OF THE COMPANY IS INCLUDED IN THE SECTION HEREIN
ENTITLED "RISK FACTORS".
3
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PROSPECTUS SUMMARY
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Prospectus under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations, including but not
limited to those " as well as in the Company's press releases or oral statements
that may be made by the Company or by officers, directors or employees of the
Company acting on the Company's 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 Prospectus should be
read as being applicable to all related forward-looking statements wherever they
appear. In "Risk Factors".
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS OR IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. REFERENCE IS
MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN.
THE COMPANY
During the first year of operations, the Company researched the interaction
between high speed, rapid pulsed (Ti-Sapphire) laser technology and various
detection technologies associated with standard computed tomographic ("CT")
schemes. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first images
and filed a total of twelve ancillary United States patents from 1996 to October
1998, two additional patents were filed in November 1998. The Company intends to
file an additional patent application within the next six months.
Since its inception in December 1993, Imaging Diagnostic Systems, Inc. (the
"Company") has engaged principally in the development of a Computed Tomography
Laser Mammography ("CTLM(TM)") device for detecting breast cancer throuGH the
skin in a non-invasive and objective procedure. The CTLM(TM) employs high-speed
pico-second pulsed titaniUM sapphire laser and proprietary scanning geometry and
reconstruction algorithms to detect and analyze tissue in the breast for indicia
of malignancy or benignancy. The components of the laser system are purchase
from two unaffiliated parties and assembled and installed into the CTLM(TM) by
the Company. See "Business". The Company IS developing a clinical atlas of the
optical properties of benign and malignant tissues with respect to absorption
and scattering parameters as laser light pulses pass through the tissue. The
CTLM(TM) device is designed to proviDE the physician with objective data for
interpretation and further clinical work-up. Accordingly, the Company believes
that the CTLM(TM) will improve early diagnosis, reduce diagnostic uncertainty,
and decrease the number OF biopsies performed on benign lesions. See "Business".
On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLMTM device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need to submit an investigational device
exemption ("IDE") application to the FDA in order to commence human clinical
trials of the device.
The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
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application. During the month of November 1996, the Company installed its device
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and three patients weRE scanned. As the
clinical trials at Strax began, there were further advances in laser technology
effecting the size and stability of the laser component. The IDE protocol at
Strax was halted, pending the receipt of the new laser manufactured by
Spectra-Physics, Inc., which was received in January 1997. Due to the purchase
of the new laser system, the Company had modify and redesign the CTLM(TM)
hardware and software in order to make it compatibLE with the new laser. Strax
was unwilling to wait until the 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, the Company 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, the Company's termination of tHE IDE protocol and its
final report was accepted by the FDA. See "Business-Regulatory and Clinical
Status-United States/FDA".
The Company was granted, in June 1998, its second investigational device
exemption ("IDE") to conduct clinical trials. An IDE allows a company to conduct
human clinical trials without filing an application for marketing clearance. The
Company was authorized to scan 20 patients at the Company's in-house facilities
in Plantation, Florida and upon FDA approval, at three additional clinical
sites. On September 1 and September 10, 1998, the Company formally submitted the
first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA. The FDA responded to the
submission on October 1998 asking that the Company limit future submissions to
significant findings, milestones, annual reports, or changes that may effect the
safety of the CTLM(TM). In all the Company scanned 20 women at its 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. 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. The Company immediately supplied the additional
documentation required by the FDA and the conditions were complied with. 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 1999,
however due to renovations at Nassau County Medical Center, the delivery of the
CTLM(TM) was postponed until the renovations were complete. On March 3, 1999 the
CTLM(TM) SysteM WAS shipped to Nassau County Medical Center and was installed,
calibrated, and ready to scan on April 19, 1999. Due to unforeseen problems at
the Nassau County Facility which are discussed in detail in "Business-Clinical
and Regulatory Status, no patients have been scanned to date. The testing is
designed to develop diagnostic criteria for CTLM(TM) images. The Company has
entered into discussions with hospitals in Chicago, Boston and NEW York for
potential clinical test sites. Although no firm commitments have been obtained
from these hospitals, the Company believes that it will be able to expand the
clinical testing to these areas. In order to expand its clinical trials to other
sites,the IDE application which includes Nassau County would have to be amended
by supplying the required documentation i.e. the protocol, signed investigator
agreement, IRB approvals and the informed consent form. See "Risk
Factors-Government Regulation". See "Business-Regulatory and Clinical
Status-United States/FDA" and Business Government Regulations"
The Company's executive offices are located at 6531 NW 18th Court, Plantation,
Florida 33313. Its telephone number is (954) 581-9800.
5
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THE OFFERING
SECURITIES OFFERED BY SELLING SECURITY HOLDERS
COMMON STOCK 12 24,402,801
EQUITY SECURITIES OUTSTANDING
COMMON STOCK 43,908,2091
SERIES B PREFERRED SHARES 390
SERIES G PREFERRED 38
SERIES H PREFERRED 103
SERIES I PREFERRED 138
WARRANTS 508,1253
OPTIONS 4,128,3713
1 ) Pursuant to the terms of the Registration Rights Agreements between the
Company and the Preferred and Debenture holder, the amount being registered and
included herein is 100% of the number of shares that would be required to be
issued if the Preferred Stock and Debenture were converted on the day before the
filing of the Registration Statement. The Company believes that this is a good
faith estimate of the number of shares needed for conversion. In the event that
additional shares are needed to meet conversion requirements, the Company will
file a new registration statement to register the additional shares. See "Sales
of Unregistered Securities".
2) Does not include shares of common stock underlying the conversion privileges
in the Series B, G, H and I Convertible Preferred Shares and the Debenture
which, for the purpose of this Prospectus, are estimated at 8,973,769, 955,975,
2,591,195 3,471,296 and 2,767,296 respectively, warrants and options to purchase
508,125 and 4,128,371 shares respectively and 3,500,000 shares to be issued is
connection with the Patent Licensing Agreement. See "Sales of Unregistered
Securities".
3) The options were issued in connection with the Company's Stock Option Plan
and/or in connection with Employment Agreements. The exercise price of the
options range from $.55 to $4.35 per share. The warrants were issued to
consultants, finders, and private placement investors. The exercise price of the
warrants range from $1.09 to $5.00.
TRADING SYMBOL IMDS
USE OF PROCEEDS The Company will not receive any
proceeds from the sale of common stock
by the Selling Shareholders.
RISK FACTORS AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD REVIEW CAREFULLY
AND CONSIDER THE FACTORS DESCRIBED
IN "RISK FACTORS."
RISK FACTORS
IN MAKING AN INVESTMENT DECISION, PROSPECTIVE PURCHASERS SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THOSE DESCRIBES ELSEWHERE.
6
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LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company has a limited history of operations. Since its inception in December
1993, the Company has engaged principally in the development of the CTLM(TM).
which has not been approved for sale in the United StateS. Consequently, the
Company has little experience in manufacturing, marketing and selling its
products. The Company currently has no source of operating revenue and has
incurred net operating losses since its inception. At March 31, 1999, the
Company had an accumulated deficit of approximately $31,904,458, after discounts
and dividends on preferred stock. Such losses have resulted principally from
costs associated with the incurred in research and development and clinical
trials and from general and administrative costs associated with the Company's
operations. The Company expects operating losses will increase for at least the
next several years due principally to the anticipated expenses associated with
the pre-market approval process for the CTLM(TM) DevicE, the anticipated
commercialization of the CTLM(TM), development of, and clinical trials for, the
CTLM(TM)and OTHER research and development activities. See "Management
Discussion and Analysis of Financial Condition and Results of Operations.
UNCERTAINTY OF FUTURE PROFITABILITY; GOING CONCERN.
The Company's ability to achieve profitability will depend in part on its
ability to obtain regulatory approvals for its CTLM(TM), develop the capacity to
manufacture and market the CTLM(TM), either by itself or in collaborATION with
others and market acceptance of the CTLM(TM). There can be no assurance if and
when the Company will receiVE regulatory approvals for the development and
commercial manufacturing and marketing of the CTLM(TM) or achieVE profitability.
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. Accordingly,
the extent of future losses and the time required to achieve profitability are
highly uncertain. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations and "Financial Statements".
The Company's has received an opinion from its auditors stating that the fact
that the Company has suffered substantial losses and has yet to generate an
internal cash flow raises substantial doubt about the Company's ability to
continue as a going concern. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations and "Financial Statements".
UNCERTAIN ABILITY TO MEET CAPITAL NEEDS.
The Company will require substantial additional funds for clinical testing of
the CTLM(TM) Device, 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). The Company's future capital requirements will depend
on many factors, including the following: the progress of its 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 the Company's existing collaborative, licensing and other
relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish; and the development of
commercialization activities and arrangements. Moreover, the Company's 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. The Company does 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) Device .
However, the Company's 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 the Company's research and development programs,
competitive and technological advances, the FDA and foreign regulatory processes
and other factors.
The Company needs additional capital to fund its operations, and is seeking to
obtain additional capital through debt or equity financing, or collaborative
licensing or other arrangements with strategic partners. 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, however, that additional
financingwill be available when needed, or if available, will be available on
acceptable terms. The Company has already granted a mortgage on its corporate
7
<PAGE>
property as security for the convertible debenture and therefore, in all
likelihood, would be unable to use such property to collaterialize any
additional financing that additional financing. Insufficient funds may prevent
the Company from implementing its business strategy and will require the Company
to further delay, scale back or eliminate certain of its research, product
development-and marketing programs and may require the Company to license to
third parties rights to commercialize products or technologies that the Company
would otherwise seek to develop itself, or to scale back or eliminate its other
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Sale of Unregistered Securities-Private Placement of
Preferred Stock", "Sale of Unregistered Securities-Debentures" "Sale of
Unregistered Securities-Private Placement of Common Stock", and "Sale of
Unregistered Securities-Equity Line of Credit", "Sale of Unregistered
Securities-Equity Line of Credit", "Description of Securities" and "Financial
Statements".
UNCERTAINTY OF FDA MARKETING CLEARANCE FOR THE CTLM(TM) .
In November 1997, the Company's clinical site at Strax Breast Diagnostic
Institute in Lauderhill, Florida was closed. In December 1997, the FDA granted
approval to include specific studies on augmented breasts as part of the
Company's extensive in-house study of the CTLM(TM). The Company was granted, in
June 1998, its secoND investigational device exemption ("IDE") to conduct
clinical trials. An IDE allows a company to conduct human clinical trials
without filing an application for marketing clearance. The Company was
authorized to scan 20 patients at the Company's in-house facilities in
Plantation, Florida and upon FDA approval, at three additional clinical sites.
On September 1 and September 10, 1998, the Company formally submitted the first
and second series of the 20 patient in-vivo (human) images and corresponding
interpretation data to the FDA. On January 14, 1999, the Company received notice
that the IDE application to extend the in-vivo investigational device 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) was postponed until such
time as the renovations were completE. On March 3, 1999 the CTLM(TM) System was
shipped to Nassau County Medical Center and was installed, calibrated, aND ready
to scan on April 19, 1999. Due to unforseen problems at the Nassau County
facility which are discussed in detail in "Business-Clinical and Regulatory
Status", no patients have been scanned to date. The testing is designed to
develop diagnostic criteria for CTLM(TM) images. The Company has entered into
discussions wiTH hospitals in Chicago, Boston and New York for potential
clinical test sites. Although no firm commitments have been obtained from these
hospitals, the Company believes that it will be able to expand the clinical
testing to these areas upon FDA approval. At the conclusion of the clinical
trials the Company will submit the PMA, if and when accepted for filing by the
FDA, it will be designated for review under the FDA's Expedited Review policy.
There can be no assurance, however, that such Expedited Review status will be
maintained or result in a more expeditious approval, or approval at all. See
"Government Regulation; No Assurance of Regulatory Approval."
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 (i) that results obtained in any
additional trials will be consistent with the results obtained in trials
conducted by the Company to date, (ii) that results obtained in any clinical
trial or series of clinical trials will be consistent among all study sites,
(iii) that 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., or (iv) that any such results, or
the filing of the PMA will be accepted by the FDA. There can be no assurance
that the FDA or other regulatory approvals for the CTLM(TM) Device will be
granted on a timely basis, or at all. Failure to obtain FDA clearance TO market
the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, caSH flows, and results of operations.
PENNY STOCK REGULATIONS AND RESTRICTIONS
The Securities Exchange Commission (the "Commission") has adopted regulations,
which generally define Penny Stocks to be an Equity Security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exemptions. At present, the market price of the
Company's Common Stock is substantially less than $5.00 per share and therefore
may be designated as a "penny stock." pursuant to the rules under the Securities
Exchange Act of 1934, as amended. Such a designation requires any broker or
dealer selling such securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser, and determine that
the purchaser is reasonably suitable to purchase such securities. These rules
may restrict the ability of Broker / Dealers to sell the Company's Common Stock
and may affect the ability of Investors to sell their Shares. The issuance of
8
<PAGE>
large amounts of common stock upon conversion and the subsequent sale of such
shares may further depress the price of the common stock. In addition, since
each new issuance of common stock dilutes existing shareholders, the issuance of
substantial additional shares may effectuate a change of control of the Company.
Moreover, since the Company's common stock is traded on the NASDAQ
over-the-counter bulletin board market, investors may find it difficult to
dispose of or obtain accurate quotations as to the value of the Company's common
stock. See "Business-NASDAQ Listing" and "Market Price of Securities and Related
Stockholders Matters".
POSSIBLE VOLATILITY OF STOCK PRICE.
The price of the Company's Common Stock has fluctuated substantially since it
began trading on the OTC Bulletin Board in September 1994. The market price of
the shares of the Common Stock, like that of the common stock of many other
medical device companies, is likely to continue to be highly volatile. Factors
such as the timing and results of clinical trials by the Company or its
competitors, governmental regulation, healthcare legislation, equity or debt
funding, developments in patent or other proprietary rights of the Company or
its competitors, including litigation, fluctuations in the Company's operating
results, and market conditions for medical device company stocks and life
science stocks in general, could have a significant impact on the future price
of the Common Stock. The Company's stock is currently traded on the OTC Bulletin
Board. The Company is seeking to be in compliance with NASDAQ SmallCap Market
Listing Requirements, however, at present. does not meet NASDAQ listing
requirements. The trading of the Company's Common Stock on the NASDAQ SmallCap
Market is conditioned upon the Company's meeting certain quantitative criteria
related to the market price of the Company's Common Stock, net tangible assets,
market capitalization and certain other quantitative and non-quantitative
requirements established by such stock market. To maintain eligibility for
trading on the NASDAQ Small-Cap Market, among other requirements, the Company is
required to have net tangible assets in excess of $4,000,000 and have a minimum
bid price of $3 per share for initial inclusion and then maintain a bid price of
$ 1 per share. See "Business NASDAQ Listing" and "Market Price of Securities and
Related Shareholder Matters".
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK POSSIBLE BARRIERS TO
TAKEOVER OR ACQUISITION The Company's Articles of Incorporation authorize the
issuance of "blank check" preferred stock with such designations, rights, and
preferences as may be determined from time to time by the board of directors.
Accordingly, the board of directors is empowered, without stockholder approval,
to designate and issue additional series of preferred stock with dividend,
liquidation, conversion, voting or other rights, including the right to issue
convertible securities with no limitations on conversion, which could adversely
affect the voting power or other rights of the holders of the Company's Common
Stock, substantially dilute the common shareholder's interest and depress the
price of the Company's common stock. In addition, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. Moreover, the substantial number
of issued and outstanding convertible preferred shares and the convertible
debentures, and their terms of conversion may discourage or prevent an
acquisition of the Company. The Company has, in the past, issued Convertible
Preferred Stock and Convertible Debentures without a limit on the number of
shares that can be issued upon conversion and may continue to do so in the
future. See "Sale of Unregistered Securities" and "Description of Securities"
The Company's outstanding Preferred Shares and Debentures are convertible based
upon discounts of 75% from the market price except for the Series B shares which
are discounted 82%. Since the conversion price of the Preferred and the
Debentures are based on a percentage of the market price, WITHOUT A LIMIT ON THE
NUMBER OF SHARES THAT CAN BE ISSUED UPON CONVERSION, in the event that the price
of the Company's common stock decreases, the percentage of shares outstanding
that will be held by the Preferred and Debenture Holders upon conversion will
increase accordingly. See "Sale of Unregistered Securities-Private Placement of
Preferred Stock", "Sale of Unregistered Securities-Debentures" and "Sale of
Unregistered Securities-Equity Line of Credit".
Due to the fact that, when converting Convertible securities issued without
limitations on conversion, including those issued by the Company, the lower the
market price the greater the number of shares to be issued to the holders of
such securities 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 stock and Debenture's potential for increased share
issuance and profit in addition to a stock overhang of an undeterminably amount
may depress the price of the Company's common stock. See "Sale of Unregistered
Securities-Private Placement of Preferred Stock", "Sale of Unregistered
Securities-Debentures" and "Sale of Unregistered Securities-Equity Line of
Credit".
9
<PAGE>
EXTENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS.
Many aspects of the medical industry in the United States, including the
Company's business, are subject to extensive federal and state government
regulation. Although the Company believes that its operations comply with
applicable regulations, there can be no assurance that subsequent adoption of
laws or interpretations of existing laws will not regulate, restrict, or
otherwise adversely affect the Company's business.
The manufacture and sale of medical devices, including the CTLM(TM) and any
other products that may be developed BY the Company, are subject to extensive
regulation by numerous governmental authorities in the United States,
principally the FDA and corresponding state agencies, and in other countries. In
the United States, the CTLM(TM) IS regulated as a medical device and is subject
to the FDA's pre-market clearance or approval requirements. Securing FDA
clearances and approvals may require the submission of extensive clinical data
and supporting information to the FDA. To obtain FDA approval of an application
for pre-market approval, ("PMA") the pre-market approval application must
demonstrate that the subject device has clinical utility, meaning that the
device has a beneficial therapeutic effect, or that as a diagnostic tool, it
provides information that measurably contributes to a diagnosis of a disease or
condition.
The process of obtaining FDA and other required regulatory approvals may be
lengthy, expensive, and uncertain and frequently requires from six months to
several years from the date of the FDA submission, if pre-market approval is
obtained at all. Following the filing of a submission of the PMA for the
CTLM(TM) Device, the FDA may requiRE more information or clarification of
information already provided as part of the PMA. During the review period, an
advisory panel will likely be convened by the FDA to review and evaluate the PMA
and provide recommendations to the FDA as to whether the PMA should be approved.
Although the FDA may grant Expedited Review status to the CTLM(TM) Device, there
can be no assurance that such status will be maintained or result in timely
approval of tHE CTLM(TM) Device, if approval is obtained at all. Failure to
obtain FDA marketing clearance of the CTLM(TM) DEVICE would have a material
adverse effect on the Company's business, financial condition, cash flows, and
results of operations. See "Uncertainty of FDA Approval for the CTLM(TM)
Device."
The Company cannot file its PMA application for the CTLM(TM) until its clinical
trials are completed. There can BE no assurance, however, that the Company's
clinical trials will be successfully completed, or if completed, will provide
sufficient data to support a PMA application for the CTLM(TM). Nor can there be
any assurance that the FDA will not require the Company to conduct additional
clinical trials for the CTLM(TM). See " Business- GovernmeNT Regulation-United
States" and "Business- Regulatory and Clinical Status".
Sales of medical devices outside the United States may be subject to
international regulatory requirements that vary from country to country. The
time required to gain approval for sale internationally may be longer or shorter
than that required for FDA approval and the requirements may differ. In
addition, in order to sell its products within the European Economic Area
("EEA"), companies are required to achieve compliance with the requirements of
the Medical Devices Directive and affix a "CE" marking on their products to
attest such compliance. In Europe, the Company will be required to obtain the
certifications necessary to enable the CE mark to be affixed to the Company's
products in order to conduct sales in member countries of the European Union.
The Company is in preliminary preparations regarding CE certification. Component
parts that have been finalized are being tested in the Company's 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. The Company
has chosen DGM of Denmark as its notifying body. A notifying body ("NB") is a
regulatory body from the private sector, who is responsible for the review and
approval of the documentation submitted by the Company in order to enable the CE
mark to be affixed to products. See "Business-Government Regulation-Foreign
Regulation" and Clinical Status-Foreign".
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<PAGE>
The Company has not obtained such certificates and there can be no assurance it
will be able to do so in a timely manner, or at all. Regulatory approvals, if
granted, may include significant limitations on the indicated uses for which the
CTLM(TM) may be marketed. In addition, to obtain such approvals, the FDA and
certain foreiGN regulatory authorities may impose numerous other requirements
with which other medical device manufacturers must comply. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Product approvals could be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. The third-party manufacturers upon which the Company will depend to
manufacture its products (GMPs) are required to adhere to applicable FDA
regulations regarding GMPs including the Quality System Regulations ("QSR") and
similar regulations in other countries, which include testing, control and
documentation requirements. Ongoing compliance with QSR and other applicable
regulatory requirements will be monitored by periodic inspections by the FDA and
by comparable agencies in other countries. Failure to comply with applicable
regulatory requirements, including marketing and promoting products for
unapproved use, could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant pre-market
clearance or approval for devices, withdrawal of approvals and criminal
prosecution. Changes in existing regulations or adoption of new government
regulations or polices could prevent or delay regulatory approval of the
Company's products. Certain material changes to medical devices also are subject
to FDA review and clearance or approval. See " Business- Government
Regulation-Foreign" "Business- Regulatory and Clinical Status
In addition, unapproved products subject to the PMA requirements must receive
prior FDA export approval in order to be marketed outside of the United States
unless they are approved for use by any member country of the European Union or
certain other countries, including Australia, Canada, Israel, Japan, New
Zealand, Switzerland and South Africa, in which case they can be exported to any
country provided that certain limited notification requirements are met. There
can be no assurance that the Company 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 of the Company to meet the FDA's export requirements or obtain FDA
export approval when required to do so, or to obtain approval for import, could
have a material adverse effect on the Company's business, financial condition,
cash flows and results of operations.
There can be no assurance that the Company will be able to obtain FDA approval
of a PMA application for the CTLM(TM), foreign marketing clearances for the
CTLM(TM) or regulatory approvals or clearances for other products THAT the
Company may develop, on a timely basis, or at all, and delays in receipt of or
failure to obtain such approvals or clearances, the loss of previously obtained
approvals, or failure to comply with existing or future regulatory requirements
would have material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON PATENT LICENSED BY FOUNDER;
The Company owns the rights, pursuant to an exclusive patent licensing
agreement, for the use of the patent for the CTLM(TM) technology. The patent is
owned by Richard Grable, the Company's Chief Executive Officer. SEE
"Business-Patent License Agreement". In addition, the Company has 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 the Company
breaches the patent licensing agreement, the Company could lose the licensing
rights to the CTLM(TM) technology. The loss of the patent license would have a
material adverse effect on the Company and its continued operations. See
"Business-Patents" and "Business-Patent Licensing Agreement".
UNCERTAIN ABILITY TO PROTECT PATENTS AND PROPRIETARY TECHNOLOGY AND INFORMATION
The Company's ability to compete effectively in the medical products industry
will depend on its success in protecting its proprietary technology, both in the
United States and abroad. The patent positions of medical products companies
generally involve complex legal and factual questions. The Company currently has
12 additional patents pending with regard to Optical Tomography. Neither the
Company nor Mr. Grable hold foreign patents, however the Company has applied for
patents in several foreign countries. The Company intends to file for additional
patents on products, including the CTLM(TM), for which it feels the cost of
obtaining a patent is economically reasonable in relation to the expected
protection obtained. There can be no assurances that any patent that the Company
11
<PAGE>
applies for will be issued, or that any patents issued will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
any competitive advantage. The Company could incur substantial costs in
defending any patent infringement suits or in asserting any patent rights,
including those granted by third parties, the expenditure of which the Company
might not be able to afford. See "Business-Patents" and "Business-Patent
Licensing Agreement".
Although the Company has entered into confidentiality and invention agreements
with its employees and consultants, there can be no assurance that such
agreements will be honored or that the Company will be able to protect its
rights to its non patented trade secrets and know-how effectively. See "Legal
Proceedings". Moreover, there can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets and know-how.
In addition, the Company may be required to obtain licenses to patents or other
proprietary rights from third parties. There can be no assurance that any
licenses required under any patents or proprietary rights would be made
available on acceptable terms, if at all. If the Company does not obtain
required licenses, it could encounter delays in product development or find that
the development, manufacture, or sale of products requiring such licenses could
be foreclosed. Additionally, the Company may, from time to time, support and
collaborate in research conducted by universities and governmental research
organizations. There can be no assurance that the Company will have or be able
to acquire exclusive rights to the inventions or technical information derived
from such collaborations or that disputes will not arise with respect to rights
in derivative or related research programs conducted by the Company or such
collaborators.
EARLY STAGE PRODUCT DEVELOPMENT.
Due to the Company's need for additional capital, the Company's proposed
products, other than the CTLM(TM) DevicE, including a scanner for the early
detection of colon cancer, are at an early stage of development. The CTLM(TM)
Device must receive marketing clearance from the FDA before it can be
commercially marketed in the United States. There can be no assurance that any
of the Company's proposed products will be found to be safe and effective, meet
applicable regulatory standards or receive necessary regulatory clearance, or if
safe and effective, can be developed into commercial products, manufactured on a
large scale or be economical to market. Nor can there be any assurance that the
Company's proposed products will achieve or sustain market acceptance. In the
event necessary regulatory approvals are obtained for the CTLM(TM) Device, there
can be no assurance that tHE Company will be successful in establishing
commercial operations, including gaining market acceptance of the CTLM(TM)
Device and implementing commercial-scale manufacturing and sales and marketing
programs. There iS, therefore, substantial risk that the Company's product
development and commercialization efforts will not prove to be successful. See
"Business".
DEPENDENCE ON A SINGLE PRODUCT.
Although the Company is in the process of developing additional products based
on its core technology, including an enhancement of the CTLM(TM) Device for use
with fluorescence and PhotoDynamic Therapy (PDT), none of suCH applications is
expected to result in a commercial product for at least several years, if at
all. Consequently, pending its approval for commercial distribution in the
United States, the CTLM(TM) Device would account fOR substantially all of the
Company's revenues for the foreseeable future. Failure to gain regulatory
approvals or market acceptance for the CTLM(TM) Device would have a material
adverse effect on the Company's business, financiAL condition, cash flows, and
results of operations.. See "Business"
DEPENDENCE UPON SUPPLIERS
Although the Company believes that there are a number of possible suppliers for
most of the components and subassemblies required for the CTLM(TM), certain
components for it laser system are provided by two unaffiliatED suppliers (the
"Laser Suppliers"). Although these components are provided by a limited number
of other suppliers, the Company believes its Laser Suppliers and their products
are the most reliable. The Company has no agreement with its Laser Suppliers and
purchases the laser components on an as needed basis. The disruption or
termination of the Company's Laser Suppliers, at present, could have a
short-term adverse effect on the Company's ability to manufacture the CTLM(TM).
Once the Company begins to produce the CTLM(TM) in larger quantities, THE
disruption or termination of the Company's Laser Suppliers could disrupt
production schedules or delay or curtail production, all of which could
materially adversely affect the Company's business and results of operations.
See "Business- CTLM(TM).
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<PAGE>
DEPENDENCE ON MARKET ACCEPTANCE.
There can be no assurance that physicians or the medical community in general
will accept and utilize the CTLM(TM) device or any other products developed by
the Company. The extent that, and rate of which, the CTLM(TM) achievES market
acceptance and penetration will depend on many variables including, but not
limited to, the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of the CTLM(TM), the advantage
of the CTLM(TM) over existing technology and cancer detection methods (including
x-ray mammographY, ultrasound or high frequency ultrasound, MRI, thermography,
diaphonography, electrical impedance and transillumination devices), third-party
reimbursements practices and the Company's manufacturing, quality control,
marketing and sales efforts. There can be no assurance that the medical
community and third-party payers will accept the Company's unique technology.
Similar risks will confront any other products developed by the Company in the
future. Failure of the Company's products to gain market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations. See "Business".
LIMITED MARKETING AND SALES CAPABILITY.
The Company has limited internal marketing and sales resources and personnel. In
order to market any products it may develop, the Company will have to develop a
marketing and sales force with technical expertise and distribution capability.
There can be no assurance that the Company will be able to establish sales and
distribution capabilities or that the Company will be successful in gaining
market acceptance for any products it may develop. There can be no assurance
that the Company will be able to recruit and retain skilled sales, marketing,
service or support personnel, that agreements with distributors will be
available on terms commercially reasonable to the Company, or at all, or that
the Company's marketing and sales efforts will be successful. Failure to
successfully establish a marketing and sales organization, whether directly or
through third parties, would have a material adverse effect on the Company's
business, financial condition, cash flows, and results of operations. The
Company has already entered into contract for the distribution of the CTLM(TM)
IN the United Kingdom, Ireland, France, South Korea, the Pacific Rim including
China, Switzerland, Moscow, Germany, Austria, the Republic of Turkey, Ecuador,
Lebanon, Syria, United Arab Emirates, Qatar, Bahrain, Holland, Belgium, Spain,
Portugal, Poland and Luxembourg. The Company intends to pursue additional
distribution arrangements in Europe and Asiawith strategic marketing partners
who have established marketing capabilities and will continue to develop its
distribution network for overseas. There can be no assurance that the Company
will be able to further develop this distribution network on acceptable terms,
if at all or that any of the Company's proposed marketing schedules or plans can
or will be met. To the extent that the Company arranges with third parties to
market its products, the success of such products may depend on the efforts of
such third parties. There can be no assurance that any of the Company's proposed
marketing schedules or plans can or will be met. See "Business-Sales and
Marketing".
LIMITATION ON THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies, and other organizations) may
affect the pricing or relative attractiveness of the Company's products by
regulating the level of reimbursement provided by such payors to the physicians
and clinics and imaging centers utilizing the CTLM(TM) or any other products
that tHE Company may develop or by refusing reimbursement. If examinations
utilizing the Company's products were not reimbursed under these programs, the
Company's ability to sell its products may be materially and adversely affected.
There can be no assurance that third-party payors will provide reimbursement for
use of the Company's products. Moreover, the level of reimbursement, if any, may
impact the market acceptance and pricing of the Company's products, including
the CTLM(TM) Device. Failure to obtain favorable rates of third party
reimbursemeNT could have a material adverse effect on the Company's business,
financial condition, cash flows, and results of operations.
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In certain countries, the Company's 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.
In international markets, reimbursement by private third-party medical insurance
providers, including governmental insurers and independent providers varies from
country to country. In addition, such third-party medical insurance providers
may require additional information or clinical data prior to providing
reimbursement for a product. In certain countries, the Company's ability to
achieve significant market penetration may depend upon the availability of
third-party governmental reimbursement. Revenues and profitability of medical
device companies may be affected by the continuing efforts of governmental and
third party payors to contain or reduce the cost of health care through various
means. See "Business-Third-Party Reimbursement; Health Care Reform".
UNCERTAINTIES REGARDING HEALTH CARE REFORM
If adopted and implemented, such reforms could have material adverse effect on
the Company's business, financial, condition, cash flows, and results of
operations. Several states and the U.S. government are investigating a variety
of alternatives to reform the health care delivery system. These reform efforts
include proposals to limit and further reduce and control health care spending
on health care items and services, limit coverage for new technology and limit
or control the price health care providers and drug and device manufacturers may
charge for their services and products, respectively. If adopted and
implemented, such reforms could have material adverse effect on the Company's
business, financial condition, and results of operations.
SUBSTANTIAL CAPITAL NEEDS AND NEED FOR ADDITIONAL AUTHORIZED COMMON STOCK.
The Company will require substantial additional funds for its research and
development programs, pre-clinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs, results of pre-clinical and clinical
testing, the time and cost invoked in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. Moreover, the Company's fixed
commitments, including salaries and fee for current employees and consultants,
and other contractual agreements and are likely to increase as additional
agreements are entered into and additional personnel are retained.
The Company has a firm commitment for a $15 Million, three year Equity Line of
Credit whereby the Company, as it deems necessary, may raise capital through the
sale of its common stock to Austost Anstalt Schaan and Balmore Funds S.A., which
represent a consortium of prominent European banking institutions. Austost
Anstalt Schaan and Balmore Funds S.A. will be deemed the beneficial ownership of
the shares. The Shares will be purchased by the consortium at a discount from
the Market Price of the Company's Common Stock. 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 common stock pursuant to
Regulation D and then registration of the Shares or the Company will have to
file a shelf registration at the time that it intends to utilize the Equity Line
of Credit. Although no assurances can be made, the Company anticipates that it
will need approximately $8,000,000 in addition to its $9,000,000 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 of
Credit or if Company declines to use the Equity Line of Credit, the Company may
seek such additional funding through public or private financing or
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collaborative, licensing and other arrangements with corporate partners. If the
Company utilizes the Equity Line of Credit or additional funds are raised by
issuing equity securities, especially Convertible Preferred Stock, dilution to
existing Shareholders will result and future investors may be granted rights
superior to those of existing Shareholders. There can be no assurance, however,
that additional financing will be available when needed, or if available, will
be available on acceptable terms. Insufficient funds may prevent the Company
from implementing its business strategy or may require the Company to delay,
scale back, or eliminate certain of its research and product development
programs or to license to third parties rights to commercialize products or
technologies that the Company would otherwise seek to develop itself. See
"Market Price of Securities and Related Stockholder Matters-Financing/Equity
Line of Credit, "Risk Factors-Sale of Unregistered Securities-Financing/Equity
Line of Credit" and "Sale of Unregistered Securities-Financing/Equity Line of
Credit.
POSSIBLE ADVERSE IMPACT OF Y2K
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
remediation by the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.
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. See "Business-Year 2000".
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependent on it ability to
issue stock for services. Since July 1, 1996, the Company has 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 "Sale of Unregistered
Securities and Issuance of Stock for Services" and "Note 16 to Financial
Statements".
ADDITIONAL SALES OF UNREGISTERED SECURITIES; POSSIBLE ABSENCE OF LIMITATIONS ON
CONVERSION
The Company has 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 deciding to issue Preferred Shares and Debentures
pursuant to the private placements, the Company took into account the number of
common shares authorized and outstanding, the market price of the common stock
at the time of each Preferred or Debenture 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 there were enough shares, based on the
price of the Company's common stock at the time of the sale of the Preferred to
satisfy the Preferred conversion requirements. Although the Company's Board of
Directors tried to negotiate a floor on the conversion price of each series of
Preferred Stock and the Debentures prior to sale, it was unable to do so. In
order to obtain working capital the Company will continue to seek capital
through debt or equity financing which may include the issuance of Convertible
Preferred Stock whose rights and preferences are superior than those of the
common stock holders. The Company will endeavor to negotiate the best
transaction possible taking into account the impact on its shareholders,
dilution, loss of voting power and the possibility of a change of control.
However, in order to satisfy its working capital needs, the Company may be
forced to issue convertible securities with no limitations on conversion.
In the event that the Company issues convertible preferred stock or convertible
debentures without a limit on the number of shares that can be issued upon
conversion and the price of the Company's 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
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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
holder's potential for increased share issuance and profit, including profits
derived from shorting the Company's common stock, in addition to a stock
overhang of an undeterminable amount, may depress the price of the Company's
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 the Company's property available for
distribution $10,000 per share
SUBSTANTIAL INCREASE IN AUTHORIZED COMMON STOCK
The Company pursuant to a Written Action of a majority of its shareholders has
amended its Articles of Incorporation, to increase its authorized common stock
from 48,000,000 shares to 100,000,000 common shares in order to facilitate the
conversion of approximately $4,500,000 in Series B Convertible Stock and
$1,080,000 in Series H Preferred Stock, the only Preferred Series outstanding at
that time. On January 28, 1999, the Company filed a Definitive Information
Statement with the Securities and Exchange Commission (the "Commission") with
regard to the Written Action. The Majority Shareholders' consent with respect to
the Amendment became effective on February 18, 1999. See "Market Price of
Securities and Related Stockholder Matters". Prior to the Amendment, due to the
decrease in the Company's stock price, the Company did not have an adequate
number of shares authorized to meet is contractual obligations. In addition, the
Company believes that the Amendment will insure that there are a sufficient
number of shares of Common Stock available for issuance upon exercise of
outstanding stock options and warrants and enhance the ability of the Company to
attract and retain qualified employees, consultants, officers and directors by
enabling the Company to create stock option, incentives and rewards for their
contributions to the success of the Company. Moreover, until such time as the
Company is able to generate revenues, it is dependent on equity or other
financing to continue operations. The Company will require substantial
additional funds for its research and development programs, pre-clinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
marketing programs.
Based on the closing price of the Company's common stock as of May 14, 1999
($.53), 8,973,769 shares would be required to convert the Series B shares,
955,975 shares would be required to convert the Series G shares, 3,684,211
shares would be required to convert the Series H shares, 3,471,698 would be
required to convert the Series I shares 2,767,296 shares would be required to
convert the Debenture and although the Company is contractually prohibited from
doing so,35,377,358 shares would be required to draw down the entire Equity Line
of Credit. See ", "Sale of Unregistered Securities-Private Placement of
Preferred Stock", "Sale of Unregistered Securities-Debentures" "Sale of
Unregistered Securities-Private Placement of Common Stock", and "Sale of
Unregistered Securities-Equity Line of Credit". In addition, 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 April 6, 1999, the Company
would need in excess of 127 million authorized shares to effectuate all
conversion, utilize the total Equity Line of Credit and fulfill its remaining
stock related obligations. See "Patent Licensing Agreement", "Equity Line of
Credit", and "Certain Transactions".
DEPENDENCE ON QUALIFIED PERSONNEL.
Due to the specialized scientific nature of the Company's business, the Company
is highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel. Therefore the Company has entered into
employment agreements with certain of its executive officers and key employees.
The loss of the services of existing personnel, especially Mr. Grable, the
inventor of the CTLM(TM), as well as the failure TO recruit key scientific,
technical and managerial personnel in a timely manner would be detrimental to
the Company's research and development programs and could have an adverse impact
upon the business affairs or finances of the Company. The Company's anticipated
growth and expansion into areas and activities requiring additional expertise,
such as marketing, will require the additional of new management personnel.
Competition for qualified personnel is intense and there can be no assurance
that the Company will be able to continue to attract and retain qualified
personnel necessary for the development of its business. See "Management".
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS/POSSIBLE CHANGE OF CONTROL
Management of the Company beneficially owns 38.3%, 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
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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 the Company's 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 25%. This additional dilution to Management's ownership percentage could
effectuate a change in control of the Company. See "Management", "Principal
Shareholders", and "Description of Securities".
POSSIBLE CONFLICT OF INTEREST
Richard Grable and Linda Grable hold a majority of the seats on the Company's
Board of Directors (the "Board"). Consequently, they are in a position to
control their own compensation and to approve affiliated transactions, if any.
From time to time Linda Grable, the Company's President, has personally
guaranteed promissory notes issued by the Company to third parties. Ms. Grable
received no compensation for these guarantees. In June 1998, the Company
finalized an exclusive Patent License Agreement with Richard Grable, the
Company's Chief Executive Officer. Mr. Grable is the owner of the Patent, which
encompasses the technology for the CTLM(TM) device. SEE "Description of
Business-Patent Licensing Agreement" and "Certain Transactions".
The Board's policy is to obtain unanimous consent for affiliated transaction and
compensation issues. Although the Company's Board intends to act fairly and in
full compliance with their fiduciary obligations, there can be no assurance that
the Company will not, as a result of the conflict of interest described above,
possibly enter into arrangements under terms less favorable than it could have
obtained had it been dealing with unrelated persons.
In February 1999, the Company's Board of Directors voted to replace the shares
Messrs. Grable, Schwartz and Ms. Grable sold on behalf of the Company, in order
to provide the Company with working capital. "See Certain Transactions".
HIGHLY COMPETITIVE MARKET.
The market in which the Company intends to participate is highly competitive.
Many of the companies in the cancer diagnostic and screening markets have
substantially greater technological, financial, research and development,
manufacturing, human and marketing resources and experience than the Company.
Such companies may succeed in developing products that are more effective or
less costly than the Company's products or such companies may be successful in
manufacturing and marketing their products than the Company. Physicians using
imaging equipment such as x-ray mammography equipment, ultrasound or high
frequency ultrasound systems, Magnetic Resonance Imaging (MRI) systems, and
thermography, diaphonography and transilluminational devices may not use the
Company's products. Currently mammography is employed widely and the Company's
ability to demonstrate the Company's ability to sell the CTLM(TM) to medical
facilities will, in part, be dependent on the Company's ability TO demonstrate
the clinical utility of the CTLM(TM) as an adjunct to mammography and physical
examination and iTS advantages over other available diagnostic tests. The
competition for developing a commercial device utilizing computed TOMOGRAPHY
techniques and laser technology is difficult to ascertain given the proprietary
nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's
CTLM(TM) utilizes. The most prestigious of these institutions includes the
University of Pennsylvania, The City College of New York, and University College
London. Two of these institutions have granted licenses on certain patented
technologies to two companies: University of Pennsylvania - Non-Invasive
Technologies; City College of New York - MediScience, Inc. See
"Business-Competition".
DEPENDENCE ON THIRD PARTIES.
The Company has used certain third parties to manufacture and deliver the
components of the CTLM(TM) Device aND intends to continue to use third parties
to manufacture and deliver such components and any other products, which the
Company may seek to develop. Such third parties must adhere to the QSR enforced
by the FDA through its facilities inspection program and such third parties'
facilities must pass a plant inspection before the FDA will grant pre-market
approval of the Company's products. There can be no assurance that the
third-party manufacturers on which the Company depends for the manufacture of
CTLM(TM) components will be in compliance with tHE QSR at the time of the
pre-approval inspection or will maintain such compliance. Such failure could
significantly delay FDA approval of the PMA application for the CTLM(TM) Device,
and such delay would have A material adverse effect on the Company's business,
financial condition, cash flows, and results of operations.
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The qualification of additional or replacement suppliers for certain components
of the CTLM(TM) Device or servicES is a lengthy process. For certain services
and components the Company currently relies on single suppliers. If the Company
encounters delays or difficulties with its third-party suppliers in producing,
packaging, or distributing components of the CTLM(TM) Device, market
introduction and subsequent sales would be adverseLY affected. The Company also
may have to rely on alternative sources of supply. In such case, there can be no
assurance that the Company will be able to enter into alternative supply
arrangements at commercially acceptable rates, if at all. If the Company is
unable to obtain or retain qualified third-party manufacturers on commercially
acceptable terms, it may not be able to commercialize its products as planned.
The Company's dependence upon third parties for the manufacture of its products
may adversely affect the Company's profit margins and its ability to develop and
deliver its products on a timely and competitive basis.
POSSIBLE TECHNICAL OBSOLESCENCE.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's proposed products obsolete. Although the Company believes that The
CTLM(TM) can be upgraded to maintain its state-of-the-art character, the
development of new technologies OR refinements of existing ones might make the
Company's existing system technologically or economically obsolete, or cause a
reduction in the value of, or reduce the need for, the Company's CTLM(TM). There
can be no assuranCE that the development of new types of diagnostic medical
equipment or technology will not have a material adverse effect on the Company's
business, financial condition, and results of operations. Commercial
availability of such products could render the Company's products obsolete,
which would have a material adverse effect on the Company's business, financial
condition, cash flows, and results of operations. Although the Company is aware
of no substantial technological changes pending, should such change occur, there
can be no assurance that the Company will be able to acquire the new or improved
systems which may be required to update the CTLM(TM). SEE
"Business-Competition".
DELAYS IN GETTING PRODUCT TO MARKET
Originally the Company anticipated that the CTLM(TM) would be ready for
distribution in the summer of 1998, howevER during the course of clinical
trials, the Company learned of certain problems with particular components of
the CTLM(TM), which needed to be corrected. Solutions to these problems had to
be found and adjustments had to be maDE to the CTLM(TM) to correct such
problems. Specifically, the laser components were removed from the base of tHE
scanning bed and installed with additional laser components on a dedicated
breadboard laser table, which is enclosed with a cabinet. The electronic
components involved with image acquisition were also removed from the scanning
bed and installed in a dedicated electronic cabinet with pull out drawers for
easy serviceability. Pre-amplifiers were installed on the detector circuits and
changes were made in the fiber optics.
The Company needs to obtain FDA marketing clearance for the CTLM(TM) device
before it can be sold in the U.S. However, the device may be sold under special
circumstances pursuant to an IDE. Under FDA guidelines, only product cost and
clinical costs can be recovered. No profit is allowed in IDE sales. Sales of
medical imaging devices can be made in those countries not requiring the CE
mark. Sales can also be made under exemptions for clinical investigational
testing.
The Company originally anticipated that the first foreign distributions of the
CTLM(TM) would occur in its fourTH fiscal quarter beginning April 1999, however
due to the problems discussed above and the delay in the Nassau County clinical
investigation, discussed in detail in "Business Regulatory and Clinical Status",
the Company will not be able to give a revised anticipated distribution date
until clinical data is obtained and reviewed from the Nassau County clinical
investigation. See "Business-Government Regulation" and "Business-Regulatory and
Clinical Status".
RELIANCE ON INTERNATIONAL SALES.
The Company intends to commence international sales of the CTLM(TM) in Europe
and Asia, where permitted, prior TO commencing commercial sales in the United
States, where sales cannot occur unless and until the Company receives
pre-market approval from the FDA. See "Business-Government Regulation". Thus,
until the Company receives pre-market approval from the FDA to market the
CTLM(TM)in the United States, as to which there can be no assurance, the Company
revenues, if any, will be derived from sales to international distributors. A
significant portion of the Company's revenues, therefore, may be subject to the
risks associated with international sales, including economical and political
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instability, shipping delays, fluctuation of foreign currency exchange rates,
foreign regulatory requirements and various trade restrictions, all of which
could have a significant impact on the Company's ability to deliver products on
a timely basis. Future imposition of, or significant increases in the level of
customs duties, export quotas or other trade restrictions could have a material
adverse effect on the Company's business, financial condition and results of
operations. The regulation of medical devices, particularly in Europe, continues
to develop and there can be no assurance that new laws or regulations will not
have an adverse effect on the Company. See "Business-Sale and Marketing" and
"Business-International Distributors".
In order to minimize the risk of doing business with distributors in countries
which hare having difficult financial times, the Company's International
Distribution Agreements all require payment via an irrevocable letter of credit
drawn on a United States bank prior to shipment of the CTLM(TM).
RISK OF PRODUCT LIABILITY.
The Company's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing, and marketing of cancer detection
products. Significant litigation, not involving the Company, has occurred in the
past based on the allegations of false negative diagnoses of cancer. While the
CTLMTM device is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability. Although the FDA does not require product
liability insurance with regard to clinical investigations, the Company obtained
and presently carries product liability insurance in the amount of $3,000,000,
at the request of Nassau County. While the Company plans to maintain insurance
against product and professional liability and defense costs, there can be no
assurance that claims against the Company arising with respect to its products
will be successfully defended or that the insurance to be carried by the Company
will be sufficient to cover liabilities arising from such claims. A successful
claim against the Company in excess of the Company's insurance coverage could
have a material adverse effect on the Company. Furthermore, there can be no
assurance that the Company will be able to continue to obtain or maintain
product liability insurance on acceptable terms. See "Business-Product
Liability".
LACK OF FEASIBILITY STUDY
The Company has not performed any market or feasibility study to assess the
interest, demand, or need for the CTLM(TM). There can be no assurance that any
such study would support Management's belief that sufficient demaND will exist.
See generally "Business" and Business-Competition".
POTENTIAL FOR ENVIRONMENTAL LIABILITY.
Although the Company's manufacturing processes do not currently involve the use
of potentially hazardous materials, it may use such materials in the future. The
Company may, in the future, become subject to stringent federal, state and local
laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
such materials. There can be no assurance that the Company will not incur
significant future costs to comply with environmental laws, rules, regulations
and policies, or that the business, financial position, cash flows or results of
operations of the Company will not be materially and adversely affected by
current or future environmental laws, rules, regulations and policies or by any
releases or discharges of hazardous materials.
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LACK OF DIVIDENDS
The Company has not paid a dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future. See "Dividend Policy".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with the Company's
Financial Statements and the Notes thereto, included elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997.
General and administrative expenses in the aggregate during the twelve months
ended June 30, 1998, were $4,478,055 representing an increase of $1,474,313 from
$3,003,742 during the twelve months ended June 30, 1997. 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 increase is due primarily to substantial increases
in amortization of deferred compensation expense. The increase in amortization
of deferred compensation is a result of the issuance of stock options to the
officers at a discount, which are amortized over the term of their employment
contracts. Selling, general and administrative expenses during the twelve months
ended June 30, 1998, were $396,752 representing a decrease of $132,001 from
$528,753 during the twelve months ended June 30, 1997. The decrease is primarily
due to one time expenses regarding the move into the Company's new building in
Plantation, Florida.
Compensation and related benefits during the twelve months ended June 30, 1998,
were $1,987,104 representing a decrease of $1,477,020 from $3,464,124 during the
twelve months ended June 30, 1997. The decrease in compensation and related
benefits is due to the additional compensation recorded in 1997 on the
compensatory stock options. The increase in compensation recorded in 1997 on the
compensatory stock options is a result of the provisions of APB No. 25 whereby
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.
Research and development expenses during the twelve months ended June 30, 1998,
were $254,722 representing a decrease of $810,456 from $1,065,178 during the
twelve months ended June 30, 1997. This decrease is due primarily to finalizing
certain components of the CTLMTM device.
Advertising and promotion expenses during the twelve months ended June 30, 1998,
were $329,446 representing an increase of $162,926 during the twelve months
ended June 30, 1997. The increase was due primarily to the costs associated with
additional advertising in domestic and foreign medical imaging and medical
device publications.
Consulting expenses during the twelve months ended June 30, 1998, were
$1,220,676 representing an increase of $456,312 during the twelve months ended
June 30, 1997. The increase was due primarily to the hiring 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, 1998, were $162,549
representing an increase of $41,262 during the twelve months ended June 30,
1997. The increase was due primarily to additional premiums for Workers' Comp.,
Health Insurance, and Property and Casualty Insurance.
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Professional expenses during the twelve months ended June 30, 1998, were
$454,730 representing an increase of $276 during the twelve months ended June
30, 1997. The increase was due primarily to additional legal fees regarding the
NASDAQ appeal and the legal action taken against a former employee. See
"Business-Legal Proceedings".
Stockholder expenses during the twelve months ended June 30, 1998, were $75,608
representing an increase of $54,706 from during the twelve months ended June 30,
1997. The increase was due to the costs associated with preparing and mailing
the Company's annual report and Proxy Statement.
Trade show expenses during the twelve months ended June 30, 1998, were $216,182
representing an increase of $61,400 from during the twelve months ended June 30,
1997. The increase is due to the costs of preparing for (including changes and
modifications required to the Company's exhibit) and attending the 1997
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, 1998, were
$111,559 representing a decrease of $84,026 during the twelve months ended June
30, 1997. This decrease was primarily due to reduced travel and housing expenses
for consultants.
Rent expense during the twelve months ended June 30, 1998, was $26,213
representing a decrease of $22,684 during the twelve months ended June 30, 1997.
This decrease was primarily due to the purchase of equipment during the fiscal
year that was previously leased and the relocation to a Company owned facility.
Interest expense during the twelve months ended June 30, 1998, were $55,543
representing an increase of $52,799 during the twelve months ended June 30,
1997. The increase was due to interest paid on short-term loans used for working
capital for the Company.
Interest income during the twelve months ended June 30, 1998, was $22,137
representing a decrease of $94,835 from during the twelve months ended June 30,
1997. This decrease was due to a decrease of funds invested by the Company.
Depreciation and amortization expenses during the twelve months ended June 30,
1998, were $283,966 representing an increase of $53,919 from $230,047 during the
twelve month period ended June 30, 1997. This increase is due primarily to the
purchase of additional laboratory equipment and manufacturing fixtures.
Dividends on cumulative preferred stock from discount at issuance during the
twelve months ended June 30, 1998, were $1,741,015 representing an increase of
$742,895 from $998,120 during the twelve-month period ended June 30, 1997. This
increase is due primarily to the issuance of additional series of cumulative
preferred stock with dividend provisions.
Dividends on cumulative preferred stock earned during the twelve months ended
June 30, 1998, were $315,000 representing an increase of $130,325 from $184,675
during the twelve-month period ended June 30, 1997. This increase is due
primarily to the additional accrued dividends on the series B cumulative
preferred stock.
Comparative fiscal year June 30, 1997 numbers have been changed to reflect
restatement as per Financial Statement, Notes to Financial Statements, (3)
Restatements, Page F15.
BALANCE SHEET DATA
The Company has financed its operations since inception by the issuance of
equity securities with aggregate net proceeds of approximately $17,746,206 and
through loan transactions in the aggregate amount of $520,407. During Fiscal
1998, the Company received net proceeds of approximately $1,879,500 from the
private placement of its Series C Convertible Preferred Stock and Warrants,
approximately $495,000 from the private placement of its Series D Convertible
Preferred Stock and Warrants, approximately $495,000 from the private placement
of its Series E Convertible Preferred Stock and Warrants, approximately $700,000
from the private placement of its Series F Convertible Preferred Stock, all
pursuant to Regulation S of the Securities Act of 1933, as amended, and
approximately $990,000 from the private placement of its Series H Convertible
Preferred Stock and Warrants pursuant to Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.
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The Company's combined cash and cash equivalents totaled $310,116 at June 30,
1998, representing a decrease of $73,107 from $383,223 at June 30, 1997. The
decrease in cash and cash equivalents is due to continuing operations.
The Company 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 its initial
product, the CTLM(TM) device.
The Company's prototype equipment totaled $-0- at June 30, 1998 and $1,216,585
at June 30, 1996. All direct costs associated with the prototype equipment have
been capitalized. The Company has reclassified the prototype equipment into
inventory as the development of the Computed Tomography Laser Mammography
(CTLMTM) device has been, for the most part, completed and the manufacture of
five (5) devices to be placed into clinical sites has commenced.
The Company's property and equipment, net, totaled $2,920,980 at June 30, 1998
and $3,293,297 at June 30, 1997. This decrease is due to depreciation and
retirement of certain equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sales of its product
begins, the Company is totally dependent upon debt and equity funding. In the
event that the Company is unable to obtain debt or equity financing or is unable
to obtain such financing on terms and conditions acceptable to the Company, the
Company may have to cease or severely curtail its operations. This would
materially impact the Company's ability to continue as a going concern.
The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during fiscal
1998 was $3,540,001 primarily due to the Company's continued research and
development of the CTLM(TM) and preparations for FDA Clinical Trials including
the manufacture of five (5) CTLM(TM) Breast Imaging Systems aND the hiring of
six additional employees, compared to net cash used by operating activities of
research and development of the CTLM(TM) device and related software development
of $4,532,866 in fiscal 1997. At June 30, 1998, the Company had a working
capital of $(257,166) compared to a working capital of $(294,433) at June 30,
1997. On May 28, 1998 the Company announced that it had entered into an
irrevocable agreement with a consortium of prominent banking institutions which
will invest up to $15 million in the Company over the next three years. The
Company estimates that $2.3 million will be required to complete FDA clinical
trials through PMA submission and to ramp-up for the manufacture of the CTLM(TM)
device. Statements made in the May 28th announcement are no longER accurate
because the Company was unable to draw on the equity credit line. Delays in
finalizing the agreement, trading activity causing the stock price to fall below
the minimum requirement, and registration requirements contributed to the
inability to utilize the equity line of credit. 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 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 1998, the Company was able to raise a total of $5,399,599 less
expenses through Regulation S and Regulation D transactions. The Company will
continue to seek equity or debt financing in order to meet its working capital
needs. The Company does not expect to generate a positive internal cash flow for
at least the next twelve-months due to the expected increase in spending for
research and development and the expected costs of commercializing it initial
product, the CTLM(TM). The Company will require additional funds for its
research aND development, clinical testing, operating expenses, Food and Drug
Administration regulatory processes, and manufacturing and marketing programs.
Accordingly, the Company will be required to raise additional funds prior to the
end of calendar year 1998 in order to continue operations. The Company plans to
raise additional funds by either equity or debt financing, including entering
into a transaction(s) to privately place equity, either common or preferred
stock, or debt securities, or combinations of both; or by placing equity into
the public market through an underwritten secondary offering or obtaining
mortgage financing on it real property and improvements. If additional funds are
22
<PAGE>
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 the Company.
The Company's ability to effectuate its plan of and continue operations is
dependent on its ability to raise capital, structure a profitable business, and
generate revenues. If the Company's working capital were insufficient to fund
its operations, it would have to explore additional sources of financing.
Although the Company has a firm commitment for a $15 million Equity line of
Credit, it must first register the shares to be issued pursuant to the credit
line. At present, the Company has no plans to register such shares, but may do
so in the future. See "Sale of Unregistered Stock-Financing/Equity Line of
Credit".
Capital expenditures for the fiscal 1998 were approximately $115,738 as compared
to approximately $2,815,923 for fiscal 1997. These expenditures were a direct
result of purchases of computer and other equipment, office, warehouse and
manufacturing fixtures, trade show equipment, computer software, laboratory
equipment, and other fixed assets. The Company anticipates that its capital
expenditures for fiscal 1999 will be approximately $100,000.
During the six months ending December 31, 1998 there were no changes in the
Company's existing debt agreements and the Company had no outstanding bank loans
as of December 31, 1998. The Company's annual fixed commitments, including
salaries and fees for current employees and consultants, rent, payments under
license agreements and other contractual commitments are approximately
$9,000,000 as of the date of this Prospectus and are likely to increase as
additional agreements are entered into and additional personnel are retained.
The Company will require substantial additional funds for its 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 the
Company's control. The Company's future capital requirements will depend on many
factors, including the following: the progress of its research and development
projects; the progress of pre-clinical and clinical testing; the time and cost
involved in obtaining regulatory approvals; 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 the Company's existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish; and the development of
commercialization activities and arrangements. The Company does 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) device. The Company
has sufficient cash to fund the Company'S operations until the end of the fiscal
year ending June 30, 1999. Thereafter the Company may require additional funding
through the 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. The Company plans to continue its policy of investing excess funds,
if any, in a daily cash management account at First Union National Bank. See
"Cautionary Statements Regarding Forward-Looking Statements Uncertainties as to
Future Profitability."
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependent on it ability to
issue stock for services. Since July 1, 1996 to the filing date of this
Prospectus, the Company has 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 16 to Financial Statements".
23
<PAGE>
BUSINESS
OVERVIEW
Imaging Diagnostic Systems, Inc. (the "Company") is a medical technology company
that has developed and is testing a Computed Tomography Laser Mammography
("CTLM(TM)") device for detecting breast cancer through the skin IN a
non-invasive procedure. The CTLM(TM) employs a high-speed pico-second pulsed
titanium sapphire laser aND proprietary scanning geometry and reconstruction
algorithms to detect and analyze tissue in the breast for indicia of malignancy
or benignancy. The components of the laser system are purchased from two
unaffiliated parties and assembled and installed into the CTLM(TM) by the
Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters as
laser light pulses pass through the tissue. The CTLM(TM) device IS designed to
provide the physician with objective data for interpretation and further
clinical work-up. Accordingly, the Company believes that the CTLM(TM) will
improve early diagnosis, reduce diagnostic uncertainty, aND decrease the number
of biopsies performed on benign lesions.
HISTORY
During the first year of operations, the Company researched the interaction
between high speed, rapid pulsed (Ti-Sapphire) laser technology and various
detection technologies associated with standard computed tomographic ("CT")
schemes. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first images
and filed a total of twelve ancillary United States patents from 1996.The
Company intends to file an additional patent application within the next six
months. During this period of time there were further advances in laser
technology effecting the size and stability of the laser component. The Company
incorporated these changes by purchasing a laser package manufactured by
Spectra-Physics, Inc.
On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLMTM device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need to submit an investigational device
exemption ("IDE") application to the FDA in order to commence human clinical
trials of the device.
The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November 1996, the Company installed its device
24
<PAGE>
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and 3 patients weRE scanned. As the
clinical trials at Strax were beginning, there were further advances in laser
technology effecting the size and stability of the laser component. The IDE
protocol at Strax was halted, pending the receipt of the new laser manufactured
by Spectra-Physics, Inc., which was received in January 1999. Due to the
purchase of the new laser system, the Company had to modify and redesign the
CTLM(TM) hardware and software in ordER to make it compatible with the new
laser. Strax was unwilling to wait until the modifications were completed unless
it received compensation for the CTLM(TM) remaining on its premises. 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, THE Company's
termination of the IDE protocol and its final report was accepted by the FDA.
In February 1996 the Company entered into a letter of intent with an independent
distributor to place a CTLM(TM) device 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 the Company announced today 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, The Company's
liaison person and proposed principal investigator was Dr. Donna M. Gallagher.
After Dr. Gallagher relocated, the Company did not pursue further involvement at
the hospital.
The Company was granted, in June 1998, its second investigational device
exemption ("IDE") to conduct clinical trials. An IDE allows a company to conduct
human clinical trials without filing an application for marketing clearance. The
Company was authorized to scan 20 patients at the Company's in-house facilities
in Plantation, Florida and upon FDA approval, at three additional clinical
sites. On September 1 and September 10, 1998, the Company formally submitted the
first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA.
The FDA responded to the submission on October 1998 asking that the Company
limit future submissions to significant findings, milestones, annual reports, or
changes that may effect the safety of the CTLM(TM). In all tHE Company scanned
20 women at its 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.
The Company requested that it be permitted to expand the scope of the study to
include a medical facility where access to women with breast cancer is 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.
The significant number of breast surgeries performed each week at Nassau County
was expected to provide a relatively constant supply of histologically confirmed
cases.
The FDA approved expanding the IDE clinical testing to Nassau County. Because of
the limited experience acquired from the 20-patient in-house study, the Company
elected to establish the Nassau County clinical site and begin testing before
expanding the next series of clinical tests to additional locations.
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. The Company immediately supplied the additional documentation required
by the FDA and the conditions were complied with. 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 1999, however due to renovations at
Nassau County Medical Center, the delivery of the CTLM(TM) was postponed until
the renovations were complete. On March 3, 1999 the CTLM(TM) System was shipped
to Nassau County Medical Center. Due to unforeseen problems at the Nassau County
Facility which are discussed in detail in "Business-Clinical and Regulatory
Status, no patients have been scanned to date.
The testing is designed to develop diagnostic criteria for CTLM(TM) images. The
Company has entered into discussions with 4 hospitals, which are located in
Chicago, Boston and New York for potential clinical test sites. Although no firm
25
<PAGE>
commitments have been obtained from these hospitals, the Company believes that
it will be able to expand the clinical testing to these areas. In order to
expand its clinical trials to other sites, the expanded IDE application which
includes Nassau County would have to be amended by supplying the required
documentation i.e. the protocol, signed investigator agreement, IRB approvals
and the informed consent form. See "Risk Factors-Government Regulation". See
"Business-Regulatory and Clinical Status-United States/FDA" and Business
Government Regulations"
On June 12, 1997, the Company was advised by patent counsel that Mr. Grable's
patent, filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus" was
granted with 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, the Company, realizing that it had no formal written agreement in
place with Mr. Grable, immediately began negotiating with Mr. Grable for the
exclusive use of the patent. In June 1998, a written agreement was entered into.
See "Risk Factors-Dependence on Patent Licensed by Founder; Dependence on
Patents and other Proprietary Information", "Business-Patent" and
"Business-Patent License Agreement".
BREAST CANCER
Breast cancer is one of the most common cancers among women and, notwithstanding
the currently available detection modalities, is the leading cause of death
among women aged 35 to 45. According to the American Cancer Society ("ACS"),
approximately one in eight women in the United States will develop breast cancer
during her lifetime. Nationwide, it is estimated that in 1998, approximately
178,700 new cases of invasive breast cancer will be diagnosed among women in the
United States, and an estimated 43,500 women will die from this disease.
Excluding skin cancers, the breast is the most frequent site of cancer among
American women accounting for 32% of incident cancers and 17% of cancer deaths.
It is the second leading cause of death for American women following lung cancer
and is the leading cause of cancer death among women aged 40 to 55. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
98% to 72% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. Extensive
documentation demonstrates that mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommend as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, ACS has published guidelines for breast cancer
screening including: (i) monthly breast self-examinations for all women over the
age of 20; (ii) a baseline mammogram for women by the age of 40; (iii) a
mammogram every one to two years for women between the ages of 40 and 49; (iv)
an annual mammogram for women age 50 or older. As a result of family medical
histories and other factors, certain women are at "high risk" of developing
breast cancer during their lifetimes. For these women, physicians often
recommend close monitoring, particularly if an abnormality posing increased risk
factors has been detected.
Each year, approximately eight million women in the United States require
diagnostic testing for breast cancer due to a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend
further diagnostic procedures, including diagnostic mammography and ultrasound,
a minimally invasive procedure such as fine needle aspiration or large core
needle biopsy. In each case, the potential benefits of additional diagnostic
testing must be balanced against the costs, risks and discomfort to the patient
associated with undergoing the additional procedures. Each of the currently
available non-surgical modalities for breast cancer detection has various
clinical limitations. While the minimally invasive procedures provide more
diagnostic information, there is still present a 4% miss-rate factor.
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<PAGE>
Due in part to the limitations of the currently available modalities to identify
malignant lesions, a large number of patients with suspicious lesions proceed to
surgical biopsy, an invasive and expensive procedure. Approximately 800,000
surgical biopsies are performed each year in the United States, of which
approximately 700,000 result in the surgical removal of benign breast tissue.
The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000
per procedure. Thus biopsies of benign breast tissue cost the U.S. health care
system approximately $2.45 billion annually. In addition, biopsies result in
pain, scarring, and anxiety to patients. Patients who are referred to biopsy
usually are required to schedule the procedure in advance and generally must
wait up to 48 hours for their biopsy results.
SCREENING AND DIAGNOSTIC MODALITIES
PHYSICAL EXAMINATION
- --------------------
Physical examinations may be conducted by a physician or clinician as part of a
medical examination, or by a woman performing a breast self-examination;
however, a physical examination of the breast can only detect relatively large
lesions, which may be advanced cancers. Furthermore, physical examination of the
breast does not reliably distinguish between malignant and benign tissue. More
than half the women who menstruate will have a lump in a breast at some point,
but fewer than 10% of such lumps will be malignant.
MAMMOGRAPHY
- -----------
Mammography is a non-invasive x-ray modality commonly used for both routine
breast cancer screening and as a diagnostic tool. A mammogram produces an image
of the internal structure of the breast that is intended to display lesions as
white spots against the black and/or white background of normal tissue. In a
screening mammogram, radiologists seek to detect suspicious lesions, while in a
diagnostic mammogram radiologist seek to characterize suspicious lesions.
Mammograms require subjective interpretation by a radiologist and are often
uncomfortable for the patient. Because x-ray mammography exposes the patient to
radiation, ACS recommends that mammograms be limited to once per year. In
addition, x-ray mammography is considered to be less effective for women under
the age of 50 who generally have radiographically dense breast tissue. The
average cost of a diagnostic mammogram is approximately $55 to $200 per
procedure (an average of $113), and requires the use of capital equipment
ranging in cost from approximately $75,00 to $225,000. It is expected that the
CTLM(TM) deviCE will cost approximately $300,000 and the cost of a bilateral
exam will be $125 to $150. Due the high capital costs associated with
mammography equipment and the specialized training necessary to operate the
equipment and to interpret radiographic images, mammography is usually available
only at specialty clinics or hospitals.
ULTRASOUND
- ----------
Ultrasound uses high frequency sound waves to create an image of soft tissues in
the body in a non-invasive manner. Like mammography, this image requires
interpretation by a physician. Ultrasound's principal role in breast cancer
diagnosis has been to assist the physician in determining whether a palpable
lesion is likely to be a cyst (usually benign) or a solid mass (potentially
cancerous). The average cost for an ultrasound of the breast is approximately
$125 to $500 per procedure (an average of $235) and requires the use of capital
equipment ranging in cost from approximately $60,000 to $200,000. Again, it is
expected that the CTLM(TM) device will coST approximately $350,000 and the cost
of an exam will be $125 to $150. Like mammography, ultrasound is generally
performed at specialty clinics or hospitals.
BIOPSY
- ------
Other currently available minimally invasive diagnostic techniques include fine
needle aspirations or core needle biopsy employing either the stereotactic or
hand held method. In each of these procedures a physician seeks to obtain either
cellular or tissue samples of suspicious lesions for cytodiagnosis or
histodiagnosis. Inadequate sampling can render these tests invalid. These
procedures are invasive, require follow-up, and range in cost from approximately
$370 to $1,000 per procedure.
THE COMPANY
The Company has a limited history of operations. Since its inception in December
1993, the Company has engaged principally in the development of the CTLMTM. The
Company currently has no source of operating revenue and has incurred net
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operating losses since its inception. At March 31, 1999, the Company had an
accumulated deficit of $31,904,458, after discounts and dividends on preferred
stock. Such losses have resulted principally from costs associated with the
Company's operations. The Company expects operating losses will increase for at
least the next several years as total costs and expenses continue to increase
due principally to the anticipated commercialization of the CTLMTM, development
of, and clinical trials for, the CTLMTM and other research and development
activities. The Company's ability to achieve profitability will depend in part
on its ability to obtain regulatory approvals for its proposed products and
develop the capacity to manufacture and market any approved products either by
itself or in collaboration with others. There can be no assurance if and when
the Company will receive regulatory approvals for the development and commercial
manufacturing and marketing of its proposed products, or achieve profitability.
See "Management's Discussion and Analyses of Financial Condition and Results of
Operations."
CTLM(TM)
- --------
Since its inception in December 1993, the Company has been engaged in the
research, development and testing of its CTLMTM device. The CTLM(TM) is a system
for detecting breast cancer through the skin in a non-invasiVE procedure that
does not require compression or x-ray. The CTLM(TM) employs a high-speed
pico-second pulsed titaniUM sapphire laser and proprietary scanning geometry and
reconstruction algorithms that create contiguous cross sectional slice images of
the breast which are used in the detection and analysis of changes in the breast
for indicia of malignancy or benignancy. The components of the laser system are
purchase from two unaffiliated parties and assembled and installed into the
CTLM(TM) by the Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters of as
it passes through the tissue. The CTLM(TM) is designed to provide tHE physician
with objective data for interpretation and further clinical work-up.
Accordingly, the Company believes that the CTLM(TM) will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsiES
performed on benign lesions. Further, the CTLMTM does not expose the patient to
ionizing radiation or painful compression, which the Company believes are
contributing factors to a portion of the patient population not obtaining a
conventional mammogram.
A breast exam utilizing the CTLM(TM) is non-invasive and can be performed by a
medical technician in less than 15 minutes. A patient lies face down on the
scanning table with a breast hanging pendulously in the scanning chamber. Once
the entire breast is scanned the other breast is placed in the chamber for
scanning. A bilateral breast scan (both breasts) takes approximately 15 minutes.
Each scan takes approximately 6-8 minutes. The CTLM(TM) has been designed in
such a way as to provide the physician and patient with quick access to
information concerning the probability that an identified lesion is malignant or
benign. The procedure is designed to provide the physician and patient with an
objective, on-site, immediate diagnostic decisions, including whether or not to
proceed to surgical biopsy. Further, the CTLM(TM) is designed to archive and
compare scans and proviDE the patient with a computer disc (CD) with images
produced from the date of her scan.
COMPARISON TO EXISTING DIAGNOSTIC MODALITIES
- --------------------------------------------
The 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.
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<PAGE>
Scanning of the breast with the CTLM(TM) utilizes no compression of tissue. The
laser and detector array orbits 360 degrees around the breast gathering data
that is used to reconstruct multiple cross-sectional images of the breast's
internal structures. The Company believes that such images will provide the
physician with increased accuracy in lesion location, as well as determination
of the extent and involvement of breast disease. The CTLM(TM) will also be able
to produce a near three-dimensional view.
Breast augmentation through the use of either silicone or saline implants
renders another difficult situation when employing conventional mammography for
imaging. Although radiographic and positioning techniques have vastly improved
the ability to compress and image more breast tissue than ever before, there
still remains a certain amount of breast tissue unable to be imaged due to its
placement around the implant. This is not the case with CTLM(TM) scans. Due to
the free suspension of the breast in the CTLM(TM) scanning chamber, and the
abILITY of the CTLM(TM) to image the breast from the chest wall to the nipple,
data can be collected from around the entiRE breast. The scanning capacity of
the CTLM(TM) laser light transmission through the breast is not impeded BY
silicone or saline implants.
The Company believes that the shortcomings of current breast cancer management,
which include discomfort and exposure to radiation, represent a significant
market opportunity for an objective technology that does not have these
shortcomings. The use of the CTLMdevice to detect breast cancer is believed to
be especially promising for women between the ages of 20 to 50 (over 50 million
women in the United States) for whom x-ray mammography has lower efficacy. These
women often present diffuse palpable benign breast conditions, which can mask
malignancies or pre-malignant conditions.
GOVERNMENT REGULATION
UNITED STATES REGULATION
- ------------------------
The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(TM) device in
the United States. Because the CTLM(TM) is a medical device, IT IS subject to
the relevant provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act")
and implementing its regulations. Pursuant to the FD&C Act, the Food and Drug
Administration ("FDA") regulates, among other things, the manufacture, labeling,
distribution, and promotion of the CTLM(TM) in the United States. The FD&C Act
requirES that a medical device must (unless exempted by regulation) be cleared
or approved by the FDA before being commercially distributed in the United
States. The FD&C Act also requires that manufacturers of medical devices, among
other things, comply with the labeling requirements and to manufacture devices
in accordance with Good Manufacturing Practices ("GMPs"), which require that
companies manufacture their products and maintain related documentation in a
conformed manner with respect to manufacturing, testing, and quality control
activities. The FDA inspects medical device manufacturers and distributors, and
has broad authority to order recalls of medical devices, to seize non-complying
medical devices, to enjoin and/or impose civil penalties, and to criminally
prosecute violators.
Pursuant to the FD&C Act, the FDA classifies medical devices intended for human
use into three classes: Class I, Class II, and Class III. In general, Class I
devices are products the safety and effectiveness of which the FDA determines
can be reasonably assured by general controls under the FD&C Act relating to
such matters as adulteration, misbranding, registration, notification, records
and reports, and GMPs. Class II devices are products for which the FDA
determines that these general controls are insufficient to provide reasonable
assurance of safety and effectiveness, and that require special controls such as
the promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
are devices for which the FDA has insufficient information to conclude that
either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a potential
unreasonable risk of illness or injury. Devices in Class III, such as the
Company's CTLM,(TM) require pre-market approval, as described below.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. There are two review procedures by
which medical devices can receive such approval or clearance. Some devices may
qualify for clearance under a Section 510(k) procedure, which is not applicable
to the CTLM(TM) since it is a Class III devicE. Since the CTLM(TM) does not
qualify for the 510(k) procedure it must apply to the FDA for pre-marketing
approvAL ("PMA") before marketing can begin. PMA applications must demonstrate,
among other matters, that the medical device is safe and effective. A PMA
29
<PAGE>
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 a PMA application will be approved by the FDA. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing. The Company intends to file for expedited review of its PMA
application. See "Regulatory and Clinical Status, United States/FDA". The
inability of the Company to obtain FDA approval would have a material adverse
effect on the Company's business and financial condition and could result in
postponement of the commercialization of the CTLM.(TM) See "Business- Regulatory
and Clinical Status".
Any products manufactured or distributed by the Company pursuant to a PMA are or
will be subject to pervasive and continuing regulation by the FDA. The FDA Act
also requires that the Company's 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 the Company's products may be regulated by various state agencies.
All lasers manufactured for the Company 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 laveling and certification requirements. Various warning
labels must be affixed to the laser, depending on the class for the product
under the performance standard.
The Company and the manufacturers of the Company's products may be inspected on
a routine basis by both the FDA and the individual states for compliance with
current GMP regulations and other requirements.
In addition to the foregoing, the Company is 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 the Company 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 the Company's ability to conduct business.
See "Risk Factors - 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 time
required to obtain approval for sale in foreign countries may be longer or
shorter that that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit the
Company to begin marketing the CTLM(TM) device in Europe aND Asia before
marketing would be permitted in the United States. In order to sell its products
within the European Economic Area ("EEA"), companies are required to achieve
compliance with requirements of the Medical Devices Directive and affix a "CE"
marking on their products to attest such compliance. In Europe, the Company will
be required to obtain the certifications necessary to enable the CE mark to be
affixed to the Company's products in order to conduct sales in member countries
of the European Union. The Company is in preliminary preparations regarding CE
certification. Component parts that have been finalized are being tested in the
Company's 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. The Company has chosen DGM of Denmark as its notifying body. A
notifying body ("NB") is a regulatory body from the private sector, who is
30
<PAGE>
responsible for the review and approval of the documentation submitted by the
Company in order to enable the CE mark to be affixed to products. See "Risk
Factors - 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) device in the European
Economic Area (EEA). THE listed standards are for the EEA market only and
additional document/standards exists for other markets. These standards may have
direct or indirect reference to additional standards and additional standards
may apply:
SAFETY (ELECTRICAL/MECHANICAL) The safety of operators, patients and
maintenance persons are 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. for the same purpose.
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: Safety of laser products. Part 1: Equipment
classification, requirements, and user's guide.
EN 60 950: Safety of Information Technology Equipment
Including Business Equipment.
SAFETY (EMC) 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 basically the
ability of a product to exist in the presence of other products without
the functionality of either device being effected. 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.
PROGRAMMABLE ELECTRICAL SYSTEMS (SOFTWARE) The medical industry has
recently determine 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 ones
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. C collateral standard:
Programmable electrical medical systems.
QUALITY ASSURANCE SYSTEMS In efforts to assure quality processes, he
Company is 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.
31
<PAGE>
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, the Company is 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 marketed outside of the United States
unless the are approved for the use by any member country of the European Union
or certain other countries, Including Australia, Canada, Isreal, Japan, New
Zealand, Switzerland and South Africa, in which case they can be exported to any
country provided that certain notification requirements are met. There can be no
assurance that the Company 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 of the
Company to meet the FDA'sexport requirements or obtain FDA export approval when
required to do so, or obtain approval for import, could have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations.
REGULATORY AND CLINICAL STATUS
UNITED STATES/FDA
- -----------------
On March 19, 1998 the Company submitted the final Report for the Company's IDE.
Also on March 19, 1998 the Company met with representatives of the FDA. The
purpose of the meeting was to describe several options to the Company's IDE and
to get the FDA's perspective on these approaches. It was decided that the
Company will conduct clinical trials under the IDE with 20 patient studies
performed in-house and monitored by an Institutional Review Board ("IRB")
established by the Company. The information obtained from the study will be
submitted to the FDA to enable the Company to commence the clinical studies at
three unaffiliated clinical sites.
In April 1998 the Company appointed seven physicians and one physicist who are
specialists in the following fields: Gynecology/Obstetrics and Mammography (4),
breast surgery (1), Neurology (1), Radiology (1), and optics and laser
engineering (1), to serve on the IRB. The IRB was appointed to review, to
approve the initiation of, and to conduct periodic review of the Company's
research involving human subjects. The primary purpose of the IRB is to assure,
both in advance and by periodic review, that appropriate steps are taken to
protect the rights and welfare of humans participating as subjects of the
32
<PAGE>
research. To accomplish this purpose, IRB's use a group process to review
research protocols and related materials (e.g., informed consent documents and
investigator brochures) to ensure that:
(i) Risks to subjects are minimized by using procedures that are
consistent with sound research design and that do not unnecessarily expose
subjects to risk, and whenever appropriate, by using procedures already
being performed on the subjects for diagnostic or treatment purposes.
(ii) Risks to subjects are reasonable in relation to anticipated benefits
(if any) to subjects, and the importance of the knowledge that may be
expected to result.
(iii) Selection of subjects is equitable.
(iv) Informed consent will be sought from each prospective subject or the
subject's legally authorized representative and will be documented in
accordance with, and to the extent required, by the FDA's informed consent
regulation.
(v) Where appropriate, the research plan makes adequate provision for
monitoring the data collected to ensure the safety of subjects.
(vi) There are adequate provisions to protect the privacy of subjects and
to maintain the confidentiality of data.
(vii) Appropriate additional safeguards have been included in the study to
protect the rights and welfare of subjects who are members of a vulnerable
group.
The IRB is not responsible for nor does it participate in obtaining data, the
interpretation of data or clinical results, or the approval of the CTLM(TM). The
IRB does not receive any compensation for its services; however, IF pursuant to
FDA requirements, one of the members should supervise the actual scanning of
women, they are paid a supervisory clinical honorarium of $250 per day. The
optics and laser engineer IRB member also serves and has served for the past
three years, as a consultant to the Company on an "as needed" basis. He receives
a consulting fee from the Company of $700 per month. The Neurology IRB member is
married to one of the Company's engineers. Pursuant to FDA regulations, these
type of relationship between an IRB member and the Company and an IRB member and
a Company employee are not prohibited.
On May 15, 1998 the Company submitted a supplemental safety report to the FDA
which encompasses all of the modifications and upgrades since the initial safety
report was filed.
In order to collect the clinical data for the PMA, the Company was granted, in
June 1998, its second investigational device exemption ("IDE") to conduct
clinical trials. An IDE allows a company to conduct human clinical trials
without filing an application for marketing clearance. The Company was
authorized to scan 20 patients at its in-house facilities in Plantation,
Florida. On September 1 and September 10, 1998, the Company formally submitted
the first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA.
The FDA responded to the submission on October 1998 asking that the Company
limit future submissions to significant findings, milestones, annual reports, or
changes that may effect the safety of the CTLM(TM). In all the Company scanned
20 women at its 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.
The Company requested that it be permitted to expand the scope of the study to
include a medical facility where access to women with breast cancer is 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.
The significant number of breast surgeries performed each week at Nassau County
was expected to provide a relatively constant supply of histologically confirmed
cases.
33
<PAGE>
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. The Company received final approval to conduct the investigational
study on February 26, 1999. This IDE application is limited to one institution
(Nassau County Medical Center) and 275 subjects. The Company selected the number
275 based on the distribution of the types of breast conditions outlined in the
IDE protocol. Pursuant to the Company's 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,
the Company elected to establish one clinical site, Nassau County, and begin
testing before expanding the next series of clinical tests to additional
locations.
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 CTLM(TM) was shipped on March 3, 1999 and was
installed, calibrated, and ready to scan on April 19, 1999. The installation at
Nassau County Medical Center has taken considerably longer, but has been
hampered by several administrative problems within the hospital caused by
outside interference. Unknown to the Company, a prisoner at the Nassau County
jail was beaten and died on January 13, 1999. One of the Nassau County
physicians, who is one of the principal investigators chosen by Nassau County
for the CTLM(TM) clinical trials, was the surgeon in charge and, along with two
residentS, subpoenaed to testify before a federal grand jury looking into the
death of Nassau jail inmate that was ruled a homicide by the Nassau County
Medical Examiner.
The investigation into the inmate's death was ongoing when another unforeseen
event occurred, a demeaning Miami Herald newspaper article appeared on February
22, 1999. The Company has outside counsel reviewing the article with respect to
the intention of the authors, the accuracy of the information, defamation, and
libel. Nassau County administrators received a copy of the article through an
unknown source within days of when the article appeared. Nassau County then
began to receive harassing and defamatory phone calls with regard to the Company
and the clinical trials. The tone of the article coupled with phone calls caused
a serious concern among the Board of Governors (the "Board") of Nassau County.
With one scandal already unfolding, the Board wanted to be sure that there would
be no problems with the CTLM(TM) clinical trials.
On March 3, 1999, Nassau County halted the installation of the CTLM(TM) until
the hospital could decide whether OR not it wanted to proceed with the clinical
trials. After a meeting with the Chief Executive Officer, Medical Director and
several of the Board members of Nassau County on March 22, 1999 to discuss the
issues, on March 26, 1999, Nassau County provided the Company with the following
conditions under which the installation could continue:
1. NCMC would have a laser expert review the use of the laser for
breast imaging,
2. The Company would reimburse Nassau County for costs associated with
the project,
3. The Head of Radiology would receive print-outs of the results
immediately after each CTLM(TM) scan, and
4. No publicity.
On March 29, 1999 a letter was sent to Nassau County requesting confirmation of
the four conditions. A written reply has not been received. On March 30, 1999, a
letter was written by the Nassau County Medical Director granting IDSI access to
the examination room to complete the installation and commence the study. On
March 30, 1999, IDSI personnel arrived to continue the installation. During the
installation, it was learned that the heat load produced by the CTLM(TM) device
had not been considered by the Nassau County facilities personnel. The roOM
temperature rose above an acceptable operating temperature for the lasers.
Calibration of the CTLM(TM) could not BE performed until the temperature problem
was resolved. On April 14, 1999, Nassau County provided a portable air
conditioning unit for the room. On April 15, 1999, IDSI personnel completed the
calibration of the CTLM.
On April 19, 1999, the Company's applications specialist arrived to work out the
day-to-day working relationships between her and the Nassau County staff. During
these discussions it was learned that Nassau County was trying to change the
protocol of the IDE even though it had already been reviewed and approved by
both the Nassau County IRB and the FDA. The Board of Nassau County had
arbitrarily decided not to allow Company personnel access to the mammography
films and, where available, the ultrasound and/or magnetic resonance imaging
(MRI) images until after all 275 patient scans were completed.
On April 19 and 20, 1999, a letter was written to the Medical Director of Nassau
County and the two principal investigators, respectively, to discuss the new
requirements. Nassau County did not respond to either letter. On May 5, 1999,
Nassau County orally provided the Company with the following conditions in order
to begin the clinical studies:
34
<PAGE>
1. No patient information, i.e., mammography, ultrasound, and/or
ultrasound films or reports would be released to the Company until all
275 patients have been scanned,
2. NCMC medical staff would select, without the Company's involvement
and knowledge of the patient's condition, all patients that are
examined, and
3. IDSI was asked to pay 6-months of testing expenses in advance.
The conditions, as of May 10, 1999, imposed by Nassau County essentially prevent
IDSI from performing any comparisons until all 275 volunteers have been scanned
with the CTLM. These conditions are in direct contradiction to the previously
accepted IDE protocol, and have been caused, the Company believes, as a direct
result of the Miami Herald article and tortuous acts by certain individuals. The
Company believes that the "blind study" proposed by Nassau County would defeat
the purpose of the clinical investigational trials. If the Company accepts the
new protocol, in order to proceed with the study it would have to amend and
resubmit the IDE protocol.
Nassau County was asked for a written confirmation of its position and an
estimate of the expenses that the Company would be required to pay at the start
of the clinical testing. As of May 15, 1999, Nassau County has not replied. To
date, over $26,000 has been spent on the Nassau County installation and the
study has been delayed by at least 90 days through no fault of the Company.
Because of the delay and the uncertainty of the Nassau County clinical
investigational trials, the Company is unable to project when the PMA will be
ready for submission. Due to these atypical delays, no patients have been
scanned to date.
The Company is presently examining the options available to it, which are:
1. Move the CTLM(TM) system to another hospital with a more friendly
environment,
2. Accept Nassau County's terms and conditions, as they are described
above, or
3. Refuse to provide CTLM(TM) images to NCMC until they provide
mammography, ultrasound, and/or ultrasouND films or reports.
There could be no way that IDSI could have foreseen these delays that are
atypical for CTLM(TM) installatioN. Because of the circumstances surrounding
this installation, no volunteers have been scanned as of May 10, 1999.
At present the Company believes that the issues with Nassau County can be
resolved, however it has already entered into preliminary discussions with
several other medical facilities in the event that it has to terminate the
Nassau County site. In addition, the Company has entered into discussions with
four hospitals, which are located in Chicago, Boston, and New York for potential
clinical test sites. Although no firm commitments have been obtained from these
hospitals, the Company believes that it will be able to expand the clinical
testing to these areas. In order to move its Nassau County IDE to another site
or to expand its clinical trials to other sites, the IDE application for Nassau
County would have to be amended by supplying the required documentation i.e. the
protocol, signed investigator agreement, IRB approvals and the informed consent
form. See "Risk Factors-Government Regulation". See "Business-Regulatory and
Clinical Status-United States/FDA" and Business Government Regulations"
The Company intends to perform studies at four hospitals each of, which will
follow the IDE protocol 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, not have a
histological confirmation of their respective condition, for example a woman
dies before her surgery, or other reason. Additionally, the Company plans 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.
35
<PAGE>
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 the Company 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
table below.
<TABLE>
<CAPTION>
------------------------ ----------------------- --------------------------------
Highest Degree Earned Professional Specialty Affiliation With NCMC
General - Specific
------------------------ ----------------------- --------------------------------
<S> <C> <C> <C>
M.D. Neurology Yes
------------------------ ----------------------- --------------------------------
M.D. Surgery Yes
------------------------ ----------------------- --------------------------------
M.D. Pediatrics Yes
------------------------ ----------------------- --------------------------------
Reverend Other Fields, Religion Yes
------------------------ ----------------------- --------------------------------
M.D. Obstetrics & Yes
Gynecology
------------------------ ----------------------- --------------------------------
Ph.D Psychiatry; Yes
Behavioral Scientist
------------------------ ----------------------- --------------------------------
M.D. Pathology Yes
------------------------ ----------------------- --------------------------------
M.D., Medicine- Yes
Ph.D. Allergy/Immunology
------------------------ ----------------------- --------------------------------
M.B. Administrator No
------------------------ ----------------------- --------------------------------
J.D. Other Fields, Law No
------------------------ ----------------------- --------------------------------
M.D. Psychiatry Yes
------------------------ ----------------------- --------------------------------
M.D. Pediatrics Yes
------------------------ ----------------------- --------------------------------
Ph.D. Obstetrics & Yes
Gynecology
------------------------ ----------------------- --------------------------------
M.D. Psychiatry Yes
------------------------ ----------------------- --------------------------------
Ph.D. Biostatistician Yes
------------------------ ----------------------- --------------------------------
Ph.D. Anesthesiology Yes
------------------------ ----------------------- --------------------------------
B.S., Pharmacy Yes
R.Ph.
------------------------ ----------------------- --------------------------------
Ph.D. Medicine - Yes
Biochemistry
------------------------ ----------------------- --------------------------------
Ph.D. Pediatrics Yes
-Microbiology
------------------------ ----------------------- --------------------------------
Ph.D. Administrative Yes
------------------------ ----------------------- --------------------------------
M.D. Director for Academic Yes
Affairs
------------------------ ----------------------- --------------------------------
Ph.D. Pathology Yes
------------------------ ----------------------- --------------------------------
M.D. Academic Affairs Yes
------------------------ ----------------------- --------------------------------
</TABLE>
In order to sell the CTLM(TM) device commercially in the United States, the
Company must obtain marketing clearanCE from the FDA. A PMA application must be
supported by extensive data, including pre-clinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.
The FDA has adopted a policy of expedited review that is available to medical
devices satisfying one or more of the following criteria:
o The device addresses a condition, which is serious or life
threatening or presents a risk of serious injury for which no
alternative legally marketed diagnostic/therapeutic modality
exists.
o The device addresses a condition, which is life threatening or
irreversibly debilitating, and provides for clinically important
earlier diagnosis or significant advances in safety and/or
effectiveness over existing alternatives.
o The device represents a clear clinically meaningful advantage over
existing technology, defined as having major (not incremental)
increased effectiveness or reduced risk compared to existing
technology.
o The availability of the device is otherwise in the best interest
of the public health.
Although the Company believes that it qualifies for expedited review, there can
be no assurance that any such review will be granted of if granted that the PMA
will be approved or that such approval will be received on a timely basis. See "
Business-Government Regulation".
36
<PAGE>
FOREIGN
- -------
The Company has begun the process of evaluating the CTLM(TM) for application of
regulatory approval marks aND showing compliance with the MDD which allows
placement of the CE Mark. Many steps need to be taken into consideration with
the end goal of accessing the EEA market. The following is a brief explanation
of the steps the Company has taken or is currently taking to achieve this goal.
EVALUATING AND SECURING A NOTIFIED BODY ("NB") - The role of an NB is to assist
manufacturers (domestic and international) in showing compliance with the
governmental regulations that govern that specific category. Each country's
government is able to designate a Competent Authority, which, among other
things, is responsible for the evaluation of regulatory non-governmental
agencies for designation as a NB.
An agency can be approved to be a NB for different categories (i.e. electrical
products, machinery, medical, etc.).. For instance, the NB that the Company will
choose will be one that is approved to assist manufacturers in showing
compliance with MDD. As MDD is very encompassing (product safety, quality
assurance, EMC, software, etc.) some NBs are only approved to assist
manufacturers in certain areas (i.e. quality assurance evaluations) and the
manufacturer will need to look to another NB for assistance in the other areas.
The Company is in the process of evaluating applicable NBs and intends to select
a NB that can assist it in all matters of the MDD.
The evaluation and acceptance of an appropriate NB is critical since changing an
NB once chosen is a costly matter. Great care must be taken in finding a NB with
a reputation for educated interpretation of requirements and excellent customer
service. The Company has completed its evaluation and has 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).
The Company plans to work with UL to obtain approvals for the U.S. market. DGM
has provided the Company with information on the necessary steps in accessing
the market of the EEA, however no contracts have been entered into at this time.
PRODUCT SAFETY EVALUATION - The Company believes that one of the most important
aspects of product safety is the design of the product. If safety standards are
not considered through the design of the product, the product safety evaluation
may require that the mechanical and electrical parts of the product be
re-designed. The Company has made every effort to confirm throughout the
CTLM(TM) design process that it is in compliance with aLL domestic and
international safety standards. In this manner, the Company is very much
involved in the product safety evaluation and, although the Company has not
entered into contract with a NB for this purpose, it is in contact with several
regulatory agencies on a regular basis for guidance. There are, however, some
considerations that cannot be anticipated, such as electrical magnetic
compatibility ("EMC"), which requires equipment that is not cost effective for
the Company to purchase in order to evaluate. There is also the consideration of
new requirements, or new interpretations of existing requirements, that may
effect the CTLM(TM).
QUALITY ASSURANCE - The Company's current goal is to implement a full quality
system at the Company's corporate offices. The Company's Quality Assurance
Manager ("QAM") has begun the process of implementation in accordance with the
required standards. After implementation of the quality system, auditors are
required to review a history of the system in particular how it works and how
the normal difficulties that occur in design and manufacturing were overcome.
The Company's QAM and the NB will need to determine how much history is required
for proper proof that the system is adequate.
SOFTWARE EVALUATION - The preparations for software evaluation are headed by the
Company's Software Manager. Because the standards in this area are relatively
new to the industry, regulatory agencies will be very cautious in the
evaluation. Through advice from the proposed NB, the Company has begun document
preparation for evaluation submission. One of the larger steps in documentation
preparation for this evaluation is the risk analysis for the device. Although
there may be changes to the CTLM(TM) that may effect the report, the Company hAS
completed a risk analysis for the CTLM(TM) and is ready to proceed with the
remainder of the documentation.
EFFICACY - Almost any market will require the proof of the effectiveness of a
medical device. This is done by clinical trials and is a process that is
basically the same for the United States as for the EEA, however reporting
methods may differ. As the Company continues with clinical trials in the U. S.,
these efforts will also benefit it in the EEA market.
37
<PAGE>
SALES AND MARKETING
The Company presently employs a Director of Sales. His job consists of locating,
obtaining and coordinating with strategic marketing and distribution companies
who have established marketing capabilities, both domestic and international.
The target domestic market includes most of the over 10,000 mammography centers
across the United States, which exist in both large and small hospitals and
private clinics. The international target market is large government and private
hospitals.
Since the field of Medical Optical Imaging is relatively new to most
radiologists and mammographers and to the extent that, and rate of which, the
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 device over existing technology
and cancer detection methods. The Company has focused its efforts on
establishing a presence at major Breast Imaging Conferences that are held each
year. Failure of the Company's products to gain market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations. There can be no assurance that physicians or the medical
community in general will accept and/or utilize the CTLMTM.
In order to market any products it may develop, the Company will have to develop
a marketing and sales force with technical expertise and distribution
capability. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or that the Company will be successful in
gaining market acceptance for any products it may develop.
RELIANCE ON INTERNATIONAL SALES.
- --------------------------------
The laws of certain European and Asian countries may permit the Company to begin
marketing the CTLM(TM) device IN Europe and Asia before marketing would be
permitted in the United States. See "Business-Government Regulation." The
Company intends to commence international sales of the CTLM(TM) in Europe and
Asia prior to commenciNG commercial sales in the United States, where sales
cannot occur unless and until the Company receives pre-market approval from the
FDA. Thus, until the Company receives pre-market approval from the FDA to market
the CTLM(TM) IN the United States, as to which there can be no assurance, the
Company revenues, if any, will be derived from sales to international
distributors. A significant portion of the Company's revenues, therefore, may be
subject to the risks associated with international sales, including economical
and political instability, shipping delays, fluctuation of foreign currency
exchange rates, foreign regulatory requirements and various trade restrictions,
all of which could have a significant impact on the Company's ability to deliver
products on a timely basis. Future imposition of, or significant increases in
the level of customs duties, export quotas or other trade restrictions could
have a material adverse effect on the Company's business, financial condition
and results of operations. The regulation of medical devices, particularly in
Europe, continues to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company. See "Risk
Factors-Government Regulation".
INTERNATIONAL DISTRIBUTORS
In January 1998, the Company entered into an International Distribution
Agreement with Emtron, a leading medical equipment distributor based in the
Republic of Turkey. Emtron currently represents products for companies such as
Summit Technology, Sunrise Medical Technology, Iris Medical Instruments, Telsar,
and Medlab, among many others, in the Republic of Turkey. Emtron appears to have
a strong presence in the industry, marketing to the 30 university hospitals, the
Social Security System (which has over 100 hospitals) and larger private
hospitals in Turkey.
Pursuant to the Agreement, Emtron will have exclusive rights to market the
CTLM(TM) device in the Republic of Turkey for a term of 18 months with an option
to renew for an additional one-year term. The Company believes that this
alliance with Emtron will give the CTLM(TM) a tremendous exposure in the
Republic of Turkey.
In April 1998, the Company entered into an exclusive International Distribution
Agreement with Focus Surgical LTD., to distribute the CTLM(TM) device to
hospitals and clinics throughout the United Kingdom and Ireland. THE term of the
Agreement is three years, with a minimum purchase requirement of 10, 12, and 15
CTLM(TM) devices in tHE first, second, and third year(s) of the Agreement,
respectively. For the purpose of the Agreement, the first year is deemed to
begin when the Company obtains PMA acceptance from the FDA. See "Risk
Factors-Government Regulation, "Risk Factors-Reliance on International Sales"
38
<PAGE>
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, the Company entered into distribution agreements with
Consultronix and Iberadac to distribute the CTLM(TM) through out Poland and
Portugal and Spain, respectively. The Agreements are for a term of 3 years, with
a renewal option by the Company for an additional one year, provided that 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.
The Company has already secured exclusive distributors as follows:
INTERNATIONAL DISTRIBUTORS BY COUNTRY
<TABLE>
<CAPTION>
RENEWAL OPTION
COUNTRY TERM EXPIRATION BY THE COMPANY RENEWAL PERIOD
------- ---- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Australia 3 years 3/13/00 Yes 2 years
Austria 3 years 3/11/00 Yes 2 years
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
France 29 months 12/31/98 Yes 2 years
Germany 3 years 3/11/00 Yes 2 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 12/31/98 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
</TABLE>
To date, the Company has not marketed, or generated revenues from the
commercialization of the CTLM(TM). OriginalLY the Company anticipated that the
CTLM(TM) would be ready for distribution in the summer of 1998, however during
tHE course of 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
39
<PAGE>
correct such problems. Due to the delays in the Nassau CounTY clinical
investigation trials the Company is presently unable to project when the first
distribution of the CTLM(TM) will occur.
THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of the Company's products by regulating
the level of reimbursement provided by such payors to the physicians and clinics
utilizing the CTLMTM or by refusing reimbursement. If examinations utilizing the
Company's products were not reimbursed under these programs, the Company's
ability to sell its products may be materially and/or adversely affected. There
can be no assurance that third-party payors will provide reimbursement for use
of the Company's products. Several states and the U.S. government are
investigating a variety of alternatives to reform the health care delivery
system and further reduce and control health care spending on health care items
and services, limit coverage for new technology and limit or control the price
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have material adverse effect on the Company's business, financial
condition and results of operations. In international markets, reimbursement by
private third-party medical insurance providers, including governmental insurers
and independent providers, varies from country to country. In certain countries,
the Company's ability to achieve significant market penetration may depend upon
the availability of third-party governmental reimbursement. Revenues and
profitability of medical device companies may be affected by the continuing
efforts of governmental and third party payers to contain or reduce the cost of
health care through various means. See "Risk Factors- Limitation on Third Party
Reimbursement; Health Care Reform".
PRODUCT LIABILITY
The Company's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing, and marketing of cancer detection
products. Significant litigation, not involving the Company, has occurred in the
past based on the allegations of false negative diagnoses of cancer. While the
CTLMTM device is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability. Although the FDA does not require liability
insurance and the Company did not acquire it for the Strax or in-house clinical
investigational trials, at present, the Company carries $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 "Risk Factors-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 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, regulatory, manufacturing, human and
marketing resources, and experience than the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective or less costly than those
developed or marketed by the Company or that would render the Company's
technology and products obsolete or noncompetitive. Additionally, there can be
no assurance that the Company will be able to compete against such competitors
and potential competitors in terms of manufacturing, marketing, and sales.
To a great extent, 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, and
thermography, diaphonography and transilluminational devices. Physicians
presently using these customary types of imaging equipment may not use the
Company's products. Although the Company believes that its products may offer
certain technological advantages over its competitors' currently-marketed
products, earlier entrants in the market for a diagnostic application often
obtain and maintain significant market share relative to later entrants.
40
<PAGE>
Currently, mammography is employed widely and the Company's ability to sell the
CTLMTM device to medical facilities will, in part, be dependent on the Company's
ability to demonstrate the clinical utility of the CTLMTM device as an adjunct
to mammography and physical examination and its advantages over other available
diagnostic tests. The competition for developing a commercial device utilizing
computed tommography techniques and laser technology is difficult to ascertain
given the proprietary nature of the technology. There are a significant number
of academic institutions involved in various areas of research involving
"optical medical imaging" which is a shorthand description of the technology the
Company's CTLMTM device utilizes. A brief list of the most prestigious of these
institutions includes the University of Pennsylvania, The City College of New
York, and University College London. Two of these institutions have granted
licenses on certain patented technologies to two companies: University of
Pennsylvania - Non-Invasive Technologies; City College of New York -
MediScience, Inc.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's 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 the Company's business, financial condition and results of
operations
PATENTS
In December 1997, the patent for the CTLMTM was issued by the United States
Department of Commerce Patent and Trademark Office under Patent Number 5692511
(the "Patent"). 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.
The Company owns the rights, to the Patent pursuant to an exclusive patent
licensing agreement, for the use of the Patent for the CTLM(TM) technology. The
life of a Patent is 17 years. The Patent is owned by Richard GrablE, the
Company's Chief Executive Officer. In addition, the Company has twelve
additional United States patents pending with regard to Optical Tomography, as
follows:
<TABLE>
<CAPTION>
U.S. PATENTS PENDING
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
Apparatus
(Electronics & Imaging)
Yes Diagnostic Tomographic Laser Imaging 6356-US 08/952,821 7/31/98 Pending
Apparatus
(Patient Support Structor) in addition to
above
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
Surface
of an Object Being Scanned
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Device for Determining the Perimeter of the 6559-1 08/965,149 11/6/97 Pending
Surface of an Object Being Scanned and for
Limiting Reflection from the Object Surface
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 for 6572-1 08/979,328 11/26/97 Pending
Use
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
Object
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 Pending
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 # No CCD Array Used as a Multiple-Detector
6825 60/118,745 2/5/99
</TABLE>
41
<PAGE>
Neither the Company nor Mr. Grable hold foreign patents, however the table below
sets forth certain information with regard to the patents that have been applied
for.
<TABLE>
<CAPTION>
FOREIGN PATENT APPLICATIONS PENDING
AUSTRALIA
INV. DATE INVOICE# DESCRIPTION FOR INTL. APPL. # FILING DATE
- --------- -------- ----------- --- ------------- -----------
<S> <C> <C> <C> <C> <C>
12/29/97 C974248JD National Phase in Diagnostic Tomographic PCT/US95/08225 7/10/95
Australia Laser Imaging Apparatus
of PCT Appl.
CANADA
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
2/4/98 C984481JPD National Phase in Diagnostic Tomographic PCT/US95/08225 7/10/95
Canada Laser Imaging Apparatus
of PCT Appl.
CHINA
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
5/27/98 PM986040JD Chinese Patent Appl. Diagnostic Tomographic PCT/US95/08225 7/10/95
Laser Imaging Apparatus
For Invention
EUROPEAN
PATENT OFFICE
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
1/28/98 C984270JD National Stage in Diagnostic Tomographic PCT/US95/08225 7/10/95
Europe Laser Imaging Apparatus
of PCT Appl.
JAPAN
2/5/98 C984482JPD Natl. Phase in Japan Diagnostic Tomographic PCT/US95/08225 7/10/95
Laser Imaging Apparatus
of PCT Appl.
MEXICO
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
9/2/98 C987553JD National Phase in Diagnostic Tomographic PCT/US95/08225 7/10/95
Mexico Laser Imaging Apparatus
of PCT Appl.
42
<PAGE>
PCT COVERS
EUROPEAN
COUNTRIES
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
Imaging Apparatus
2/19/98 C984498JPD PCT Intl. Appl of IDSI Detector Array for Use in a PCT/US97/20970 11/28/97
Laser Imaging Apparatus
2/19/98 C984497JPD PCT Intl. Appl of IDSI Method for Reconstructing PCT/US97/23160 11/28/97
the Image of an Object
Scanned with a Laser
Imaging Apparatus
3/18/98 C985531JPD PCT Intl. Appl. Of Device for Determining the PCT/US97/19615 11/7/97
Wake, Perimeter of the Surface
Grable & Rohler of an Object Being Scanned
and for Limiting
Reflection from the Object
Surface
5/13/98 C986209JPD PCT Intl. Appl of IDSI Apparatus for Determining PCT/US97/19614 11/7/97
the Perimeter of the
Surface of an Object Being
Scanned
1/20/99 C999316JD PCT Intl. Appl of IDSI Time-Resolved Breast PCT/us98/24939 11/25/98
Imaging Device
</TABLE>
The Company intends to file for patents on products, including the CTLM(TM), for
which it feels the cost of obtaining a patent is economically reasonable in
relation to the expected protection obtained. There can be no assurances that
any patent that the Company applies for will be issued, or that any patents
issued will protect the Company's technology. If the patents the Company license
or obtains are infringed upon, or if the Company is required to defend any
patent infringement cases brought against it, it will require substantial
capital, the expenditure of which the Company might not be able to afford. See
"Risk Factors-Patents"
PATENT LICENSING AGREEMENT
BACKGROUND
In December of 1993 Richard Grable, Linda Grable and Allan L. Schwartz (the
"Founders"), Imaging Diagnostic Systems, Inc., which at that time was a
privately held Florida corporation (the "Private Company"). The sole purpose of
the Private Company was to further develop Richard Grable's invention, a CT
laser breast-imaging device (the "Mammoscan(TM)"). The Mammoscan(TM) had already
been exhibited at the RSNA 89' session and held the promise of a new, emerging
technology for the detection of breast abnormalities without compression or
ionizing X-rays. This device used a laser diode for its energy source and a 386
processor that was extremely slow. Once the technology required to speed up the
processing became available the Founders believed that this device would be a
major breakthrough in the early detection of breast cancer.
It was unanimously decided that the Private Company should merge with a public
shell and raise its initial seed funding through the sale of common stock
pursuant to Regulation D, Rule 504. On April 14, 1994 the Company merged with
Alkan Corp., a New Jersey public company. Alkan Corp.'s name was changed to
Imaging Diagnostic Systems Inc. and the privately held Company was dissolved.
Although the Company and Mr. Grable had an understanding that the Company 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 December1997. 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). The Company still did not have a binding agreement with regard to its
use of the Patent.. When Mr. Grable filed the patent application in June of
1995, the Board instructed the Company's General Counsel to draft an Exclusive
Patent License Agreement. The Company's 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 the Company did not realize that a formal agreement had
not been executed.
43
<PAGE>
NEGOTIATIONS
- ------------
In September 1997 the Company hired new general counsel. In her review of the
records of the Company she discovered that no agreement for the use of the
Patent had been executed and apprised the Board of Directors of this fact that
the Company had no binding agreement for the use of the Patent. Since it was
always the intent of Mr. Grable to grant the Company an exclusive license to the
Patent, a licensing agreement was negotiated The Company's General counsel
represented the Company and Mr. Grable retained separate counsel for himself.
Mr. Schwartz negotiated the terms of the Patent License Agreement on behalf of
the Company. The Company 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 the Company, the
Company believes 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 for the
Company upon receiving FDA marketing clearance.
Moreover, the Company believes that the terms of the Patent License Agreement
are fair to the Company 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. The
Company's belief is based on the following facts and circumstances;(i) an oral
understanding with Mr. Grable already existed from the inception of the Company
regarding the Patent License; (ii) a Royalty Agreement was already included in
Mr. Grable's Employment Agreement; (iii)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; (iv) the Company had expended substantial funds for the
development of the CTLM(TM)and technically had no legal right for its use; (v).
Mr. Grable and Mr. Schwartz both had a fiduciary duty to the Company and its
Shareholders to formalize, in writing, the oral agreement regarding the Patent
and (vi) the value of the Patent to the Company 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 the Company received FDA marketing
clearance in the latter part of calendar 1998. Since all of the revenues and the
Company's 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, the Company is unable to determine when they anticipate
FDA Marketing Clearance. Moreover, due to these delays, the Company is unable to
determine when it will begin to generate revenue.
Due to the foregoing and because, under Mr. Grable's guidance, the development
of the CTLM(TM) was nearing completion, FDA clinical trials were underway, and
three external clinical sites at hospitals in the United States were being
planned, and because the Board believed that the transaction was fair, the lack
of a fairness opinion by a financial advisor did not affect the decision of the
Board. This situation placed Mr. Grable in better bargaining position, which
strengthened as the CTLM(TM) moved closer to being a marketable medical imaging
device.
Initially, Mr. Grable's counsel advised him to request 15 million shares of
common stock that would be immediately registered in order to afford Mr. Grable
protection against dilution. The Company rejected that offer and continued
negotiating. After several offers and counter offers and several discussions,
Mr. Grable accepted a lesser number of shares (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.
Once the Company begins to generate revenues, it is contractually obligated to
pay, until July 4, 1999 (the expiration date of Mr. Grable's Employment
Agreement), Development Royalties set forth below pursuant to Mr. Grable's
Employment Agreement and the Licensing Royalties set forth below pursuant to the
Patent Licensing Agreement until such time as the Patent Licensing Agreement is
ratified by the shareholders.
See "The Agreement" below.
Pursuant to the License Royalty structure, the percentage of Royalties to be
paid is in a declining scale as opposed to the ascending scale contained in the
Amendment to Mr. Grable's Employment Agreement. Although the License Royalty
structure is higher on every level than the Development Royalty structure, the
Company believes that in the long run it is more advantageous for the Company 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:
44
<PAGE>
<TABLE>
<CAPTION>
DEVELOPMENT ROYALTY STRUCTURE LICENSING ROYALTY STRUCTURE
----------------------------- ---------------------------
GROSS SALES PERCENTAGE GROSS SALES PERCENTAGE
------------------------- ----------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
$0 to $999,999 2.5% $0 to $1,999,999 10%
------------------------- ----------------- ---------------------- ------------------
$1,000,000 to $1,999,999 3% $2,000,000 to 9%
$3,999,999
------------------------- ----------------- ---------------------- ------------------
$2,000,000 to $3,999,999 3.5% $4,000,000 to 8%
$6,999,999
------------------------- ----------------- ---------------------- ------------------
$4,000,000 to $9,999,999 4% $7,000,000 to 7%
$9,999,99
------------------------- ----------------- ---------------------- ------------------
Greater than $10,000,000 5% Greater than 6%
$10,000,000
------------------------- ----------------- ---------------------- ------------------
</TABLE>
AGREEMENT
- ---------
In June 1998, the Company and Mr. Grable, entered into the Patent Licensing
Agreement. Pursuant to the terms of the Patent Licensing Agreement, the Company
was granted the exclusive right to modify, customize, maintain, incorporate,
manufacture, sell, and otherwise utilize and practice the Patent, all
improvements thereto and all technology related to the process, throughout the
world. This license shall apply to any extension or re-issue of the Patent. The
term of the license is for the life of the Patent (17 years) and any renewal
thereof, subject to termination, under certain conditions. As consideration for
the License, on June 5, 1998, the Company issued to Mr. Grable 3,500,000 shares
of common stock and is required to issue and additional 3,500,000 shares in June
1999. The market price of the Shares at the time of issuance was $.54 per Share.
In addition, the Company has agreed to pay to Mr. Grable, a royalty based upon
the net selling price (the dollar amount earned from the sale by the Company,
both international and domestic, before taxes minus the cost of the goods sold
and commissions or discounts paid), of all products and goods in which the
Patent is used, before taxes and after deducting the direct cost of the product
and commissions or discounts paid (the "Royalty"). 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.
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 shareholder approval was not required by the Florida Business Corporation
Act. Pursuant to the Patent License Agreement, the Company is required to have
the Patent License Agreement ratified by its Shareholders at its next special or
annual meeting of Shareholders in order for the Licensing Royalties set forth
above, to take the place of the Development Royalties set forth in the Amendment
to Mr. Grable's Employment Agreement, and for such Amendment to become void and
have no effect. The ratification by the shareholders was requested by Mr.
Grable, based upon advice from his counsel. If shareholder ratification is not
obtained, the Company would contractually be required to pay Development
Royalties until July 4, 1999 (the expiration date of Mr. Grable's Employment
Agreement) in addition to the Patent License Royalties. If ratification is
received, in the event that litigation is instituted with regard to the validity
of the Patent License Agreement, the Company or Mr. Grable could and may assert
as a defense that shareholders approved the Patent License. All shareholders
will be entitled to vote on the ratification.
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 the Company's common stock,
reorganization of the Company, consolidation with or merger into or sale or
conveyance of all or substantially all of the Company's assets to another
corporation or any other similar event which serves to decrease the number of
Shares issued pursuant to the Patent Licensing Agreement. See "Risk
Factors-Possible Conflict of Interest" and "Certain Transactions". The Patent
has generated no revenues to date. The Company had anticipated generating
revenues in the 4th 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, the Company 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, the
Company received correspondence from Kodak, which confirmed that the Company's
OEM agreement would not be changed by the acquisition of Imation. At that the
time, the Company purchased a new Dry View Imager which was delivered on April
45
<PAGE>
5, 1999. The additional Imation Dry View Imager on loan to the Company as a
demonstrator was shipped to Nassau County Medical Center on April 7, 1999.
Pursuant to the OEM Agreement, the Company has been granted a limited,
nonexclusive, worldwide, royalty-free license to use Imation's proprietary
information with regard to technical interface, and timing diagrams,
specification, definitions, and drawings defining such technical interface (the
"Dry View Technology").
The OEM Agreement also gives the Company the right to market the Dry View
Technology directly or indirectly through its Distributors. The DryView(TM)
imagesetting film is a hard-dot quality film that requirES NO CHEMIcal
PROCESSING, 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. Due to the fact that the processing procedure for the
DryView(TM) does not use chemicals and therefore eliminates the possibility of
environmental contamination, eliminates the need for a dark room and eliminates
the cost of chemical processing, the Company believes that the Dry View
Technology will provide the Company's end uses with the most efficient,
economical, and ecological product in the medical industry.
It was originally believed that the OEM agreement could provide the Company with
immediate revenues from 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
the Company would be competing with Imation's (now Kodak's own sales force) and
others who have vaster resources and personal than the Company. Due to this
competition factor, the Company has not marketed any DryView to date and will
use the technology as a Value-added option to the CTLM(TM) device when sold,
thus eliminating the need for the customer to set up a dark room and purchase
chemicals for processing, which traditional image processors require. It also
eliminates the need for a dark room.
NASDAQ LISTING
On March 24, 1996, the Company filed its application with Nasdaq to be listed on
the Small Cap Market. The Company's request for listing was subsequently denied
after a hearing before the Listing Qualifications Panel (the "Panel"). The
denial was based upon the fact that one of the Company's outside shareholders
(the "Shareholder"), who had no control or relationship with the Company, other
than as a minority shareholder, had a questionable background and owned a 5%
interest in the Company.
As a result, the Company appealed the denial decision to the Nasdaq Listing and
Hearing Review Committee (the "Committee") which on February 5, 1997, reversed
the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying initial
inclusion be reversed and the case be remanded to the Staff with
instructions to implement the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th provided
Nasdaq with copies of all documentation necessary to satisfy any concerns that
the Panel had regarding the Shareholder. On March 31, 1997, prior to the time
Nasdaq acted on the proposal, Barron's published an inaccurate article stating
that a Nasdaq spokesman indicated that the listing would be denied. For the 36
trading day period prior to the date of this article the Company's stock traded
at $3.00 and above. The article had a predictable negative impact on the
Company's stock and the price dropped below $3.00 and did not recover , despite
a retraction from Barron's on April 7, 1997. See "Market Price of Securities.
Based upon this decline the Nasdaq staff refused to approve the Company's
application for listing. ". On May 14, 1999, the Company's common stock closed
at $.53.
The Company appealed the denial of the listing at an oral hearing before the
Nasdaq Qualification Hearing Panel (the "Panel") in Washington D.C. on January
22, 1998. On February 10, 1998, the Panel issued its decision which stated, in
part that despite the Company's argument, the Panel was of the opinion that the
Company 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 the
Company to effect a reverse split sufficient to raise the bid price above the
$4.00 minimum. The Panel was of the opinion that the Company was in compliance
with the net tangible assets requirement, however the Panel expressed concern
relating to the Company's ability to maintain compliance with the $2,000,000 net
46
<PAGE>
tangible assets requirement over the long term. The Panel granted the Company's
request for initial inclusion on the Nasdaq Small Cap Market, subject to the
following conditions:
1. On or before May 11, 1998, the Company must effect a reverse stock
split sufficient to raise its bid price to, or above $4.00 per share for the
opening of one trading day or in the alternative, on or before May 11, 1998, the
Company must have and retain for 10 consecutive trading days a $4.00 bid price
through natural forces.
2. On or before May 11, 1998, the Company must make a public filing
with the SEC and Nasdaq evidencing a minimum of $5,000,000 in net tangible
assets.
Due to the substantial amount of preferred shares outstanding at the time, the
Board of Directors determined that a reverse split at this time would be
detrimental to the interests of its shareholders and vetoed the proposal for the
reverse split. The conditional listing expired on May 11, 1998.
The Company immediately appealed this decision to the Nasdaq Listing and Hearing
Review Council (the "Council"). On May 19, 1998 the Company received the
Decision of the Council which affirmed the decision of the Panel. The Council
stated that:
"In making this decision, we find unpersuasive the Company's argument that
on remand, it was not required to satisfy the initial inclusion bid
requirement, or by implication, any of the other listing requirements. In
fact the purpose of a remand and the continuing role of the staff in the
process is to provide assurance that the Company satisfied Nasdaq listing
requirement at the time it was listed, a fact that the Company likely
understood when it went through the re-application process following
remand."
The Company contends that this determination is incorrect in that the Company
never went through a re-application process following remand. The Council went
on to state, in part, that:
"The Company could have no reasonable expectation that it received a
waiver of Nasdaq listing standard. The decision merely determines that the
ownership of the shareholder at issue would not prevent listing, given the
Company's plan to insulate itself. We believe that the Panel's exception,
which appears to be within the Company's control to achieve, was
appropriate. While the incorrect Barron's article was unfortunate, we note
that a retraction was later printed and sufficient time has passed to
allow the Company's stock to be fairly priced in the market. We note that
at the time of our consideration, the bid price for the Company's 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 the Company's history of losses which
have increased on a quarterly basis.
On June 11, 1998, the Company filed an Application for Review before the United
States Securities and Exchange Commission to appeal the Decision of the Council.
The basis for the appeal was that the Council erred in affirming the Panel's
decision placing conditions upon the Company's initial inclusion. The Company
contends that: (i) it did satisfy all the listing requirements on a timely basis
but was initially rejected for listing by the Nasdaq Staff and Panel on grounds
that were ultimately reversed by the Committee in the first appeal; (ii) that
the Company satisfied the listing requirement and this fact was so recognized in
the Committee's Decision in the first appeal; (iii) that due to the four month
delay cased by the Nasdaq Staff; dilatory review process, and the irresponsible
remarks made by a Nasdaq Staff member to Barron's; the price of the Company's
stock declined below the initial listing requirement (but remained well above
the maintenance requirement). Based upon price deficiency alone, the Company was
denied listing.
On August 8, 1998, the Company filed it's Brief in Support of Application for
Review. Nasdaq's brief was due on September 10, 1998 and filed on September 15,
1998. On September 25, 1998, the Company filed its Reply Memorandum to the Brief
of the Nasdaq Stock Market. As of May 17, 1999 no hearing has been scheduled or
decision rendered.
47
<PAGE>
EMPLOYEES
As of As of May 14, 1999, the Company had 33 full-time employees, including its
three executive officers, and two part-time employees. A majority of the
Company's employees (22) are employed in the areas of scientific and product
research and development. The Company's ability to provide its services is
dependent upon the Company recruiting, hiring and retaining qualified technical
personnel. To date, the Company has been able to recruit and retain sufficient
qualified personnel. None of the Company's employees is represented by a labor
union. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
Due to the specialized scientific nature of the Company's business, the Company
is highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel. Therefore the Company has entered into
employment agreements with certain of its executive officers and employees. The
loss of the services of existing personnel as well as the failure to recruit key
scientific, technical and managerial personnel in a timely manner would be
detrimental to the Company's research and development programs and to its
business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as marketing, will require the
additional of new management personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business See. "Directors, Executive Officers, Promoters and Control Persons; and
Compliance with Section 16(a) of the Exchange Act".
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.
48
<PAGE>
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
remediation by the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.
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.
PROPERTY
The Company's facilities are located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by the Company and comprise a 24,000-sq. ft.
building located on a 5 acre landscaped tract. In April 1999, the Company placed
a mortgage on its property in connection with the issuance of a Convertible
Debenture. See "Risk Factors - Uncertain Ability to Meet Capital Needs and Sale
of Unregistered Securities-Convertible Debenture". The Company believes that its
facility is adequate for its current and reasonably foreseeable future needs.
The Company will assemble the device at its facility from hardware components
that will be made by vendors to Company specifications. The software components
of the device are developed by the Company.
LEGAL PROCEEDINGS
On July 10, 1997, the Company filed an action in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, case no. 97-10533, against Dr. Valey
Kamalov ("Kamalov") 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. The Company believes that Dr. Kamalov appropriated propriety
information of the Company and used Company time and resources to develop
technology, which he removed from the Company for his own personal use after
terminating his employment. In order to obtain and keep in place a temporary
injunction that prohibited from using the technology and the propriety
information, the Company 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. The Company appealed and lost. Dr. Kamalov threatened to file
a counterclaim. Due to the substantial legal expenses incurred and to be
incurred by the Company in proceeding with the litigation, the possible addition
of a counterclaim and the complicated technical aspects of the case, the
Company's litigation counsel recommended that the Company settle the matter. The
Company entered into a settlement in December 1998. Pursuant to the settlement
the Dr. Kamalov retained $90,000 of the $100,000 bond and the remainder was
returned to the Company.
49
<PAGE>
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. 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, the Company entered
into a Subscription Agreement with Charlton whereby the Company agreed to issue
to Charlton 138 shares of its Series I, 7% Convertible Preferred Stock. The
Company's 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 the
Company's outstanding common stock at any one time.
The Company is not aware of any other material legal proceedings, pending or
contemplated, to which the Company is, or would be, a party or of which any of
its property is, or would be, the subject. See "Sale of Unregistered
Securities-Preferred Stock-Series B".
MANAGEMENT
The following table sets forth certain information concerning directors and
executive officers of the Company:
NAME AGE POSITION
- ---- --- --------
Richard J. Grable 56 Chief Executive Officer and Director
Linda B. Grable 61 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)
device. From January, 1994, to February, 1994: Mr. Grable was vice-president,
research and development, for Lintronics Technologies, Inc., Tampa, Florida, a
manufacturer of breast imaging systems. From March, 1992, to December, 1993: Mr.
Grable was a an engineering consultant for Lintronics Technologies, Inc., Tampa,
Florida, a manufacturer of breast imaging systems. From August, 1991 to
February, 1992: Mr. Grable was an engineering consultant for Audio Intelligence
Devices, Inc., Ft. Lauderdale, Florida, a manufacturer of surveillance devices.
From May, 1990, to July, 1991: Mr. Grable was an engineering consultant for
Telmed, Inc., Ft. Lauderdale, Florida, a software and electronic design company.
LINDA B. GRABLE
Linda B. Grable has been President and Chairman of the Board of Directors of the
Company since 1994. From September 1991, to February, 1994, Mrs. Grable was
President and Director of VCC Communications, Inc., Tampa, Florida, a
manufacturer of voltage controlled oscillators (VCO). From August, 1988, to
April, 1991: Mrs. Grable was President of Lintronics International Ltd., Inc.,
Plantation, Florida, a manufacturer of breast imaging systems.
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<PAGE>
ALLAN L. SCHWARTZ
Allan L. Schwartz has been Executive Vice-President, Chief Financial Officer,
and a Director of the Company since 1994. From April 1993, to February 1994: Mr.
Schwartz was President and Director of DynaMed Technologies, Inc., Coral
Springs, Florida, a company that developed neural network software for use with
laser imaging systems. From August, 1991, to April, 1993: Mr. Schwartz was
President and Director of Tron Industries, Inc., North Lauderdale, Florida, a
developer of low voltage neon novelty products. From April 1991, to July 1991:
Mr. Schwartz worked as a manufacturing consultant for SE Enterprises, Miami,
Florida, a manufacturer of prototype homes.
Directors of the Company hold office until the next annual meeting of
shareholders and the election and qualification of their successors. Officers
serve at the discretion of the board.
KEY EMPLOYEE
Robert H. Wake is the Company's Director of Engineering and has been employed as
such since April 1995. From January, 1994 to March, 1995, Mr. Wake was a
consultant to various companies in 3-D computer imaging. From October, 1986, to
December, 1993: Mr. Wake founded and was President of Reality Imaging
Corporation, Solon, Ohio, a manufacturer of 3-D computer imaging systems. Mr.
Wake invented the Voxel Flinger 3-D imaging technology.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership, furnishing the Company with copies of all
Section 16(a) forms they file. To the best of the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company, all
Section 16(a) filing requirements applicable to its officers and directors were
complied with during the year ended June 30, 1998. The Company has not received
copies of amended Form 13 D from Goodland International Investments Limited and
Weyburn Overseas Limited indicating their ability to convert and/or the
conversion of the Series B Preferred Shares into common shares in excess of 10%
of the outstanding shares.
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or paid to
the Company's Chief Executive Officer and other executive officers for services
rendered to the Company during 1998 and 1997. No other person, who, during 1997
and 1996 served as an executive officer of the Company, had a total annual
salary and bonus in excess of $100,000. Also see "Stock Option Plan-Option/SAR
Grants in Last Fiscal Year".
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
Name & Principal
Position Year Salary Other Annual Restricted Securities/Underlying
Compensation(3) Stock Awards Option/SARs (1) (2)
- ------------------------- ------- ------------ -------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Richard J. Grable, CEO 1996 $183,333
and Director 1997 $289,779 $115,000 $268,000 22,883
1998 $286,225 534,602 (3)
- ------------------------- ------- ------------ -------------- --------------- ------------------
Linda B Grable, 1996 $91,000
President and Director 1997 $97,451 $115,000 $268,000 22,883
1998 $119,070 534,602(4)
- ------------------------- ------- ------------ -------------- --------------- ------------------
Allan L. Schwartz, 1996 $124,000
Exec. V.P., CFO and 1997 $111,534 $115,000 $268,000 130,410
Director 1998 $119,070 534,602 (3)
- ------------------------- ------- ------------ -------------- --------------- ------------------
</TABLE>
(1) The aggregate dollar value of the 1997 and 1998 options, based on the
averaged high and low price on June 30, 1998 are as follows: Richard J.
Grable -$225,781.42; Linda B. Grable-$225,781; and Allan L.
Schwartz-$269,329.86.
(2) Does not include qualified options to purchase 208,333 shares a $.48 per
share (110% of fair market value on day of issuance) and non-qualified
options to purchase 250,000 shares at $.17 per share (35%) of fair market
value on day of grant) issued to each of Messrs. Grable and Schwartz and
Ms Grable on July 6, 1998.
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<PAGE>
(3) On April 15, 1997, the Company paid addition alone-time compensation to
the three officers to cover Federal Income Taxes on stock options
exercised in f/y 1996. The officers, based on information provided by the
General Counsel to the Company at that time, believed that the exercise of
said options were not taxable until the shares were sold. Upon review by
the outside auditors, it was determined that the exercise of those options
must be treated as additional wages and subject to Federal Income Taxes.
If the officers were correctly advised they would have not exercised the
options and would not have been subject to Federal Income Taxes. The Board
of Directors, considering the above circumstances, decided to pay each
officer one-time additional compensation to cover the coast of the
additional Federal Income Taxes due.
(4) Includes 250, 000 non-qualifies options that were required, by contract,
to be issued in July 1997 but were not issued until January 2, 1998.
EMPLOYMENT AGREEMENTS
The Company entered into five-year employment agreements with each of Mr.
Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B. Grable that expire
July 6, 1999. Pursuant to the terms of the employment agreements, base annual
salaries, after giving effect to cost of living adjustments, are as follows:
Richard J. Grable: $286,224.96; Linda B. Grable: $119,069.52 and Allan L.
Schwartz $119,069.52. During the Company's operational stage the salary of Allan
L. Schwartz salary will increase to $156,000. In addition, in fiscal 1998
Messrs. Grable and Schwartz and Ms. Grable each receive a car allowance of $500
per month. Each employment agreement provides for bonuses, health insurance, car
allowance, and related benefits, and a cost of living adjustment of 7% per
annum. The bonuses are equal to 5% of the adjusted consolidated net earnings of
the Company. No bonuses have been paid to date. In addition, pursuant to each
Agreement, Mr. Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B.
Grable each have an option to purchase 250,000 shares of common stock each
calendar year at 35% of the fair market value of the common stock of the Company
at the time of grant.
Richard Grable will receive a royalty bonus of 2.5% to a maximum of 5%, based
upon varying levels of gross sales of the CTLM(TM) device. Upon ratification of
the Patent Licensing Agreement at the next annual meeting of shareholders, the
royalties as outlined in that agreement will take the place of those set forth
in the original employment agreement. See "Risk Factors-Possible Conflict of
Interest" and "Business-.Patent Licensing Agreement" and "Certain Transactions".
The following table sets forth certain information with regard to the
Options/SAR grants by the Company to Management for the fiscal year ended June
31, 1998.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No. of Securities %of Total Options Exercise or Market Price
Underlying Options Granted to Employees Base Price On Date of Expiration
Name Granted In Fiscal Year ($/Share) Grant Date
- -------------- ---------------- -------------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Richard J. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- -------------- ---------------- -------------------- ----------------- ----------- --------------
Linda B. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- -------------- ---------------- -------------------- ----------------- ----------- --------------
Allan L. 250,000 14% $.31 $.85 1/2/02
Schwartz (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- -------------- ---------------- -------------------- ----------------- ----------- --------------
</TABLE>
(1) In January 1998, pursuant to employment agreements dated July 4, 1994,
Richard Grable, Linda Grable, and Allan Schwartz were granted options to
purchase and aggregate of 500,000 Common Shares each. The grants for were for
the July 1996 and July 1997 anniversary dates of their employment and were never
issued by prior counsel for the Company. The options are non-qualified stock
options, vesting one year from the grant date and exercisable at an exercise
price of $0.31 per share (35% of the fair market value on the date of issuance).
In January 1998, Richard Grable, Linda Grable, and Allan Schwartz were granted
options to purchase 22,883 and 34,602 shares of Common Shares each pursuant to
the Company's incentive stock option plan. These options were earned in July
1996 and July 1997 but never issued due to the oversight by prior counsel,
however the options for the 22,883 shares were disclosed in the Company's Proxy
Statement last year. These shares are exercisable at any time at an exercise
price of $4.37 and $2.63 per share, respectively (110% of the fair market value
on the contractual date of issuance). Does not include qualified options to
purchase 208,333 shares at $.48 per shares (110% of the fair market value on
July 5, 1998) and 250,000 shares at $.17 per share (35% of fair market value
($.435) on day of grant) issued to each of Richard Grable Linda Grable and Allan
Schwartz on July 5, 1998 pursuant to their employment and stock option
agreements. None of these options have been exercised to date.
- -----------------------
52
<PAGE>
STOCK OPTION PLANS
- ------------------
The Company has established an incentive stock option plan, as defined by
Section 422, Internal Revenue Code of 1986. For the fiscal year ended June 30,
1998, all of the executive officers were participants in this plan. The plan was
approved by the Board of Directors and adopted by the shareholders at the March
29, 1995 annual meeting. The plan provides for the granting, exercising and
issuing of incentive option pursuant to Internal Revenue Code Section 422. The
Company may grant incentive stock options to purchase up to 5% of the issued and
outstanding common stock of the Company at any time. The Board of Directors has
direct responsibility for the administration of the plan.
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock, as of the date of
grant. The exercise price of incentive options to officers, or affiliated
persons, must be at least 110% of the fair market value as of the date of grant.
Pursuant to sock option agreements, Mr. Richard J. Grable, Mr. Allan L. Schwartz
and Mrs. Linda B. Grable each have an option to purchase that number of shares
equal to $100,000 divided by 110% of the fair market value of the shares on July
6th of each year. The Stock Option Agreement terminates on September 1, 1999.
The Company intends to establish a new stock and option plan and present it for
shareholder approval at its next annual meeting.
CERTAIN TRANSACTIONS
Richard J. Grable and. Linda B. Grable are husband and wife. Further, Richard J.
Grable and Linda B. Grable are each "Control Persons" as a result of their
control of a majority voting power of the Company's outstanding stock. Both
parties disclaim, however, any beneficial interest or ownership in the shares
owned by the other party.
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. "Sale of Unregistered
Securities-Private Placement of Common Stock".
In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, the Company's Chief Executive Officer. Mr. Grable is the owner
of the Patent, which encompasses the technology for the CTLM(TM) device. The
Company and Mr. Grable has previously entered into an oral agreement for the
exclusive license for the 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, the Company issued to Mr. Grable 3,500,000 shares of common stock
and is required to issue and additional 3,500,000 shares in June 1999. In
addition, the Company has agreed to pay to Mr. Grable a royalty based upon the
net selling price (the dollar amount earned from the sale by the Company, both
international and domestic, before taxes minus the cost of the goods sold and
commissions or discounts paid) of all products and goods in which the Patent is
used, before taxes and after deducting the direct cost of the product and
commissions or discounts paid. 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. See "Risk Factors-Possible Conflict of Interest" and "Description of
Business-Patent Licensing Agreement".
Since October 1998, the Company's has accrued $109,243 in salaries payable to
its executive officers and directors, Richard J. Grable, Allan Schwartz and.
Linda B. Grable, due to the Company's 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, the Company's Chief Executive
Officer, director and founder sold an aggregate of 831,743 shares of the
Company's common stock owned by him pursuant to Rule 144 and lent the aggregate
proceeds of approximately $347,775 directly to the Company.
53
<PAGE>
In January 1999, February 1999 and March 1999, Linda Grable, the Company's
President, director and founder sold an aggregate of 520,000 shares of the
Company's common stock owned by her 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, the Company's
Executive Vice President, director and founder sold an aggregate of 820,000
shares pursuant to Rule 144 and lent the aggregate proceeds of approximately
$359,707 directly to the Company.
The loans to the Company are interest free and the net proceeds will be recorded
as a loan payable to each respective founder.
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.
The Founders may be liable for income tax of approximately 18% on the
money received from the sale of the shares without having received any
personal benefit from the sales,
The Founders have reduced their percentage ownership in the company by
the number of shares that have been sold, and
The Founders will loose the tax benefit of having held the their shares
for more than 2 years.
In April 1999, the compensation was revised as follows:
In order to make the founders whole the Company will replace the shares
sold by the Founders as follows;
A share for share replacement of the shares sold,
Option 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 any tax ramifications,
Option 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
Option 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.
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 calls for share for share
replacement with no other provisions except registration rights. Since the
Founders Shares are being replaced on a share for share basis with no other
consideration, there is no capital gain therefore no tax liability. The shares
sold by the Founders were held in excess of four years and the Company is
replacing these shares with shares bearing a restricted legend.
Messrs. Grable, Schwartz and Ms. Grable received 831,743, 820,000, and 520,000
shares of the Company restricted common stock, respectively as share for share
replacement for the shares sold.
54
<PAGE>
MARKET PRICE OF SECURITIES AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ over-the-counter bulletin
board market under the symbol IMDS. There has been trading in the Company's
Common Stock since September 20, 1994. The following table sets forth, for each
of the fiscal periods indicated, the high/low and low/lowbid 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
December 1996 $4.50 $1.44
March 1998 $4.00 $2.50
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
On May 14, 1999, the closing trade price of the Common Stock as reported on the
OTC Bulletin Board was $.053. As of such date, there were approximately 745
holders of record of the Company's Common Stock.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to a vote of Security Holders. As of
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, in the form of Exhibit A hereto (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:
<TABLE>
<CAPTION>
NAME # OF COMMON % OF COMMON # OF PREFERRED % OF
SHARES SHARES SHARES PREFERRED
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>
55
<PAGE>
- ----------------
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 May 14, 1999, there are 41,736,766 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 dependent 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 May 17, 1999, there are
43,908,209 shares outstanding. Based on the closing price of the Company's
common stock as of as of May 14, 1999 ($0.53) 8,973,769 shares would be required
to convert the Series B shares, 955,975 shares would be required to convert the
Series G shares, 2,591,195 shares would be required to convert the Series H
shares, 3,471,698 would be required to convert the Series I shares, 2,767,296
shares would be required to convert the Debenture and, although the Company is
contractually prohibited from doing so 35,377,358 shares would be required to
draw down the entire Equity Line of Credit. See ", "Sale of Unregistered
Securities-Private Placement of Preferred Stock", "Sale of Unregistered
Securities-Debentures" "Sale of Unregistered Securities-Private Placement of
Common Stock", and "Sale of Unregistered Securities-Equity Line of Credit". In
addition, 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
May 14, 1999, the Company would need in excess of 105 million authorized shares
to effectuate all conversion, utilize the total Equity Line of Credit and
fulfill its remaining stock related obligations. See "Patent Licensing
Agreement", "Equity Line of Credit", and "Certain Transactions".
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.
56
<PAGE>
SALE OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT OF PREFERRED STOCK
The Company has had to rely on the private placement of Preferred and common
stock to obtain working capital. In deciding to issue Preferred Shares pursuant
to the private placements, the Company took into account the number of common
shares authorized and outstanding, the market price of the common stock at the
time of each Preferred sale and the number of common shares the Preferred share
would have been convertible into at the time of the sale. At the time of each
private placement of Preferred Stock there were enough shares, based on the
price of the Company's common stock at the time of the sale of the Preferred to
satisfy the Preferred conversion requirements. Although the Company's Board of
Directors tried to negotiate a floor on the conversion price of each series of
Preferred Stock prior to sale, it was unable to do so. In order to obtain
working capital the Company 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. The
Company will endeavor to negotiate the best transaction possible taking into
account the impact on its shareholders, dilution, loss of voting power and the
possibility of a change of control. However, in order to satisfy its working
capital needs, the Company may be forced to issue convertible securities with no
limitations on conversion. 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 THE COMPANY HAS 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 $.05 PER
SHARE FOR FISCAL YEAR ENDING JUNE 30, 1997 TO $.07 PER SHARE FOR FISCAL YEAR
ENDING JUNE 30, 1998. THE CUMULATIVE TOTAL IS $.19 PER SHARE.
See "Risk Factors-Authorization and Discretionary Issuance of Preferred Stock",
"Risk Factors-Capital Needs and Need For Additional Authorized Common Stock" and
Risk Factors- Sale of Unregistered Securities, Financing/equity Line of Credit".
In the event that the Company issues preferred stock without a limit on the
number of shares that can be issued upon conversion and the price of the
Company's 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 the Company's common stock, in
addition to a stock overhang of an undeterminable amount, may depress the price
of the Company's 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 the Company's property available for
distribution $10,000 per share. The following table summarizes certain
information with regard to the Series B, C, D, E, F, G, H, and I Preferred
Shares as of May 14, 1999
<TABLE>
<CAPTION>
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
SERIES/# OF COMMON CONVERSION # OF COMMON SHARES APPROX. PRICE OR # OF COMMON SHARES
PREFERRED STOCK PRICE PRICE AT CONVERTIBLE INTO AT PRICE RANGE OF ISSUED UPON
SHARES AT TIME OF TIME OF TIME OF ISSUANCE (1) COMMON STOCK AT TIME CONVERSION
ISSUANCE ISSUANCE OF CONVERSION
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C>
B/390 $4.70 $3.85 1,168,831 $.379 1,931,123(2)
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
C/210 $1.63 $1.2225 1,714,268 $.4950-$1.0095 2,646,527
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
D/50 $1.22 $.915 546,448 $.2265-$.495 1,717,134
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
E/54 $1.093 $.81975 658,737 $.29775- $.77475 1,282,826
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
F/75 $1.31 $.917 817,884 $.46760-$.47320 1,971,375
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
G/38 $.34 $.255 1,490,196 N/A N/A
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
H/103 $.56 $.42 2,571,429 $5025 99,502 (3)
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
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 60 shares of Series B Preferred Stock. The
remaing 390 shares remains unconverted. The conversion notice for the
Series B Preferred Stock previously received by the Company has been
canceled 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 5 shares of Series H Preferred Stock. The
remaining 103 shares remain unconverted. As of April 6, 1999, 3,614,035
shares would be required to convert the Series H shares at the conversion
price of $.285 per share.
57
<PAGE>
SERIES B PREFERRED STOCK
In December 1996, the Company sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas
Limited ("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 the Company's common stock was approximately $4.70 per
share. Net proceeds to the Company of $4,500.000 were used for working capital
and the continuous research, development and testing of the Company's CTLM(TM)
device. No fees were paid in connection with this offering.
The Company filed a Registration Statement of 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, the Company
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 the Company's Common Stock. The Company has the option to
pay the accrued dividends in common stock.
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). See "Business-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 the
Company or the Series B Holders. On April 6, 1999, the Company also entered into
a Subscription Agreement with Charlton whereby the Company agreed to issue to
Charlton 138 shares of its Series I, 7% Convertible Preferred Stock. The
Company's 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 approximately 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.
58
<PAGE>
(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 the
Company's 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 Prospectus, 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.
SERIES C PREFERRED STOCK
- ------------------------
On October 6, 1997, the Company finalized the private placement to Austost
Anstalt Schaan, UFH Endowment, Inc., Chris Baum, Avalon Capital Limited,
Dominion Capital, Ltd. and The Cuttyhunk Fund Limited and aggregate of 210
shares of its Series C Convertible Preferred Stock ("the "Preferred Shares") at
a purchase price of $10,000 per share and Warrants to purchase up to 105,000
shares of the Company's common stock at an exercise price of $1.63 per share.
The offering was conducted pursuant to Regulation S as promulgated under the
Securities Act of 1933, as amended (the ("Regulation S Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $1.63 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, 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 of the Company. Due to this contractual ownership
limitation, the Series C Preferred Shares were converted, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99% of the Company's outstanding common stock. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
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, the Company was also required to
escrow an aggregate of 3,435,583 shares of its common stock (200% of the number
of shares the Purchasers would have received if the Preferred Shares were
exercised on the closing date of the Regulation S Sale). The shares underlying
the Preferred Shares and Warrants were entitled to demand registration rights 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, the
Company paid Settondown Capital International, Ltd., an unaffiliated Investment
Banker an aggregate of $220,500 for placement and legal fees. Net proceeds to
the Company of $1,879,500 were used for working capital and the continuous
research, development and testing of the Company's Computed Tomography Laser
Mammography (CTLM(TM)) device.
The Series C Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 2,646,527
common shares.
SERIES D PREFERRED STOCK
- ------------------------
On January 9, 1998, the Company finalized the private placement to Avalon
Capital Ltd. of 50 shares of its Series D Convertible Preferred Stock ("the
"Preferred Shares"), at a purchase price of $10,000 per share and Warrants to
purchase up to 25,000 shares of the Company's common stock at an exercise price
of $1.22 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.22 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, without additional
consideration. Pursuant to the Subscription Agreement, the Series D Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
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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 of the Company. Due to this contractual ownership
limitation, the Series D Preferred Shares were converted in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99% of the Company's outstanding common stock. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
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, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.
The Series D Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,717,134
common shares.
SERIES E PREFERRED STOCK
- ------------------------
On February 5, 1998, the Company finalized the private placement to Austost
Anstalt Schaan and Balmore Funds S.A. of 50 shares of its Series E Convertible
Preferred Stock (the "Preferred Shares"), at a purchase price of $10,000 per
share and Warrants to purchase up to 25,000 shares of the Company's common stock
at an exercise price of $1.093 per share. The offering was conducted pursuant to
Regulation S as promulgated under the Securities Act of 1933, as amended (the
"Regulation S Sale"). At the time the placement was concluded, the average bid
and ask price of the Company's common stock was approximately $1.093 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter 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 of the Company. Due to this contractual ownership
limitation, the Series E Preferred Shares were converted, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99%. The number of fully paid and non-assessable shares of common
stock, no par value, of the Company 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, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.
The Series E Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,282,826
common shares.
SERIES F PREFERRED STOCK
- ------------------------
On February 20, 1998, the Company finalized a private placement to Dominion
Capital Fund, LTD and Canadian Advantage, LTD of 75 shares of its Series F
Convertible Preferred Stock (the "F Preferred Shares") at a purchase price of
$10,000 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
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Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.31 per share
The F Preferred Shares pay a dividend of 6% per annum, payable in Common Stock
at the time of each conversion and 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 of the Company. Due to this contractual ownership
limitation, the Series F Preferred Shares were converted, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99% of the Company's outstanding Common Stock. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
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 the Registration Statement of which this Prospectus is a part (the
"Registration Statement").
In connection with the Regulation S Sale, the Company paid, Rolcan Finance, Ltd.
an aggregate of $50,000 for placement and legal fees. Net proceeds to the
Company of $700,000 were used for working capital and the continuous research,
development and testing of the Company's Computed Tomography Laser Mammography
(CTLM(TM)) device.
SERIES G PREFERRED STOCK
On March 17, 1999, the Company finalized a private placement to Amro
International, S.A., Nesher Inc., Hewlett Fund, and Guaranty & Finance Ltd. of
35 shares of its 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 the Company's 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 the Company's
common stock was approximately $.34 per share. In connection with the Regulation
D Sale, the Company 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 the
Company of $350,000 will be used for working capital and the continuous
research, development and testing of the Company's Computed Tomography Laser
Mammography (CTLM(TM)) device.
The Series G Preferred has no dividend provisions. The number of fully paid and
non-assessable shares of common stock, no par value, of the Company to be issued
upon conversion will be determined by dividing (i) the sum of $10,000 (ii) the
Conversion Price (determined as hereinafter provided) in effect at the time of
conversion. The "Conversion Price" is equal to lesser of (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 of the Company. Due to this ownership limitation, the Series G Preferred
Shares can only be converted in increments that, together with all shares of the
Company's common stock held by the Holder, would not exceed 4.99%. Pursuant to
the terms of the Registration Rights Agreement between the Company and the
Series G Holders, 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. In the event that
the Registration Statement is not filed with 14 days from the closing or that it
is not declared effective with in 60 days, the Company 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 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. In the event that the
Registration Statement is not declared effective within 120 days, the Series G
Holders have the right to force the Company to redeem the Series G Preferred at
a redemption price of 120% of the face value of the Preferred. Pursuant to the
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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 (1.320,132) are being registered herein
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 the Company's 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 the Company's common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series G Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
SERIES H PREFERRED STOCK
- ------------------------
On June 2, 1998, the Company finalized a private placement to Austost Anstalt
Schaan and Balmore Funds S.A. of 100 shares of its Series H Convertible
Preferred Stock (the "Preferred Shares") at a purchase price of $10,000 per
share and 75,000A Warrant and 50,000 B Warrants. The A and B Warrants are
exercisable at $1.00 and $1.50 per share, respectively. The offering was
conducted pursuant to Regulation D as promulgated under the Securities Act of
1933, as amended (the "Regulation D Sale"). At the time the placement was
concluded, the average bid and ask price of the Company's common stock was
approximately $.56 per share. In connection with the Regulation D Sale, the
Company paid Settondown Capital International, Ltd., an unaffiliated Investment
Banker an aggregate of $10,000 and 8 shares of the Series H Preferred Stock for
placement and legal fees. Net proceeds to the Company of $990,000 were used for
working capital and the continuous research, development and testing of the
Company's Computed Tomography Laser Mammography (CTLM(TM)) device. As of the
date of this Prospectus, 5 shares of Series H Preferred Stock have been
converted into 99,502 shares of common stock at a conversion price of $.5025 per
share.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to lesser of seventy-five percent (75%) of the Average Price
(the lowest closing bid price of the Corporation's Common Stock for the ten-day
trading period ending on the day prior to the date of conversion). There is no
floor on the conversion price and no time limits on conversion. The shares can
be converted 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 of the Company. Due to this contractual ownership limitation, the Series H
Preferred Shares can only be converted in increments that, together with all
shares of the Company's common stock held by the Holder, would not exceed 4.99%.
Pursuant to the terms of the Registration Rights Agreement, as amended, between
the Company and the Series H holder, the Company has 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
(2,661,698 shares). The Company is in technical default of the Registration
Rights Agreement, which required the Registration Statement to be declared
effective by October 2, 1998. Pursuant to the Registration Rights Agreement, the
Company is required to pay the Series H Holders in cash or in stock, as
liquidated damages for failure to have the Registration Statement declared
effective, and not as a penalty, two (2%) 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. Pursuant to the
Registration Rights Agreement, liquidated damages of $169,000 have accrued as of
March 31, 1999. The Company is 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 the Company 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. The Company has 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 the Company's common stock decreases,
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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 the Company's common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series H Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
SERIES I PREFERRED
- ------------------
On April 6, 1999, the Company also entered into a Subscription Agreement with
Charlton whereby the Company agreed to issue to Charlton 138 shares of its
Series I, 7% Convertible Preferred Stock. The Company's 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 ($725,795) due and
payable 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 the Company's
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 the Company's sole discretion, at the time of each conversion..
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
the Company's 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 of the Company. Due to this contractual ownership limitation, the Series I
Preferred Shares can only be converted in increments that, together with all
shares of the Company's 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 (3,471,698) are being
registered herein 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 the Company's 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 the Company's common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series I Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
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The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.39 per share.
CONVERTIBLE DEBENTURE
- ---------------------
The Company also entered into a Subscription Agreement with Charlton, pursuant
to which Charlton purchased a Convertible Debenture for $1,100,000. In addition,
the Company 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 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 second
funding tranche. The Company 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 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. 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 in cash or freely trading Common
Stock in the Company's sole discretion, at the time of each conversion and is
secured by mortgage on the Company's 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 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.
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 (2,767296 shares) are being
registered herein 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
the Company's 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 the Company's 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 the Company's 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 the Company's
common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Debenture is outstanding the holders are entitled to a preference in
distribution of the Company's 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 the Company's common
stock was approximately $.39 per share.
The proceeds from the sale of the Debenture ($1,100,000) will be used for
clinical investigational trials expenses and working capital.
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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 the
Company's non-executive employees. At the time the placement was concluded, the
average bid and ask price of the Company's common stock was approximately $.28
per share. These shares 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 of which this Prospectus is a part. See "Selling Security
Holders". 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, became 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). 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 of which this
Prospectus is a part. See "Selling Security Holders". 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
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. 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 of
which this Prospectus is a part. See "Selling Security Holders". 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 and 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 $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 the
Company's common stock.
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 and the niece of Linda Grable. 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
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($16,345-inventory parts and assemblies, employee health insurance, workers
comp. and property insurance) and (iv) working capital ($14,359). The Company
was 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 of which this Prospectus is a
part. See "Selling Security Holders".
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.
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 dependent on it ability to issue stock for services in
lieu of cash payment. 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.
66
<PAGE>
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. As of May 14, 1999, based on the closing
price on that date of $.53, 35,377,358 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 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).
<TABLE>
<CAPTION>
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------------
30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG.
DAILY DAILY TRADING DAILY TRADING DAILY TRADING DAILY DAILY
CLOSING PRICE TRADING VOLUME VOLUME VOLUME TRADING TRADING
VOLUME 50,001-75,000 75,001-100,000 100,001-125,000 VOLUME VOLUME
25,000-50,000 125,001-150,000 150,001 AND ABOVE
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.50-$1.00 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
$1.01 - $1.50 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
$1.51 - $2.00 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
$2.01 - $2.50 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
$2.51 - $3.00 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
$3.01 - $3.50 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
$3.51 - $4.00 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
$4.01 - ABOVE $450,000 $500,000 $550,000 $600,000 $650,000 $700,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- -------------------
</TABLE>
The number of shares noticed for sale by the Company must be the subject of an
effective Registration Statement prior to the time Company elects to exercise
its right to tender a notice requiring the Investors to purchase shares of the
Company's Common Stock.
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:
67
<PAGE>
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
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 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 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 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 nonasseable.
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 the 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 $8,000,000, in addition to its 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 f or if the Equity Lines is
unavailable due to the price of the Company's common stock or the Company is
68
<PAGE>
unable to comply with the registration provision, the Company may seek
additional funding through public or private financing, collaboration, licensing
and other arrangements with corporate partners. See "Management's Discussion and
Analysis of Financial Discussion" and Results of Operations and "Financial
Statements" and "Risk Factors".
If the Company utilizes the Equity Line of Credit or additional funds are raised
by issuing equity securities, especially Convertible Preferred Stock, dilution
to existing Shareholders will result and future investors may be granted rights
superior to those of existing Shareholders. Moreover substantial dilution may
result in a change in control of the Company. There can be no assurance,
however, that additional financing will be available when needed, or if
available, will be available on acceptable terms. Insufficient funds may prevent
the Company from implementing its business strategy or may require the Company
to delay, scale back, or eliminate certain of its research and product
development programs or to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself.
In connection with the Equity Line of Credit Agreement the Company issued 25,000
shares of common stock to Goldstein, Goldstein and Reis LLC, an unaffiliated
third party, as payment for the attorneys fees incurred by the Equity Line
funders.
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock of the
Company as of May 14, 1999 as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock;
(b) each current director executive officer; and (c) all executive officers and
directors of the Company as a group, calculated as required by the Act.
The actual number of shares of Common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 7,994,540 and 3,445,800 shares
respectively. Both Richard Grable and Linda Grable specifically disclaim any
beneficial interest in each other's shares
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OWNED % OF OUTSTANDING
OF BENEFICIAL OWNER BENEFICIALLY (1)(2) SHARES OF COMMON STOCK
- ------------------- ------------------- ----------------------
<S> <C> <C>
RICHARD J. GRABLE 13,471,976(3) 29.3%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
LINDA B. GRABLE 13,471,976(4) 29.3%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
ALLAN L. SCHWARTZ 4,544,913 (5) 10.1%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
ALL OFFICERS AND DIRECTORS 18,016,889 (6) 38.3%
AS A GROUP (3 PERSONS)
</TABLE>
(1) Except as indicated in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole
voting power and investment power with respect to all shares of Common Stock
shown beneficially owned by them.
(2) Percentage of ownership is based on 43,908,209 shares of Common Stock
outstanding as of May 17,1999 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 May 17, 1 1999 are deemed
outstanding for computing the percentage of that person and the group.
(3) Includes 1,015,818 shares subject to options and 3,445,800 shares owned by
the wife of Richard J. Grable, Linda B. Grable, of which he disclaims
beneficial ownership.
(4) Includes 1,015,818 shares subject to options and 7,162,797 shares owned by
the husband of Linda B. Grable, Richard J. Grable, of which she disclaims
beneficial ownership.
(5) Includes 1,122,333 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
beneficial ownership.
69
<PAGE>
(6) Includes 2,031,636 shares subject to options held by Linda and Richard
Grable and 122,333 shares subject to options held by Alan 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, the Company has not declared or paid any dividends with respect to its
capital stock, and the current policy of the Board of Directors is to retain any
earnings to provide for the growth of the Company. Consequently, no cash
dividends are expected to be paid on the Company's Common Stock in the
foreseeable future. "See Risk Factors-Lack of Dividends".
SELLING SECURITY HOLDERS
The Selling Security Holders consist of certain common Stock Holders, the Series
B, G, H and I Preferred Holders and the Holder of the Convertible Debentures..
The Registration Statement of which this Prospectus is a part is being filed,
and the Shares offered hereby are included herein, pursuant to registration
rights as provided for in the subscription agreement and registration rights
agreements entered into between the Company and the Selling Security Holders
(collectively, the "Registration Rights"). Due to (i) the ability of the Selling
Security Holders to determine when and whether they will sell any Shares under
this Prospectus and (ii) the uncertainty as to how many of the Warrants will be
exercised and how many shares of Common Stock will be issued upon conversion of
shares of Series H Preferred, the Company is unable to determine the exact
number of Shares that will actually be sold pursuant to this Prospectus. The
number of fully paid and non-assessable shares of common stock, no par value, of
the Company to be issued upon conversion of the Series H Preferred will be
determined by dividing (i) the sum of $10,000 (ii) the Conversion Price
(determined as hereinafter provided) in effect at the time of conversion. The
"Conversion Price" is equal to lesser of seventy-five percent (75%) of the
Average Price (the lowest closing bid price of the Corporation's Common Stock
for the ten-ten-day trading period ending on the day prior to the date of
conversion. Since the conversion price of the Series H Preferred shares is based
on the market price of the Company's Common Stock, the number of Shares subject
to registration rights will increase if the market price of the Common Stock
decreases and will decrease if the market price increases. See "Sale of
Unregistered Securities-Financing/Equity Line of Credit.
The following table identifies each Selling Security Holder based upon
information provided to the Company, sets forth as of May 14, 1999 with respect
to the Shares beneficially held by or acquirable by, as the case may be, each
Selling Security Holder and the shares of Common Stock beneficially owned by the
Selling Security Holders which are not covered by this Prospectus. No Selling
Security Holder or its affiliates except for Deborah O'Brien have held any
position, office, or other material relationship with the Company. Ms. O'Brien
is an employee of the Company and the niece of Linda Grable. Ms. O'Brien shares
were issued as partial compensation for a $115,000 loan to the Company.
70
<PAGE>
<TABLE>
<CAPTION>
SELLING SECURITY HOLDERS
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
NAME OF INVESTOR COMMON SHARES PREFERRED COMMON SHARES COMMON SHARES TOTAL NUMBER OF
OWNED PRIOR TO SHARES OWNED UNDERLYING UNDERLYING SHARES TO BE
OFFERING PREFERRED WARRANTS REGISTERED (2)
/DEBENTURE(1)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balmore Funds SA
C/0 Trident Trust Company 261,872 H-47.5 1,194,969 50,000 1,506,841
(BVI) Limited
Trident Chambers
Road Town
Tortola, British Virgin
Islands (3)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Austost Anstalt Schaan
Ladstrasse 163 261,872 H-47.5 1,194,969 50,000 1,506,841
9494 Furstentums
Vaduz, Liechtenstein(4)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Amro International, S.A. 228,125
c/o Ultra Finanz 0 G-15 377,358 405,483
Grossmunsterplatz 6
Zurich CH 8022, Switzerland
(5)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Nesher Inc. 115,000
Ragnalt Houise 0 G-8 201,258 216,258
18 Peel Road
Douglas, Isle of Man
1M14U2, United Kingdom (6)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Hewlett Fund
20 Adele Road 0 G-5 125,786 9,375 135,161
Brooklyn, New York (7)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Guaranty & Finance Ltd.
Vallarino PH 0 G-7 176,1001 13,125 189,226
Calle 52, Panama (8)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Libra Finance SA
Trident Chambers 0 G-2 50,315 0 50,315
PO Box 146, Road Town
Tortola. British Virgin
Islands (9)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Dominion Capital Fund C/o
Thomas Kernaghan & Co. Ltd. 1,334,996 0 0 0 1,334,996
365 Bay Street
Toronto, Ontario (10)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Canadian Advantage Ltd.
Partnership 636,379 0 0 0 636,379
C/o Thomas Kernaghan & Co.
Ltd.
365 Bay Street
Toronto, Ontario (11)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Scott Hugh Goldstein
C/o 65 Broadway 10th floor 25,000 0 0 0 25,000
New York, NY 10006
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Sheldon E. Goldstein
C/o 65 Broadway 10th Floor 25,000 0 0 0 25,000
New York, NY 10006
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Deborah O'Brien
C/o 6531 NW 18th Court 287,800 0 0 0 286,000
Plantation FL 33313
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
GCA Strategic Investment
Fund Ltd (12) 210,000 0 0 0 210,000
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Avalon Capital, Inc.
487 Sherwood Drive 80,000 0 0 0 80,000
Salusaliton CA 94965 (13)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
71
<PAGE>
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Charlton Avenue, LLC
c/o Citco Trustees (Cayman) 1,931,123 Series B-390 8,973,769 0 17,143,886
Limited Series I 138 3,471,698
P.O. Box 31106 SMB Debenture 2,767,296
Grand Cayman
Cayman Island, British West
Indies(14)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Settondown Capital
International, Ltd 200,000 H-8 201,258 25,000 451,415
Charlotte House, Charlotte G-1 25,157
Street
P.O. Box N 9204
Nassau, Bahamas (15)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Frank Giambroni
118 Park Ave. 200,000 0 0 0 200,000
Bay Head, NJ 08742
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
</TABLE>
1 Based on the number of shares that would be required to be issued if the
Preferred Stock and Debentures were converted at $.314716 and $.28785 per
share (75% and 82% of the price prior to registration.
2. Where applicable, the Amount being registered is 100% of the number of
shares that would be required to be issued if the Preferred Stock or
Debenture were converted on the day before the filing of the Registration
Statement plus common stock and the shares underling the Warrants.
3. Francois Morax and Matityahu Kaniel are the Directors of and have voting
control over Balmore Funds S.A.
4. Thomas Hackl and and Peter Nakowitz are the Directors of and have voting
control over Austost Anstalt Schaan.
5. H.U. Bachofen is the Director of and has voting control over AMRO
International, S.A.
6. David Grin and John Clark are the Directors of and have voting control over
Nesher, Inc.
7. Jenifer Spinner is the Director of and has voting control over Hewlett Fund.
8. Dr. Durling is the Director of and has voting control over Guaranty &
Finance Ltd.
9. Seymour Braun is the Director of and has voting control over Libra Finance
SA.
10. Livingston Asset Management Ltd. has voting control over Dominion Capital
Fund. David Sims has voting control over Livingstone.
11. VHM Management Ltd. holds the voting shares of Canadian Advantage Ltd. Ian
McKinnon and Mark Valentine have voting control over VMH Management.
12. Prime Management LTD.has voting control of GCA Strategic Investment Fund
LTD. John Kelly is the sole shareholder of and has voting control over Prime
Management LTD.
13. Wayne Coleson is the sole shareholder of and has voting control over Avalon
Capital, Inc.
14. Minglewood Capital LLC holds the voting shares of Charlton Avenue LLC. CTC
Corporation LTD is the Director of Minglewood. Michael Francombe is a
director of and has voting control over CTC Corporation LTD.
15. Anthony L.M. Inder Riden is the Director of and has voting control over
Settondown Capital International, Ltd.
- ----------------------
72
<PAGE>
PLAN OF DISTRIBUTION
The Registration Statement of which this Prospectus forms a part has been filed
pursuant to the registration rights included in Subscription Agreement between
the Company and the Selling Security Holders. To the Company's knowledge, as of
the date hereof, the Selling Security Holders has not entered into any
agreement, arrangement or understanding with any particular broker or market
maker with respect to the Shares offered hereby, nor does the Company know the
identity of the brokers or market makers which will participate in the offering.
The Shares covered hereby may be offered and sold from time to time by the
Selling Security Holders. The Selling Security Holders will act independently of
the Company in making decisions with respect to the timing, manner, and size of
each sale. Such sale may be made on the OTC Bulletin Board or otherwise, at
prices and on terms then prevailing or at prices related to the then market
price, or in negotiated transactions. The Shares may be sold by one or more of
the following methods: (a) a block trade in which the broker-dealer engaged by
the Selling Security Holders will attempt to sell Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by the broker-dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
To the best of the Company's knowledge, the Selling Security Holders have not,
as of the date hereof, entered into any arrangement with a broker or dealer for
the sale of shares through a block trade, special offering, or secondary
distribution of a purchase by a broker-dealer. In effecting sales,
broker-dealers engaged by the Selling Security Holders may arrange for other
broker-dealers to participate. Broker-dealers may receive commissions or
discounts from the Selling Security Holders in amounts to be negotiated.
In offering the Shares, the Selling Security Holders and any broker-dealers who
execute sales for the Selling Security Holders may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any profits realized by the Selling Security Holders and the
compensation of such broker-dealer may be deemed to be underwriting discounts
and commissions.
THE SELLING SHAREHOLDERS HAVE BEEN ADVISED BY THE COMPANY THAT DURING THE TIME
EACH IS ENGAGED IN DISTRIBUTION OF THE SECURITIES COVERED BY THIS PROSPECTUS,
EACH MUST COMPLY WITH RULE 10B-5 AND REGULATION M UNDER THE EXCHANGE ACT AND
PURSUANT THERETO: (I) EACH MUST NOT ENGAGE IN ANY STABILIZATION ACTIVITY IN
CONNECTION WITH THE COMPANY'S SECURITIES; (II) EACH MUST FURNISH EACH BROKER
THROUGH WHICH SECURITIES COVERED BY THIS PROSPECTUS MAY BE OFFERED THE NUMBER OF
COPIES OF THIS PROSPECTUS WHICH ARE REQUIRED BY EACH BROKER; AND (III) EACH MUST
NOT BID FOR OR PURCHASE ANY SECURITIES OF THE COMPANY OR ATTEMPT TO INDUCE ANY
PERSON TO PURCHASE ANY OF THE COMPANY'S SECURITIES OTHER THAN AS PERMITTED UNDER
THE EXCHANGE ACT RELEASE 34-38067 (DECEMBER 20, 1996) HAVE BEEN ADVISED THAT
THEY MUST COORDINATE THEIR SALES UNDER THIS PROSPECTUS WITH EACH OTHER AND THE
COMPANY FOR PURPOSES OF REGULATION M.
This offering will terminate on the earlier of (a) the date on which such
Selling Security Holders' shares may be resold pursuant to Rule 144 under the
Securities Act; or (b) the date on which all Shares offered hereby have been
sold by the Selling Security Holders. There can be no assurance that the Selling
Security Holders will sell any or all of the shares of Common Stock offered
hereby.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 102,000,00 shares of capital
stock of which 100,000,00 shares are common stock no par value and 2,000,000
shares are preferred, no par value. As of May 17, 1999, there were issued and
outstanding 43,908,209shares of Common Stock and. 390 shares of Series B
Convertible Preferred Stock, 38 shares of Series G Convertible Preferred, 105
shares of Series H Convertible Preferred, 138 shares of Series I Convertible
Preferred, Options to purchase 4,128,371 shares and Warrants to purchase 508,125
shares of Common Stock of the Company. In addition, an investor has subscribed
for $2,750,000 in convertible debentures, $1,100,000 of which have been issued
to date.
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
73
<PAGE>
"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.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights, and preferences as may be
determined from time to time by the board of directors. Accordingly, the board
of directors is empowered, without stockholder approval, to designate and issue
additional series of preferred stock with dividend, liquidation, conversion,
voting or other rights, including the right to issue convertible securities with
no limitations on conversion, which could adversely affect the voting power or
other rights of the holders of the Company's Common Stock, substantially dilute
the common shareholder's interest and depress the price of the Company's common
stock. See "Risk Factors-Authorization and Discretionary Issuance of Preferred
Stock/Barriers to Takeover"
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective August 1, 1997, the accounting firm of Margolies and Fink, Certified
Public Accountants for the Company, changed the accounting firm's name to
Margolies, Fink and Wichrowski, Certified Public Accountants.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH IN THE COMPANY'S ARTICLES OF INCORPORATION,
THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE
ACT AND IS THEREFORE UNENFORCEABLE
INTERESTS OF NAMED EXPERTS AND COUNSEL
Certain legal matters in connection with the securities being offered hereby
will be passed upon for the Company by Rebecca J. Del Medico, Esq., General
Counsel of the Company. Ms. Del Medico currently owns approximately 47,100
shares of common stock of the Company.
EXPERTS
The audited financial statements of Imaging Diagnostic Systems, Inc.
incorporated by referenced herein have been examined by Margolies, Fink and
Wichrowski, independent certified public accountants, for the periods and to the
extent set forth in their respective report and are incorporated herein in
reliance upon such report of said firm given under their authority as experts in
accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Shares will be passed upon for the Company
by Rebecca J. Del Medico, General Counsel of the Company.
FINANCIAL INFORMATION
The following financial statements should be read in conjunction with the
financial statement information contained in and incorporated by reference from
the Company's most recent report on Form 10-QSB, which is being furnished with
this Prospectus.
74
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1-2
FINANCIAL STATEMENTS:
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5-8
Statements of Cash Flows F-9-10
Notes to Financial Statements F-11-40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheet of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1998 and 1997 and for the period December 10, 1993 (date of
inception) to June 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 1998 and 1997 and the results
of its operations and its cash flows for the years ended June 30, 1998 and 1997
and for the period December 10, 1993 (date of inception) to June 30, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company has restated its
financial statements to reflect the changes in accounting for software
development costs, recording the deemed dividends on the issuance of the
preferred stock and recording the compensation on stock options in accordance
with Accounting Principles Board Opinion No. 25.
The Company is in the development stage as of June 30, 1998 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.
F - 1
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered losses and has yet to
generate an internal cash flow that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 5. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 6, 1998
F - 2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1998 AND 1997
ASSETS
1998 1997
---- ----
(restated)
Current assets:
Cash $ 310,116 $ 383,223
Restricted certificate of deposit - 103,500
Loans receivable-other - 10,073
Inventory 3,214,045 -
Prepaid expenses 33,539 56,792
-------------- -----------
Total current assets 3,557,700 553,588
-------------- -----------
Property and equipment, net 2,920,980 3,293,297
Prototype equipment -- 1,216,585
Other assets 688,463 9,635
-------------- -----------
$ 7,167,143 $ 5,073,105
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $ 1,363,766 $ 519,546
Loan payable 285,407 -
Current maturities of capital
lease obligations 9,715 8,928
Other current liabilities 2,155,978 319,547
----------- ------------
Total current liabilities 3,814,866 848,021
----------- ------------
Long-term capital lease obligations 26,134 35,849
----------- ------------
Total liabilities 3,841,000 883,870
----------- ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock (Series B),
7% cumulative annual dividend, no par
value; authorized 450 shares, issued
450 shares 4,500,000 4,500,000
Convertible preferred stock (Series D),
no par value; authorized 54 shares,
issued 29 and 0 shares, respectively 290,000 --
Convertible preferred stock (Series E),
no par value; authorized 54 shares,
issued 24 and 0 shares, respectively 240,000 --
Convertible preferred stock (Series H),
no par value; authorized 108 shares,
issued 108 and 0 shares, respectively 1,080,000 --
Common stock, no par value; authorized
48,000,000 shares, issued 36,493,544
and 24,905,084 shares, respectively 23,983,073 15,739,729
Additional paid-in capital 1,884,846 3,663,120
Deficit accumulated during the
development stage (27,336,655) (18,298,930)
----------- -----------
4,641,264 5,603,919
Less: subscriptions receivable (14,309) (35,559)
deferred compensation (1,300,812) (1,379,125)
---------- ----------
Total stockholders' equity 3,326,143 4,189,235
---------- ----------
$7,167,143 $5,073,105
========== ==========
See accompanying notes to the financial statements.
F - 3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- --------------
(restated)
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 1,210,526 $ 2,847,238 $6,475,238
Research and development 776,578 616,886 1,745,089
Research and development expenses 254,722 1,065,178 2,918,894
Advertising and promotion expenses 329,446 166,520 873,841
Selling, general and
administrative expenses 396,752 528,753 1,302,137
Clinical expenses 9,859 33,506 360,675
Consulting expenses 1,220,676 764,364 2,936,584
Insurance costs 162,549 121,287 328,791
Professional fees 454,730 178,402 1,351,835
Stockholder expenses 75,608 20,902 96,510
Trade show expenses 216,182 154,782 505,458
Travel and subsistence costs 111,559 195,585 457,159
Rent expense 26,213 48,897 247,461
Interest expense 55,543 2,744 82,596
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Interest income (22,137) (116,972) (197,417)
---------- ---------- -----------
6,981,710 7,646,119 22,714,526
---------- --------- ----------
Net loss (6,981,710) (7,646,119) (22,714,526)
Dividends on cumulative preferred stock:
From discount at issuance (1,741,015) (998,120) (4,074,609)
Earned (315,000) (184,675) (547,520)
----------- ---------- ------------
Net loss applicable to common shareholders $(9,037,725) $(8,828,914) $(27,336,655)
=========== ============ ============
Net loss per common share:
Basic
Net loss per common share $ (.32) $ (.36) $ (1.27)
========== =========== ============
Weighted average number of common shares $27,882,886 24,222,966 21,574,057
============ =========== ============
Diluted
Net loss per common share $ (.32) $ (.36) $ (1.27)
============ ========== ============
Weighted average number of common shares $ 27,882,886 $24,222,966 21,574,057
============ =========== ============
</TABLE>
See accompanying notes to the financial statements.
F - 4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock Additional
-------------------- ------------------- ----------
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at December 10, 1993 (date of inception) -0- $ -0- -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split -- -- 510,000 50,000 --
Acquisition of public shell -- -- 178,752 -- --
Net issuance of additional shares of stock -- -- 15,342,520 16,451 --
Common stock sold -- -- 36,500 36,500 --
Net loss -- -- -- -- --
--------- ---------- ---------- --------- -----------
Balance at June 30, 1994 -- -- 16,067,772 102,951 --
Common stock sold -- -- 1,980,791 1,566,595 --
Common stock issued in exchange for services -- -- 115,650 102,942 --
Common stock issued with employment agreement -- -- 75,000 78,750 --
Common stock issued for compensation -- -- 377,500 151,000 --
Stock options granted -- -- -- -- 622,500
Amortization of deferred compensation -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 50,333
Net loss -- -- -- -- --
--------- ---------- ---------- --------- -----------
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
--------- ---------- ---------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
<S> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception $ -0- $ -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split -- -- -- 50,000
Acquisition of public shell -- -- -- --
Net issuance of additional shares of stock -- -- -- 16,451
Common stock sold -- -- -- 36,500
Net loss (66,951) -- -- (66,951)
--------- ---------- ---------- ---------
Balance at June 30, 1994 (66,951) -0- -- 36,000
Common stock sold -- (523,118) -- 1,043,477
Common stock issued in exchange for services -- -- -- 102,942
Common stock issued with employment agreement -- -- -- 78,750
Common stock issued for compensation -- -- -- 151,000
Stock options granted -- -- (622,500) --
Amortization of deferred compensation -- -- 114,375 114,375
Forgiveness of officers' compensation -- -- -- 50,333
Net loss (1,086,436) -- -- (1,086,436)
---------- ---------- ---------- ----------
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
---------- ---------- ---------- ----------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 5
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
-------------------- ------------ Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
----------- --------- ---------- --------- ---------
Preferred stock sold, including dividends 4,000 3,600,000 -- -- 1,335,474
Common stock sold -- -- 700,471 1,561,110 --
Cancellation of stock subscription -- -- (410,500) (405,130) --
Common stock issued in exchange for services -- -- 2,503,789 4,257,320 --
Common stock issued with exercise of stock option -- -- 191,500 104,375 --
Common stock issued with exercise of options
for compensation -- -- 996,400 567,164 --
Conversion of preferred stock to common stock (1,600) (1,440,000) 420,662 1,974,190 (534,190)
Common stock issued as payment of preferred
stock dividends -- -- 4,754 14,629 --
Dividends accrued on preferred
stock not yet converted -- -- -- -- --
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compensation -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 100,667
Net loss (restated) -- -- -- -- (6,933,310)
----------- --------- ---------- --------- ----------
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
----------- --------- ---------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
<S> <C> <C> <C> <C>
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
---------- -------- -------- ---------
Preferred stock sold, including dividends (1,335,474) -- -- 3,600,000
Common stock sold -- -- -- 1,561,110
Cancellation of stock subscription -- 405,130 -- --
Common stock issued in exchange for services -- -- -- 4,257,320
Common stock issued with exercise of stock option -- (4,375) -- 100,000
Common stock issued with exercise of options
for compensation -- -- -- 567,164
Conversion of preferred stock to common stock -- -- -- --
Common stock issued as payment of preferred
stock dividends (14,629) -- -- --
Dividends accrued on preferred
stock not yet converted (33,216) -- -- (33,216)
Collection of stock subscriptions -- 103,679 -- 103,679
Amortization of deferred compensation -- -- 232,500 232,500
Forgiveness of officers' compensation -- -- -- 100,667
Net loss (restated) -- -- -- (6,933,310)
---------- -------- -------- ----------
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
---------- -------- -------- ----------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 6
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
--------------------- --------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
------ --------- ---------- ---------- ---------
Preferred stock sold, including dividends 450 4,500,000 -- -- 998,120
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 --
Common stock issued for compensation -- -- 353,200 918,364 --
Common stock issued with exercise of stock options -- -- 361,933 1,136,953 --
Cancellation of stock issued to employee -- -- (150,000) (52,500) --
Common stock issued as payment of preferred
stock dividends -- -- 20,760 49,603 --
Dividends accrued on preferred
stock not yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,891,500
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Net loss (restated) -- -- -- --
------ --------- ---------- ---------- ---------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
------ --------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
---------- ------- -------- ---------
Preferred stock sold, including dividends (998,120) -- -- 4,500,000
Conversion of preferred stock to common stock -- -- -- --
Common stock issued in exchange for services -- -- -- 650,129
Common stock issued for compensation -- -- -- 918,364
Common stock issued with exercise of stock options -- (33,750) -- 1,103,203
Cancellation of stock issued to employee -- -- -- (52,500)
Common stock issued as payment of preferred
stock dividends (16,387) -- -- 33,216
Dividends accrued on preferred
stock not yet converted (168,288) -- -- (168,288)
Stock options granted -- -- (1,891,500) --
Collection of stock subscriptions -- 16,875 -- 16,875
Amortization of deferred compensation -- -- 788,000 788,000
Net loss (restated) -- -- (7,646,119)
----------- ------- ---------- ---------
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
----------- ------- ---------- ---------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 7
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
--------------------- -------------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
--- --------- ---------- ---------- -----------
Preferred stock sold, including dividends
and placement fees 501 5,010,000 -- -- 1,290,515
Conversion of preferred stock to common stock (340) (3,400,000) 6,502,448 4,644,307 (1,210,414)
Common stock sold -- -- 500,000 200,000 --
Common stock issued in exchange for services -- -- 956,000 1,419,130 --
Common stock issued for compensation -- -- 64,300 54,408 --
Common stock issued with exercise of stock option -- -- 65,712 22,999 --
Common stock issued in exchange for
licensing agreement -- -- 3,500,000 1,890,000 (3,199,000)
Dividends accrued on preferred
stock not yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,340,625
Collection of stock subscriptions -- -- -- 12,500 --
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
--- --------- ---------- ---------- -----------
Balance at June 30, 1998 611 $ 6,110,000 36,493,544 $23,983,073 $ 1,884,846
--- --------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
<S> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
------------ -------- ----------- -----------
Preferred stock sold, including dividends
and placement fees (1,741,015) -- -- 4,559,500
Conversion of preferred stock to common stock -- -- -- 33,893
Common stock sold -- -- -- 200,000
Common stock issued in exchange for services -- -- -- 1,419,130
Common stock issued for compensation -- -- -- 54,408
Common stock issued with exercise of stock option -- -- -- 22,999
Common stock issued in exchange for
licensing agreement -- -- -- (1,309,000)
Dividends accrued on preferred
stock not yet converted (315,000) -- -- (315,000)
Stock options granted -- -- (1,340,625) --
Collection of stock subscriptions -- 21,250 -- 33,750
Amortization of deferred compensation -- -- 1,418,938 1,418,938
Net loss (6,981,710) -- -- (6,981,710)
------------ -------- ----------- -----------
Balance at June 30, 1998 $(27,336,655) $(14,309) $(1,300,812) $ 3,326,143
------------ -------- ----------- -----------
</TABLE>
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F - 8
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
-------------- -------------- -------------
(restated)
<S> <C> <C> <C>
Net loss $ (6,981,710) $(7,646,119) $(22,714,526)
------------ ----------- ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Non-cash compensation and consulting expenses 1,379,938 2,654,821 7,388,147
(Increase) decrease in restricted certificate of deposit 103,500 (103,500) --
(Increase) decrease in loans receivable - other 10,073 (10,073) --
Increase in inventory (155,782) -- (155,782)
(Increase) decrease in prepaid expenses 23,253 (40,892) (33,539)
(Increase) decrease in other assets (97,828) 43,375 (107,463)
Increase in accounts payable and accrued expenses 529,220 88,074 880,478
Increase (decrease) in other current liabilities (53,569) (536,599) 265,978
------------ ------------ ------------
Total adjustments 3,441,709 3,113,253 11,467,494
------------ ------------ ------------
Net cash used for operating activities (3,540,001) (4,532,866) (11,247,032)
------------ ------------ ------------
Cash flows from investing activities:
Prototype equipment (1,582,446) (641,247) (2,799,031)
Capital expenditures (115,738) (2,815,923) (3,660,994)
------------ ------------ ------------
Net cash used for investing activities (1,698,184) (3,457,170) (6,460,025)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (8,928) (5,512) (14,440)
Proceeds from stockholder loans, net -- (77,833) --
Proceeds from loan payable, net 285,407 -- 285,407
Proceeds from issuance of preferred stock 4,559,500 4,500,000 12,659,500
Net proceeds from issuance of common stock 329,099 (18,750) 5,086,706
------------ ------------
Net cash provided by financing activities 5,165,078 4,397,905 18,017,173
------------ ------------ ------------
Net increase (decrease) in cash (73,107) (3,592,131) 310,116
Cash and cash equivalents at beginning of period 383,223 3,975,354 -0-
------------ ------------ ------------
Cash and cash equivalents at end of period $ 310,116 $ 383,223 $ 310,116
============ ============ ============
(CONTINUED)
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
(restated)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,105 $ 2,744$ 30,158
========== ========== ==========
Supplemental disclosures of non-cash investing
and financing activities:
Issuance of common stock and options
in exchange for services $1,325,530 $ 650,129 $4,615,959
========== ========== ==========
Issuance of common stock in
exchange for property and equipment $ -- $ -- $ 89,650
========== ========== ==========
Issuance of common stock and other
current liability in exchange for
patent licensing agreement $ 581,000 $ -- $ 581,000
========== ========== ==========
Issuance of common stock for
compensation $ 54,408 $ 918,364 $1,690,936
========== ========== ==========
Issuance of common stock through
exercise of incentive stock options $ -- $1,103,203 $1,103,203
========== ========== ==========
Issuance of common stock as
payment for preferred stock dividends $ -- $ 49,603 $ 64,232
========== ========== ==========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ -- $ 50,289 $ 50,289
========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F - 10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc. ("IDSI- Fl."). IDSI-Fl. was
formed on December 10, 1993.(see Note 4) Effective July 1, 1995 the Company
changed its corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial Computed Tomography Laser Mammography ("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.
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 June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995 was granted with 7 independent
and 16 subordinate claims. Foreign patent applications have been filed and are
pending.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
CTLMTM device is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(CONTINUED)
F - 11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(b) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three
months or less and investment in money market funds are considered to
be cash equivalents by the Company.
(c) Inventory
Inventories, consisting principally of raw materials and
work-in-process, are carried at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) Prototype equipment
The direct costs associated with the final 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 $164,941 as computer and lab equipment. The original amortization
period of two years was increased to five years to provide for the
estimated period of time the clinical equipment would be in service to
gain FDA approval.
During the fiscal year ended June 30, 1998, the costs associated with
the various pre-production units available for sale have been
reclassified as inventory and the remaining costs which will no longer
benefit future periods were expensed to research and development costs.
(CONTINUED)
F - 12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using straight-line methods over the estimated useful lives of
the related assets.
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, capitalization of software development costs begins
upon the establishment of technological feasibility for the product.
The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable
judgement by management with respect to certain external factors,
including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. After considering the above factors, the Company has
determined that software development costs, incurred subsequent to the
initial acquisition of the basic software technology, should be
properly expensed. Such costs are included in research and development
expense in the accompanying statements of operations.
(f) Research and development
Research and development expenses consist principally of expenditures
for equipment and outside third-party consultants which are used in
testing and the development of the Company's 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.
(CONTINUED)
F - 13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Patent license agreement
The patent license agreement will be amortized over the seventeen year
life of the patent, the term of the agreement.
(i) Stock-based compensation
The Company adopted Statement of Financial Accounting Standards No.
123. "Accounting for Stock-Based Compensation" ("SFAS 123"), in fiscal
1997. As permitted by SFAS 123, the Company continues to measure
compensation costs in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", but
provides pro forma disclosures of net loss and loss per share as if the
fair value method (as defined in SFAS 123) had been applied beginning
in fiscal 1997.
(j) Long-lived assets
Effective July 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121. "Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). This statement requires companies to write
down to estimated fair value long-lived assets that are impaired. The
Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset
may not be recoverable. In performing the review of recoverability the
Company estimates the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected
future cash flows is less than the carrying amount of the assets, an
impairment loss is recognized. The Company has determined that no
impairment losses need to be recognized through the fiscal year ended
June 30, 1998.
(k) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. Under SFAS 109, the effect
on deferred taxes of a change in tax rates is recognized in income in
the year that includes the enactment date.
(CONTINUED)
F - 14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with the current period presentation.
(3) RESTATEMENT
The June 30, 1997 and 1996 financial statements have been restated to properly
reflect the accrual of compensation and recording of deferred compensation on
the qualified and non-qualified stock options for the officers, and the
correction of an accumulated depreciation understatement of $27,682 for the year
ended June 30, 1997. The effect on net loss from the compensation restatement
was an increase of $946,796 for the year ended June 30, 1996 and a decrease of
$299,055 for the year ended June 30, 1997. 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)
F - 15
<PAGE>
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 16)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(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.
(6) RESTRICTED CERTIFICATE OF DEPOSIT
The Company had issued an irrevocable letter of credit, which matured on October
4, 1997, towards the purchase of laboratory equipment. The letter of credit was
secured with the certificate of deposit.
(CONTINUED)
F - 16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INVENTORIES
Inventories consisted of the following:
JUNE 30,
---------------------------------
1998 1997
---- ----
Raw materials $ 1,296,864 $ --
Work-in process 1,917,181 --
------------- --------------
$ 3,214,045 $ --
============= ==============
(8) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
JUNE 30,
-----------------------------
1998 1997
Furniture and fixtures $ 245,219 $ 240,029
Building and land (See Note 20) 2,084,085 2,081,399
Clinical equipment -- 250,000
Computers and equipment 487,143 389,373
CTLMTM software costs 352,932 352,932
Trade show equipment 153,193 153,193
Laboratory equipment 190,031 179,862
------------ ----------
3,512,603 3,646,788
Less: accumulated depreciation (591,623) (353,491)
------------ -----------
Totals $ 2,920,980 $3,293,297
============ ===========
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLMTM software costs 5 years
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, 1998 and 1997 are $138,180 and $225,007,
respectively, which represents the net realizable value of the CTLMTM software
at the end of each period presented.
(CONTINUED)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) PROPERTY AND EQUIPMENT (CONTINUED)
Amortization expense related to the CTLMTM software for each period presented in
the statement of operations is as follows:
PERIOD ENDED AMOUNT
------------ --------
6/30/98 $ 70,587
6/30/97 70,587
6/30/96 54,345
6/30/95 19,160
6/30/94 73
--------
Total $214,752
========
(9) OTHER ASSETS
Other assets consist of the following:
JUNE 30,
--------------------------
1998 1997
---------- ----------
Patent license agreement $ 581,000 $ --
Court bond 100,000 --
Security deposits 6,080 9,635
Other 1,383 --
---------- ----------
Totals $ 688,463 $ 9,635
========== ==========
During June 1998, the Company finalized an exclusive Patent License Agreement
with its chief executive officer. The officer is the owner of patents issued on
December 2, 1997 which encompasses the technology of the 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
3,500,000 shares of common stock and is required to issue an additional
3,500,000 shares in June 1999. The License agreement has been recorded at the
historical cost basis of the chief executive officer, who owns the patent. A
liability has been recorded for the fair market value of the remaining shares to
be issued in June 1999. (see Note 11)
(CONTINUED)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JUNE 30,
-----------------------
1998 1997
---- ----
(restated)
Accounts payable - trade $ 774,952 $ 276,096
Preferred stock dividends payable 483,288 168,288
Accrued property taxes payable 15,585 14,000
Insurance financing payable 10,233 --
Accrued compensated absences 38,530 56,632
Accrued interest 18,546
Payroll taxes payable 4,250 4,530
Other 18,382 --
---------- ----------
Totals $1,363,766 $ 519,546
========== ==========
(11) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
JUNE 30,
-----------------------
1998 1997
---- ----
Patent licensing agreement payable
(see Note 9) $1,890,000 $ --
Accrued compensation-stock options 265,978 319,547
---------- ----------
$2,155,978 $ 319,547
========== ==========
The Company anticipates that the items included in other current liabilities
will be liquidated through the issuance of common stock within the next fiscal
year.
(12) LOAN PAYABLE
During the year ended June 30, 1998, the Company borrowed $460,407, from an
unrelated third-party on an unsecured basis. The loan accrues interest at a rate
of 6% per annum and is payable on demand. The Company has repaid $175,000 as of
June 30, 1998. Accrued interest of $18,546 is reflected in accrued expenses on
the balance sheet.
(CONTINUED)
F - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) LEASES
The Company has entered into a lease arrangement which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 8) and the obligation has been
recorded as debt. At June 30, 1998, approximate future minimum lease payments
under capitalized lease obligations were as follows:
YEAR ENDING JUNE 30,
1999 $ 12,384
2000 12,384
2001 12,384
2002 4,128
--------
Total minimum lease payments 41,280
Less amount representing interest (5,431)
Present value of net minimum
lease payments 35,849
Less current portion (9,715)
Long-term portion $ 26,134
========
The Company also leases certain office equipment under an operating lease
expiring in June 2002. The Company's lease for its office space expired during
the fiscal year ended June 30, 1997.
Minimum future lease payments under the non-cancelable operating lease having a
remaining term in excess of one year as of June 30, 1998 are as follows:
Fiscal year ended
JUNE 30, AMOUNT
----------------- ------
1999 $ 3,370
2000 3,676
2001 3,676
2002 3,676
---------
Total minimum future lease payments $ 14,398
=========
(CONTINUED)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(14) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $16,691,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $5,675,000 and $3,755,000 at June 30, 1998 and 1997, respectively.
The Company has reduced the deferred tax asset resulting from its tax loss
carryforwards by a valuation allowance of an equal amount as the realization of
the deferred tax asset is uncertain. The net change in the deferred tax asset
and valuation allowance from July 1, 1997 to June 30, 1998 was an increase of
approximately $1,920,000.
(15) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock. 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
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Preferred Stock will receive shares determined by dividing (i) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.
(CONTINUED)
F - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Series A Convertible Preferred
Stock. The holders of the Series A Preferred Stock are also entitled to receive
a five percent (5%) per share, per annum dividend out of legally available funds
and to the extent permitted by law. These dividends are payable quarterly on the
last business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series A Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series A Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
A Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.
The holders of the Series B Preferred Stock could have converted up to 34% of
the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may
convert their remaining shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration, into fully paid and nonassessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (i) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty-two percent (82%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than $3.85. The warrants are exercisable at
any time for an exercise price of $5.00 and will expire five years from the date
of issue.
(CONTINUED)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1998, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $483,288 of accrued
dividends payable. (See Note 20)
During the year ended June 30, 1998 the Company issued five Private Placements
of convertible preferred stock (see schedule incorporated into Note 15). The
Private Placements are summarized as follows:
SERIES C PREFERRED STOCK
------------------------
On October 6, 1997, the Company finalized the private placement to foreign
investors of 210 shares of its Series C Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 105,000
shares of the Company's common stock at an exercise price of $1.63 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series C Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series C Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion.
(CONTINUED)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock; however, in no event
will the "Conversion Price" be greater than $1.222. Pursuant to the
Regulation S documents, the Company was also required to escrow an aggregate
of 3,435,583 shares of its common stock (200% of the number of shares the
investor would have received had the shares been converted on the closing
date of the Regulation S sale).
In connection with the sale, the Company paid an unaffiliated investment
banker $220,500 for placement and legal fees, providing net proceeds to the
Company of $1,879,500.
SERIES D PREFERRED STOCK
------------------------
On January 9, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series D Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.22 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series D Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series D Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy-five percent (75%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
SERIES E PREFERRED STOCK
------------------------
On February 5, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series E Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.093 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended. The Series E Preferred Stock is
convertible, at any time, commencing 45 days from the date of issuance and
for a period of three years thereafter, in whole or in part, without the
payment
(CONTINUED)
F - 24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
of any additional consideration, into fully paid and nonassessable shares of
the Company's no par value common stock based upon the "conversion formula".
The conversion formula states that the holder of the Series E Preferred
Stock will receive shares determined by dividing (i) the sum of $10,000 by
the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
SERIES F PREFERRED STOCK
------------------------
On February 20, 1998, the Company finalized the private placement to foreign
investors of 75 shares of its Series F Convertible Preferred Stock at a
purchase price of $10,000 per share. The agreement was executed pursuant to
Regulation S as promulgated by the Securities Act of 1933, as amended.
The Series F Preferred Shares pay a dividend of 6% per annum, payable in
Common Stock at the time of each conversion and are convertible, at any
time, commencing May 15, 1998 and for a period of two years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series F Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy percent (70%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company paid an unaffiliated investment
banker $50,000 for placement and legal fees, providing net proceeds to the
Company of $700,000. The shares underlying the preferred shares and warrant
are entitled to demand registration rights under certain conditions.
SERIES H PREFERRED STOCK
------------------------
On June 2, 1998, the Company finalized the private placement to foreign
investors of 100 shares of its Series H Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 126,500
shares of the Company's common stock at an exercise price of $1.00 per
share. The agreement was executed pursuant to Regulation D as promulgated by
the Securities Act of 1933, as amended.
(CONTINUED)
F - 25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Series H Preferred Stock is convertible, at any time, for a period of
two years thereafter, in whole or in part, without the payment of any
additional consideration, into fully paid and nonassessable shares of the
Company's no par value common stock based upon the "conversion formula". The
conversion formula states that the holder of the Series H Preferred Stock
will receive shares determined by dividing (i) the sum of $10,000 by the
(ii) "Conversion Price" in effect at the time of conversion. The "Conversion
Price" shall be equal to the lesser of $.53 or seventy-five percent (75%) of
the Average Closing Price of the Company's common stock for the ten-day
trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued eight preferred shares and
paid $10,000 to an unaffiliated investment banker for placement and legal
fees, providing net proceeds to the Company of $990,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
The Company is currently in technical default of the Registration Rights
Agreement ("RRA"), which required the Registration Statement to be declared
effective by October 2, 1998. Pursuant to the RRA, the Company is required
to pay the Series H holders, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, 2% of the
principal amount of the Securities for the first thirty days, and 3% of the
principal amount of the Securities for each thirty day period thereafter
until the Company procures registration of the Securities. (See Note 20)
The agreements provide that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.
The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 1998, 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)
F - 26
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) Convertible Preferred Stock (Continued)
<TABLE>
<CAPTION>
Series A Series B Series C
-------- -------- --------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <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
Conversion of preferred
stock (210) (2,100,000)
------ ----------- ----- ---------- ---- -----------
Balance at June 30, 1998 -- $ -- 450 $4,500,000 -- $ --
====== =========== ===== ========== ==== ===========
Additional information:
- -----------------------
Discount off market price 25% 18% 25%
=== === ===
Fair market value-issue date $8.31 $3.25 $1.63
===== ===== =====
Deemed preferred stock
dividend $1,335,474 $998,120 $705,738
========== ======== ========
</TABLE>
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) Convertible Preferred Stock (Continued)
<TABLE>
<CAPTION>
Series D Series E Series F
-------- -------- --------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 -- $ -- -- $ -- -- $ --
Sale of Series A
Series A conversion
--- --------- --- ------- --- --------
Balance at June 30, 1996
Sale of Series B
Series A conversion
--- --------- --- ------- --- --------
Balance at June 30, 1997
Sale of preferred stock
(Series C - H) 54 540,000 54 540,000 75 750,000
Conversion of preferred
stock (25) (250,000) (30) (300,000) (75) (750,000)
--- --------- --- --------- --- ---------
Balance at June 30, 1998 29 $ 290,000 24 $ 240,000 -- $ --
=== ========= === ========= === =========
Additional information:
- -----------------------
Discount off market price 25% 25% 30%
=== === ===
Fair market value-issue date $0.99 $1.07 $1.24
===== ===== =====
Deemed preferred stock
dividend $182,433 $182,250 $318,966
======== ======== ========
</TABLE>
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) Convertible Preferred Stock (Continued)
<TABLE>
<CAPTION>
Series H Totals
-------- ------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 -- $ -- -- $ --
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
--- ----------- ------ -----------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
--- ----------- ------ -----------
Balance at June 30, 1997 450 4,500,000
Sale of preferred stock
(Series C - H) 108 1,080,000 501 5,010,000
Conversion of preferred
stock (340) (3,400,000)
--- ----------- ------ -----------
Balance at June 30, 1998 108 $ 1,080,000 611 $ 6,110,000
=== =========== ====== ===========
Additional information:
- -----------------------
Discount off market price 25%
===
Fair market value-issue date $0.57
=====
Deemed preferred stock
dividend $351,628
========
</TABLE>
(Continued)
F - 27
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company. (See
Statement of Stockholders' Equity)
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. During the year
ended June 30, 1996, 410,500 shares of the common stock related to these
receivables were canceled and $103,679 was collected on the receivable. The
unpaid balance on these original sales and other subsequent sales of common
stock, in the amount of $35,559, as of June 30, 1997, is reflected as a
reduction to stockholder's equity on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $102,942, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.
In addition, during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000, were satisfied with the issuance of
377,500 shares of restricted common stock. Compensation expenses has been
recorded during the fiscal year pursuant to the employment agreements with the
officers. In addition, during the year ended June 30, 1995, 75,000 shares of
restricted common stock was issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(CONTINUED)
F - 28
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK (CONTINUED)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $2,397,258
reflected as 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 15)
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock option plan and were
exercised in a "cash-less" transaction, resulting in compensation to the
officers of $567,164. Compensation cost was measured as the excess of fair
market value of the shares received over the value of the stock 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.
F - 29
<PAGE>
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK (CONTINUED)
4. On February 13, 1997, 4,000 shares were issued to an outside
consultant in exchange for services performed. Consulting services of
$11,500 were recorded, representing the fair market value ($2.88 per
share) on that date.
5. Services rendered by an independent consultant during June 1997 in
exchange for 199,000 shares. Consulting expenses of $548,149 was
charged, as the fair market value on the date of the transaction was
approximately $2.75 per share.
6. Exercise of incentive stock options 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 cash
less 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 15) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for 100,000
shares. Consulting expenses of $221,900 was charged as the fair market
value at July 10, 1997 was $2.22 per share.
2. Services rendered by an independent consultant in exchange for 200,000
shares. Consulting expenses of $400,000 was charged as the fair market
value at August 20, 1997 was $2.00 per share.
3. Services rendered by an independent consultant in exchange for 40,000
shares. Consulting expenses of $67,480 was charged as the fair market
value at September 4, 1997 was $1.69 per share.
4. Services rendered by a public relations company in exchange for 166,000
shares. Public relations expenses of $269,750 was charged as the fair
market value at October 24, 1997 was $1.63 per share.
5. On December 15, 1997, bonus stock was issued to Company employees, for
39,300 shares. Compensation expense of $41,658 was charged as the fair
market value at that date was $1.06 per share.
F - 30
<PAGE>
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK (CONTINUED)
6. Services rendered by an independent consultant in exchange for
250,000 shares. Consulting expenses of $320,000 was charged as the fair
market value at January 7, 1998 was $1.28 per share.
7. Services rendered by an independent consultant during May 1998 in
exchange for 200,000 shares. Consulting expenses of $140,000 was
charged, as the fair market value on that date was $.70 per share.
8. The Company sold 500,000 shares on May 15, 1998 in a Regulation D
offering at $.40 per share, and received cash proceeds of $200,000.
9. On June 5, 1998, the Company issued to its chief executive officer
3,500,000 shares ($1,890,000) as consideration for an exclusive Patent
License Agreement (see Note 8). The market value of the stock on this
date was $.54 per share. 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) was received by the Company.
(17) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan and pursuant to
their employment contracts, an officer may be granted non-qualified options to
purchase shares of common stock over the next five calendar years, at a minimum
of 250,000 shares per calendar year. The exercise price shall be thirty-five
percent of the fair market value at the date of grant. On July 5, 1995 the Board
of Directors authorized an amendment to the Plan to provide that upon exercise
of the option, the payment for the shares exercised under the option may be made
in whole or in part with shares of the same class of stock. The shares to be
delivered for payment would be valued at the fair market value of the stock on
the day preceding the date of exercise. The plan was terminated effective July
1, 1996, however the officers will be issued the options originally provided
under the terms of their employment contracts.
(CONTINUED)
F - 31
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This plan
provides for the granting, exercising and issuing of incentive stock options
pursuant to Internal Revenue Code Section 422. The Company may grant incentive
stock options to purchase up to 5% of the issued and outstanding common stock of
the Company at any time. The Board of Directors has direct responsibility for
the administration of these plans.
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock as of the date of grant.
The exercise price of incentive options to officers, or affiliated persons, must
be at least 110% of the fair market value as of the date of grant.
In accordance with the provisions of APB No. 25, the Company records the
discount from fair market value on the non-qualified stock options as a charge
to deferred compensation at the date of grant and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as
follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
----------------------------- -----------------------------
SHARES WTD. AVG. PRICE SHARES WTD. AVG. PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 75,000 $1.40 1,500,000 $ 1.12
Exercised -- --
----------
Outstanding at June 30, 1995 75,000 1.40 1,500,000 1.12
Granted 770,309 1.66 750,000 1.44
Exercised (164,956) .92 (1,800,000) 1.50
----------
Outstanding at June 30, 1996 680,353 1.81 450,000 .13
Granted 371,377 3.27 750,000 3.88
Exercised (395,384) 1.10 --
----------
Outstanding at June 30, 1997 656,346 3.07 1,200,000 2.47
Granted 220,755 1.95 750,000 2.75
Exercised -- (65,712) .35
Canceled (175,205) 4.25 --
----------
Outstanding at June 30, 1998 701,896 2.42 1,884,288 2.66
======== ==========
</TABLE>
(CONTINUED)
F - 32
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
At June 30, 1998 and 1997, 451,513 and 270,526, respectively, of the incentive
stock options were vested and exercisable and 1,884,288 and 1,200,000,
respectively, of the non-qualified stock options were fully vested and
exercisable. The stock options vest at various rates over periods up to ten
years. Shares of authorized common stock have been reserved for the exercise of
all options outstanding. The following summarizes the option transactions that
have occurred:
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense of
$567,164 was recorded during the year ended June 30, 1996 as a result of the
discount from the market value.
On November 7, 1994, the Company granted 300,000 non-qualified options to
its general counsel, currently a vice-president of the Company, at an
exercise price of $0.50 per share. Deferred compensation of $150,000 was
recorded on the transaction and is being amortized over the vesting period.
The options were all exercised as of June 30, 1997.
On March 30, 1995, the Company granted to the director of engineering, a
non-qualified option to purchase up to 150,000 shares of common stock per
year, or a total of 450,000 shares, during the period March 30, 1995 and
ending March 31, 1998. The exercise price shall be $0.35 per share. The
options do not "vest" until one year from the anniversary date. Deferred
compensation of $472,500 was recorded on the transaction and is being
amortized over the vesting period. The Company also granted the individual,
incentive options to purchase 75,000 shares of common stock at an exercise
price of $1.40 per share. The options originally expired on March 30, 1998,
but were reissued on March 30, 1998 for two years.
On July 5, 1995 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense was
recorded during the year ended June 30, 1996 as a result of the discount
from the market value.
On September 1, 1995, the Company issued to its three officers and directors
incentive options to purchase 107,527 shares, individually, at an exercise
price of $0.93 per share (110% of the fair market value). The options expire
on September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to
purchase 119,047 shares of common stock at an exercise price of $0.84 per
share. The options expire on September 1, 2000.
(CONTINUED)
F - 33
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
At various dates during the fiscal year ended June 30, 1996, the Company
issued to various employees incentive options to purchase 328,681 shares of
common stock at prices ranging from $0.81 to $8.18. In all instances, the
exercise price was established as the fair market value of the common stock
at the date of grant, therefore no compensation was recorded on the issuance
of the options. In most cases, one-third of the options vest one year from
the grant date, with one-third vesting each of the next two years. The
options expire in ten years from the grant date.
On July 4, 1996, the Company issued to its three officers and directors
incentive options to purchase 22,883 shares, individually, at an exercise
price of $4.37 per share (110% of the fair market value). The options expire
on July 4, 2001.
On July 5, 1996 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Deferred compensation of
$1,891,500 was recorded on the transaction and is being amortized over the
remaining term of the employment contracts (three years).
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 264,778 shares of common
stock at prices ranging from $2.56 to $3.81. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
On July 4, 1997, the Company granted to its three officers and directors
incentive options to purchase 34,000 shares, individually, at an exercise
price of $2.94 per share (110% of the fair market value). The options expire
on July 4, 2002.
On July 5, 1997, the Company issued non-qualified options to its officers
and directors to purchase 750,000 shares of common stock at 35% of the fair
market value at the date of grant. Deferred compensation of $1,340,625 was
recorded on the transaction and is being amortized over the remaining term
of the employment contract (two years).
(CONTINUED)
F - 34
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
At various dates during the year ended June 30, 1998, the Company issued to
various employees incentive options to purchase 204,905 shares of common
stock at prices ranging from $.55 to $2.60. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
The following table summarizes information about all of the stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------- -------------------------
Weighted
average
Range of remaining Weighted Weighted
EXERCISE PRICES SHARES LIFE (YEARS) AVG. PRICE SHARES AVG. PRICE
--------------- ------ ------------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
$ .35 - 1.25 1,374,720 8.61 $ .83 1,252,490 $ .78
1.36 - 2.94 975,115 7.85 1.59 936,552 1.55
3.10 - 5.08 236,349 7.67 3.93 146,759 4.34
------------------------------------------------------------------------------------------------------
$ .35 - 5.08 2,586,184 8.24 $ 1.40 2,335,801 $ 1.31
======================================================================================================
</TABLE>
At June 30, 1998, the Company has two stock-based compensation plans, which have
been previously described. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans with respect to its
employees, however compensation has been recorded with respect to its officers
due to their provisions of utilizing "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
$(53,570) and $475,955 for 1998 and 1997, respectively.
The weighted average Black-Scholes value of options granted during 1998 and 1997
was $1.44 and $2.03 per option, respectively. Had compensation cost for the
Company's fixed stock-based compensation plan been determined based on the fair
value at the grant dates for awards under this plan consistent with the method
of SFAS 123, the Company's pro forma net loss and pro forma net loss per share
would have been as indicated below:
(CONTINUED)
F - 35
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- --------------
<S> <C> <C> <C>
Net loss to common shareholders -
As reported $(9,378,102) $(8,544,949) $(27,055,993)
=========== =========== ============
Pro forma $(9,638,158) $(8,758,447) $(27,615,569)
=========== =========== ============
Basic loss per share -
As reported $ (.34) $ (.35) $ (1.25)
=========== =========== ============
Pro forma $ (.35) $ (.36) $ (1.28)
=========== =========== ============
Diluted loss per share -
As reported $ (.34) $ (.35) $ (1.25)
=========== =========== ============
Pro forma $ (.35) $ (.36) $ (1.28)
=========== =========== ============
</TABLE>
For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively: no dividend yield;
volatility of 7.1% and .2%; risk-free interest rate of 6% and 6.5%; and an
expected term of five years.
(18) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at June 30,
1998 was $350,698.
(CONTINUED)
F - 36
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(19) COMMITMENTS AND CONTINGENCIES
On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements provide for compensation to these individuals, during the Company's
development stage, at the annual rate of $250,000 (amended by Board of Directors
effective January 1, 1996), $104,000 (amended by Board of Directors effective
January 15, 1997), and $104,000, respectively.
Additional provisions have been made in these agreements for salary adjustments
to all of the individuals including bonus arrangements, once the Company is
operational. During the fourth quarter (May 1, 1995) of the fiscal year ended
June 30, 1995, the officers of the Company agreed to permanently forgive any
compensation provided in their employment contracts until the Company
establishes an adequate cash flow. The Company reinstated the compensation to
these officers beginning November 1, 1995. The total amount of compensation
forgiven by these officers amounted to $151,000; or $100,667 during the fiscal
year ended June 30, 1996 and $50,333 during the fiscal year ended June 30, 1995.
The financial statements reflect this compensation as a contribution to the
paid-in capital of the Company in the appropriate accounting periods. As a
result, the officers were paid at fifty-percent of their employment contract for
a period of twelve months.
On April 1, 1995, the Company entered into a two year agreement with its
vice-president and general counsel, and provides for annual compensation of
$85,000. This contract was extended on June 16, 1997, providing for annual
compensation of $95,000, with no limit as to the term. The officer resigned
during the fiscal year ended June 30, 1998.
As additional consideration for his development efforts in the 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.
During the years ended June 30, 1998, 1997 and 1996, employment agreements were
initiated with individuals in various positions currently within the Company.
Annual payments for compensation under these agreements amount to $170,000,
$536,500 and $206,500, respectively, in the aggregate.
(CONTINUED)
F - 37
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(19) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into agreements with various distributors located
throughout Europe, Asia and South America to market the 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.
During the year ended June 30, 1998, the Company entered into an agreement for a
fifteen million dollar, three year equity line of credit, whereby the Company,
as it deems necessary, may raise capital through the sale of its common stock to
a consortium of prominent European banking institutions. The shares will be
purchased by the consortium at a discount from the fair market value of the
Company's common stock.
(20) SUBSEQUENT EVENTS
The Company has selected Nassau County Medical Center of East Meadow, Long
Island, New York, to be its first external clinical site. The Company has
submitted its Investigational Device Exemption ("IDE") protocol to the
hospital's Institutional Review Board, which is scheduled to meet on October 14,
1998 to review the IDE protocol. Upon approval, documents will be forwarded to
the Food and Drug Administration ("FDA") for their approval. The Company will be
contacted by the FDA granting permission to proceed with the clinical trials
described in the IDE protocol.
The Company has applied for a conventional first mortgage, of up to $2,000,000,
on its office and manufacturing facility located in Plantation, Florida. At
present, a commitment letter with respect to this mortgage is still pending.
During the period subsequent to the end of the fiscal year, the Company has
borrowed approximately $410,000 in three separate transactions. The Company
issued 480,000 shares of common stock in conjunction with the borrowings.
On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Company is in the process of completing the revisions to the Information
Statement. The Majority Shareholders consent with respect to the Amendment will
take effect twenty days from the notification that the SEC has no further
comments with respect to the Information Statement.
(CONTINUED)
F - 38
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(20) SUBSEQUENT EVENTS (CONTINUED)
On September 4, 1998, the Company received a notice of conversion from the
Series B 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 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.
The Company also entered into a Subscription Agreement with the Purchaser
whereby the Company agreed to issue 138 shares of its Series I, 7% Convertible
Preferred Stock. The consideration for the subscription agreement was paid as
follows:
1. Forgiveness of approximately $725,795 of accrued interest in
connection with the Series B Convertible Preferred stock. 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.
In addition, the Company entered into a Subscription Agreement with the
Purchaser whereby the Purchaser agrees 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. The Debentures are secured by a mortgage
on the Company's land and building. 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 has irrevocably agreed to purchase $1,100,000 of the
Debentures, which will net the Company proceeds of $1,000,000 after
fees.
(CONTINUED)
F - 39
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(20) SUBSEQUENT EVENTS (CONTINUED)
2. The Company may draw a second $825,000 ($750,000 net of fees)
anytime thirty 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. 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 will be registered in the Company's S-2
Registration Statement presently pending with the Commission.
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
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 $125,000 as potential liquidated damages
resulting from the delay in effecting the Registration Statement, through
February 28, 1999. The Company has issued 424,242 shares of its common stock as
partial payment of the liquidated damages to the Series H holders.
F - 40
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION 24,402,801 SHARES OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES IMAGING DIAGNOSTIC SYSTEMS, INC. NOT CONSTITUTE AN COMMON STOCK
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE
INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE ________________
OF THIS PROSPECTUS.
PROSPECTUS
----------------- ----------------
TABLE OF CONTENTS
-----------------
PAGE
- ----
Available Information......................... 2
Incorporation of Certain
Documents By Reference........................ 3
Prospectus Summary............................ 4
Risk Factors.................................. 6
Management Discussion and Analysis of
Financial Condition and Results of
Operation................................... 19
Business...................................... 22 IMAGING DIAGNOSTIC SYSTEMS, INC.
Management.................................... 49 6531 NW 18TH COURT
Certain Transactions.......................... 52 PLANTATION, FLORIDA 33313
Market Price of Security and Other Related (954) 581-9800
Stockholder Matters......................... 53
Sales of Unregistered Securities.............. 55
Principal Stockholders........................ 67
Dividend Policy .............................. 68
Selling Security Holders...................... 68
Plan of Distribution.......................... 70
Description of Securities..................... 71
Changes in and Disagreements with
Accountants ................................ 72
Disclosure of Commission Position on
Indemnification for Securities Act May ___, 1999
Liabilities................................. 72
Interests Of Named Experts and Counsel........ 72
Experts....................................... 72
Legal Opinions................................ 72
Financial Information......................... 72
UNTIL ____________, 1999 (25 DAYS AFTER THE DATE
HEREOF) ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the securities
being registered are as follows:
SEC Registration Fee................................ $4,283.70
Edgar Formatting Fees............................... $6,630.00
-----------
TOTAL $10,913.70
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Company's Articles of Incorporation authorizes the Company to
indemnify directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal or
termination of effectiveness.
2. So long as permitted by law, no officer of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such officer occurring prior to such amendment, repeal or
termination of effectiveness.
3. To the extent that a Director, Officer, or other corporate agent of
this corporation has been successful on the merits or otherwise in
defense of any civil or criminal action, suit, or proceeding referred
to in sections (a) and (b), above, or in defense of any claim, issue,
or matter therein, he shall be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Expenses incurred by a Director, Officer, or other corporate agent
in connection with a civil or criminal action, suit, or proceeding may
be paid by the corporation in advance of the final disposition of such
action suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the corporate agent to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH ABOVE, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of the Company's Form 10-KSB for the fiscal year ending
June 30, 1995
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to Exhibit 3.
(i). 6 of the Company's Form 10-KSB for the fiscal year ending June 30,
1996. File number 033-04008.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-1 dated July 1, 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated October 15, 1997.
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of the Company's Form 10-KSB for the fiscal year ending June 30,
1995.
3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated
by reference to Exhibit 3 (i) of the Company's Form 10-SB, as amended,
file number 0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11 Certificate and Plan of Merger - is incorporated by reference to
Exhibit 3(i) of the Form 10-SB.
3.12 Certificate of Amendment - is incorporated by reference to Exhibit 3(i)
of the Form 10-SB.
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
5 Legal opinion of Rebecca J. Del Medico, Esq.,
dated April 9, 1999.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
Company's Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
II-2
<PAGE>
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
Form 10-SB.
10.5 Lock Up Agreement By and Between the Company and Richard J. Grable,
Linda B. Grable, and Allan L. Schwartz, is incorporated by reference to
Exhibit 10.5 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1996. File number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of the
Company's Form 10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1998.
10.10 Focus Distribution Agreement (United Kingdom and Ireland). Incorporated
by reference to the Company's Form 10 QSB/A filed on April 2, 1999.
10.11 Focus Distribution Agreement (Benelux countries). Incorporated by
reference to the Company's Amendment number 1 to Registration on Form
S-2, File Number 333-60405.
10.12 Syncor Distribution Agreement. Incorporated by reference to the
Company's Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
the Company's Form 10 KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference to the
Company's Form 10 KSB/A filed on April 9, 1999.
10.16 Form of Series I Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Amendment number 1 to Registration on
Form S-2, File Number 333-60405.
10.17 Form of Debenture Subscription Documents. Incorporated by reference to
the Company's Amendment number 1 to Registration on Form S-2, File
Number 333-60405.
10.18 Form of Mortgage. Incorporated by reference to the Company's 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
the Company's Amendment number 1 to Registration on Form S-2, File
Number 333-60405.
24.1 Consent of Rebecca J. Del Medico, Esq., included in the opinion filed
as Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
(B) REPORTS ON FORM 8-K
None
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its legal counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
(b) The undersigned registrant hereby undertakes that:
(i) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424 (b) (1) or (4) or 497
(h) under the Securities Act shall be deem to be part of the registration
statement as of the time it was declared effective.
II-3
<PAGE>
(ii) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13 (a) or
Sections 15 (d) of the Securities Exchange Act of 1934 (and where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15 (d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement be deemed to
be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets the
requirement for filing on Form S-2 and has duly caused this Amended Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plantation, State of Florida, on the 19th day of May
1999.
<TABLE>
<CAPTION>
<S> <C>
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /S/LINDA B. GRABLE
------------------
Linda B. Grable, Chairman of the Board,
Director, and President.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: May 19, 1999 By: /S/ LINDA B. GRABLE
-- -------------------
Linda B. Grable, Chairman of the Board
Director and President
Dated: May 19, 1999 By: /S/ RICHARD J. GRABLE
--- ---------------------
Richard J. Grable, Director
and Chief Executive Officer
Dated: May 19, 1999 By: /S/ ALLAN L. SCHWARTZ
--- ---------------------
Allan L. Schwartz, Director
and Executive Vice-President
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of the Company's Form 10-KSB for the fiscal year ending
June 30, 1995
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to Exhibit 3.
(i). 6 of the Company's Form 10-KSB for the fiscal year ending June 30,
1996. File number 033-04008.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-1 dated July 1, 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated October 15, 1997.
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of the Company's Form 10-KSB for the fiscal year ending June 30,
1995.
3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated
by reference to Exhibit 3 (i) of the Company's Form 10-SB, as amended,
file number 0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11 Certificate and Plan of Merger - is incorporated by reference to
Exhibit 3(i) of the Form 10-SB.
3.12 Certificate of Amendment - is incorporated by reference to Exhibit 3(i)
of the Form 10-SB.
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
5 Legal opinion of Rebecca J. Del Medico, Esq.,
dated April 9, 1999.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
Company's Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
<PAGE>
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
Form 10-SB.
10.5 Lock Up Agreement By and Between the Company and Richard J. Grable,
Linda B. Grable, and Allan L. Schwartz, is incorporated by reference to
Exhibit 10.5 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1996. File number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of the
Company's Form 10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1998.
10.10 Focus Distribution Agreement (United Kingdom and Ireland). Incorporated
by reference to the Company's Form 10 QSB/A filed on April 2, 1999.
10.11 Focus Distribution Agreement (Benelux countries). Incorporated by
reference to the Company's Amendment number 1 to Registration on Form
S-2, File Number 333-60405.
10.12 Syncor Distribution Agreement. Incorporated by reference to the
Company's Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
the Company's Form 10 KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference to the
Company's Form 10 KSB/A filed on April 9, 1999.
10.16 Form of Series I Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Amendment number 1 to Registration on
Form S-2, File Number 333-60405.
10.17 Form of Debenture Subscription Documents. Incorporated by reference to
the Company's Amendment number 1 to Registration on Form S-2, File
Number 333-60405.
10.18 Form of Mortgage. Incorporated by reference to the Company's 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
the Company's Amendment number 1 to Registration on Form S-2, File
Number 333-60405.
24.1 Consent of Rebecca J. Del Medico, Esq., included in the opinion filed
as Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
IMAGING DIAGNOSTIC SYSTEMS, INC.
[Letterhead of Registrant]
May 17, 1999
Imaging Diagnostic Systems, Inc.
6531 N.W. 18th Court
Plantation, FL 33313
Re: Registration Statement on Form S-2
Gentleman:
This opinion is submitted pursuant to applicable rules of the Securities and
Exchange Commission with respect to the registration by Imaging Diagnostic
Systems, Inc. (the "Company") of an aggregate of 7,130,467 shares of Common
Stock, no par value (the "Common Stock") pursuant to a Registration Statement on
Form S-2.
In my capacity as general counsel to the Company, I have examined the original,
certified, conformed, or other copies of the Company's Certificate of
Incorporation, Bylaws and corporate minutes provided to me by the Company. In
all such examinations, I have assumed the genuineness of all signatures on
original documents, and the conformity to originals or certified documents of
all copies submitted to me as conformed, Photostat or other copies. .In passing
upon certain corporate records and documents of the Company, I have necessarily
assumed the correctness and completeness of the statements made or included
therein by the Company, and I express no opinion thereon. Based upon and in
reliance of the foregoing, I am of the opinion that the Common Stock has been
and the common stock, shares underlying the Series H Preferred Stock and the
Warrants will be, upon conversion exercise or issuance, validly issued, fully
paid and non-assessable. I hereby consent to the use of this opinion in the
Registration Statement on Form S-2 to be filed with the Commission.
/s/Rebecca J. Del Medico
Rebecca J. Del Medico General Counsel
We hereby consent to the use in this Amendment No: 2 to Registration Statement
on Form S-2 of our report dated August 6, 1998, relating to the financial
statements of the Imaging Diagnostic Systems, Inc., and to the reference to our
firm under the caption "Experts" in the Prospectus.
/S/ MARGOLIES, FINK AND WICHROWSKI
----------------------------------
Margolies, Fink and Wichrowski
Pompano Beach, Florida
May 17 , 1999
