SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended: March 31, 1999
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number: 0-26028
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
------- ----------
(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
------------------------------------ -----
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _X__ No_____
The number of shares outstanding of each of the issuer's classes of equity
as of March 31, 1999: 43,908,209 shares of Common Stock, no par value; and, 390
shares of Series B, 38 shares of Series G, 103 shares of Series H Preferred
Convertible Stock, no par value and 138 shares of Series I Preferred Convertible
Stock, no par value.
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Condensed Balance Sheet -
March 31, 1999 and June 30, 1998........................................... 3
Condensed Statement of Operations Three months and nine months ended March 31,
1999 and 1998, and December 10,
1993(date of inception) to March 31, 1999............................... 4
Condensed Statement of Cash Flows Nine months ended March 31, 1999 and 1998, and
December 10, 1993(date of inception) to March 31,
1999...................................................................... 5
Notes to Condensed Financial Statements......................................... 6
Management's Discussion and Analysis of
Financial Condition and Results................................................. 7
Part II - Other Information
Item 1. Legal Proceedings.................................................... 24
Item 2. Changes in Securities................................................ 24
Item 3. Defaults Upon Senior Securities...................................... 25
Item 4. Submission of Matters to a Vote of
Security Holders ............................................... 25
Item 5. Other Information.................................................... 26
Item 6. Exhibits and Reports on Form 8-K..................................... 38
Signature ...................................................................... 39
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Balance Sheet
Assets
March 31, 1999 June 30, 1998
-------------- -------------
(Unaudited) *Audited
<S> <C> <C>
Current Assets
Cash $ 127,555 $ 310,116
Inventory 3,685,939 3,214,045
Prepaid expenses 23,485 33,539
Other current assets 19,000 --
------------ ------------
Total Current Assets 3,855,979 3,557,700
------------ ------------
Property and Equipment, net 2,863,791 2,920,980
Other Assets 587,080 688,463
------------ ------------
Total Assets $ 7,306,850 $ 7,167,143
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
and Accrued Expenses $ 1,444,259 $ 880,478
Accrued Dividends Payable 540,241 483,288
Shareholder Loans 2,112,103 285,407
Current maturity of capital
lease obligation 10,351 9,715
Other Current Liabilities 1,900,233 2,155,978
------------ ------------
Total Current Liabilities 6,007,187 3,814,866
------------ ------------
Long-term capital lease obligation 18,289 26,134
------------ ------------
Stockholders' Equity
Convertible Preferred
(Series B) 7% cum. Div 4,500,000 4,500,000
Convertible Preferred (Series D) -- 290,000
Convertible Preferred (Series E) -- 240,000
Convertible Preferred (Series G) 380,000 --
Convertible Preferred (Series H) 1,030,000 1,080,000
Common Stock 25,637,904 23,983,073
Additional Paid-In-Capital 2,030,085 1,884,846
Deficit Accumulated during
development stage (31,904,458) (27,336,655)
------------ ------------
1,673,531 4,641,264
Less subscription receivable (14,548) (14,309)
Less deferred compensation (377,609) (1,300,812)
------------ ------------
Total Stockholders' Equity 1,281,374 3,326,143
------------ ------------
Total Liabilities and
Stockholders' Equity $ 7,306,850 $ 7,167,143
============ ============
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
9 Months Ended 3 Months Ended Since Inception
March 31, March 31, (12/10/93) to
1999 1998 1999 1998 March 31, 1999
-------------------------------- -------------------------- ---------------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Compensation and related benefits:
Administrative/Engineering $ 1,005,848 $1,220,987 $363,426 $ 410,792 $ 7,481,086
Research and development 643,085 288,177 232,355 124,822 2,388,174
Research/Development expenses 76,779 367,581 2,808 57,181 2,995,673
Advertising/Promotion 33,761 319,280 2,183 24,811 907,602
Selling/General/Administrative 501,338 653,109 150,476 159,413 1,803,476
Clinical expenses 14,901 7,096 1,108 2,444 375,576
Consulting expenses 79,687 808,091 4,000 323,294 3,016,271
Insurance costs 121,376 129,790 38,588 37,678 450,167
Professional fees 234,697 423,499 (71,501) 83,524 1,586,531
Stockholder expenses 7,889 74,348 7,889 861 104,399
Trade show expenses 100,208 134,802 17,358 35,799 605,666
Travel and subsistence costs 74,059 74,146 12,869 18,740 531,218
Rent expense 27,066 16,320 7,058 (5,303) 273,783
Interest expense 160,555 2,126 13,533 2,126 243,896
Depreciation and amortization 170,619 208,120 56,873 69,373 846,481
Amortization of
deferred compensation 1,132,829 1,093,734 377,610 364,578 3,686,641
Interest Income (964) (19,245) (268) (5,494) (198,381)
------------ ------------ ------------ ------------ ------------
4,383,733 5,801,961 1,216,365 1,704,639 27,098,259
------------ ------------ ------------ ------------ ------------
Net Loss ($ 4,383,733) ($5,801,961) ($1,216,365) ($1,704,639) ($27,098,259)
Dividends on cumulative Pfd. Stock:
From discount at issuance (127,117) (1,389,387) (127,117) (501,216) (4,201,726)
Earned (56,953) (236,433) -- (77,639) (604,473)
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ($4,567,803) ($7,427,781) ($1,343,482) ($2,283,494) ($31,904,458)
============ ============ ============ ============ ============
Net loss per common share:
Basic:
Net loss per common share ($ .12) ($ .28) ($ .03) ($ .08) ($ 1.32)
============ ============ ============ ============ ============
Weighted avg.no. of common shares 38,604,361 26,447,340 39,595,946 28,764,621 24,168,028
============ ============ ============ ============ ============
Diluted:
Net loss per common share ($ .12) ($ .28) ($ .03) ($ .08) ($ 1.32)
============ ============ ============ ============ ============
Weighted avg.no. of common shares 38,604,361 26,447,340 39,595,946 28,764,621 24,168,028
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
Nine Months Since inception
Ended March 31, (12/10/93) to
1999 1998 March 31, 1999
-------------------------- ---------------
(Restated)
<S> <C> <C> <C>
Cash provided by (used for) Operations:
Net loss $ (4,383,733) $ (5,801,961) $(27,098,259)
Changes in assets and liabilities 2,053,791 2,792,652 13,521,285
------------ ------------ ------------
Net cash provided by operations (2,329,942) (3,009,309) (13,576,974)
------------ ------------ ------------
Investments
Capital expenditures (113,430) (1,278,388) (6,573,455)
------------ ------------ ------------
Cash used for investments (113,430) (1,278,388) (6,573,455)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (7,209) (6,625) (21,649)
Other financing activities 1,840,056 360,407 2,125,463
Proceeds from issuance of preferred stock 345,000 3,850,000 13,004,500
Net proceeds from issuance of common stock 82,964 127,582 5,169,670
------------ ------------ ------------
Net cash provided by financing activities 2,260,811 4,331,364 20,277,984
------------ ------------ ------------
Net increase in cash (182,561) 43,667 127,555
Cash, beginning of period 310,116 383,223 --
------------ ------------ ------------
Cash, end of period $ 127,555 $ 426,890 $ 127,555
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared March 31, 1999. The results of operations for the nine-month
period ended March 31, 1999 is not necessarily indicative of the results to be
expected for the full year.
NOTE 2 - GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sales of its product
begins, the Company is totally dependent upon debt and equity funding. See Item
2 "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In the event that the Company is unable to obtain debt or equity financing or is
unable to obtain such financing on terms and conditions acceptable to the
Company, the Company may have to cease or severely curtail its operations. This
would materially impact the Company's ability to continue as a going concern.
However, management of the Company is continually negotiating with various
outside entities for additional funding necessary to complete the clinical
testing phase of development, required before they can receive FDA marketing
clearance. Management has been able to raise the capital necessary to reach this
stage of product development and has been able to obtain funding for capital
requirements to date. There is no assurance that once development of the CTLMTM
prototype is completed and if and when Federal Drug Administration marketing
clearance is obtained, that the CTLM(TM) will achieve market acceptance or that
the Company will achieve a profitable level of operations.
6
<PAGE>
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH IN THE COMPANY'S FORM
10-KSB FOR FISCAL YEAR ENDED 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Imaging Diagnostic Systems, Inc. (the "Company") is a developmental stage
company which, since inception, has been engaged in research and development of
its Computed Tomography Laser Mammography ("CTLM(TM)"). The CTLM(TM) is a
breast-imaging device for the detection of cancer, utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. Due to the fact that the Company is in the last stages of
the development of its cancer detection technology and its CTLM(TM), it has not
yet engaged in any marketing or distribution of it products and therefore has
had no revenue from its operations.
The Company has incurred net losses applicable to common shareholders since
inception through March 31, 1999 of approximately $31,904,458 after discounts
and dividends on preferred stock. The Company anticipates that losses from
operations will continue for at least the next year, primarily due to an
anticipated increase in marketing and manufacturing expenses associated with the
commercialization of the CTLM(TM), the costs associated with the clinical trials
and other research and development activities. There can be no assurances that
the CTLM(TM) will achieve market acceptance or that sufficient revenues will be
generated from sales of the CTLM(TM) to allow the Company to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months and nine months
ended March 31, 1999, were $150,476 and $501,338, respectively, representing a
decrease of $8,937 and $151,771 for the corresponding periods for 1998. The
decreases during the respective periods ending March 31, 1999 were primarily due
to a decrease in administrative costs associated with the development of the
CTLM(TM) breast-imaging device.
Compensation and related benefits during the three months and nine months ended
March 31, 1999, were $595,781 and $1,648,933 respectively, representing an
increase of $60,167 and $139,769 for the corresponding periods for 1998. These
increases were primarily due to the recording of one-time expenses in March 1997
for compensation related to deferred Stock Appreciation Rights (SAR's) for stock
options and the recording of the one-time expenses related to the issuance of
bonus stock to the officers.
Research and development expenses during the three months and nine months ended
March 31, 1999, were $2,808 and $76,779, respectively, representing a decrease
of $54,373 and $290,802 for the corresponding periods for 1998. These decreases
are due primarily to finalizing certain components of the CTLM(TM) device.
Advertising and promotion expenses during the three months and nine months ended
March 31, 1999, were $2,183 and $33,761 representing a decrease of $22,628 and
$285,519 for the corresponding periods for 1998. The decreases are due primarily
to the reduction of advertising in domestic and foreign medical imaging and
medical device publications, and the elimination of public relations and
investor public relations expenses.
Consulting expenses during the three months and nine months ended March 31,
1999, were $4,000 and $79,687 representing a decrease of $319,294 and $728,404
for the corresponding periods for 1998. The decrease is due primarily to the
reduced use of outside consultants needed for special non-recurring projects
required prior to placing CTLM(TM) units into clinical trials.
Clinical expenses during the three months and nine months ended March 31, 1999,
were $1,108 and $14,901 representing a decrease of $1,336 and $7,805 for the
7
<PAGE>
corresponding periods for 1998. The decreases are due primarily to no clinical
trials were conducted in the third quarter. The 20 patient study was completed
in the second quarter.
Insurance costs during the three months and nine months ended March 31, 1999,
were $38,588 and $121,376 representing an increase of $910 and a decrease of
$8,414 for the corresponding periods for 1998. The increase is due primarily to
additional premiums for Workers' Comp., Health Insurance, and Property and
Casualty Insurance.
Professional expenses during the three months and nine months ended March 31,
1999, were $(71,501) and $234,697 representing a decrease of $155,025 and
$188,802 for the corresponding periods for 1998. The decrease is due primarily
to a decrease in legal fees on legal matters described in Item 1. Legal
Proceedings.
Stockholder expenses during the three months and nine months ended March 31,
1999, were $7,889 and $7,889 representing an increase of $7,028 and a decrease
of $66,459 for the corresponding periods for 1998. The increase for the three
months ended March 31, 1999 is due to the cost of printing and mailing an
Information Statement to shareholders. The decrease for the nine months ended
March 31, 1999 is due to the postponement of preparing, printing and mailing the
Company's 1998 Annual Report and Proxy Statement.
Tradeshow expenses during the three months and nine months ended March 31, 1999
were $17,358 and $100,208 representing a decrease of $18,441 and a decrease of
$34,594 for the corresponding periods for 1998. The nine-month decrease is due
to no changes or modifications were required to the Company's exhibit for the
1997 Radiological Society of North America's Scientific Assembly and Annual
Meeting in Chicago, IL.
Travel and subsistence costs during the three months and nine months ended March
31, 1999 were $12,869 and $74,059 representing a decrease of $5,871 and $87 for
the corresponding periods for 1998. The decrease was primarily due to reduced
travel and housing expenses for consultants.
Rent expense during the three months and nine months ended March 31, 1999, were
$7,058 and $27,066 representing an increase of $12,361 and $10,746 for the
corresponding periods for 1998. This increase was primarily due to the cost of
renting a high-speed oscilloscope.
Interest expense during the three months and nine months ended March 31, 1999
was $13,533 and $160,555 representing an increase of $11,407 and $158,429 for
the corresponding periods for 1998. The increase is due primarily to recording
the interest portion of the Company's telephone lease with Inter-Tel.
Dividend expense on cumulative preferred stock, from discount at issuance and
earned during the three months and nine months ended March 31, 1999 was $127,117
and $184,070 representing a decrease of $451,738 and $1,441,750 for the
corresponding periods for 1998. The decrease for both periods is a result of the
sale of the Series B Preferred to Charlton Avenue LLC. whereby, Charlton, as the
new holder agreed to forgive all of the accrued interest due and payable
(approximately $725,795). See Item 5, Other Information, Private Placements,
Series B and Series I Preferred. The net loss per common share allocated to the
dividends during the three months and nine months ended March 31, 1999 was $.003
and $.005 respectively. The Company has the option to pay the dividends in
common stock.
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $127,555 as of March
31, 1999. This is a decrease of $182,561 from $310,116 for the year ended June
30, 1998. On March 17, 1999 Imaging Diagnostic Systems, Inc. finalized a private
placement transaction resulting in $350,000 in equity financing respectively. On
March 10, and 31, 1999 the Company received an advance, in the aggregate, of
$195,000 from the Convertible Debenture which was finalized on April 6, 1999.
See Item 5, Other Information, Private Placements and Convertible Debenture.
8
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The Company does not expect to generate a positive internal cash flow for at
least the next twelve (12) months due to the expected increase in spending for
research and development, the costs associated with the clinical trials and the
expected costs of commercializing its initial product, the CTLM(TM) device.
Property and Equipment was valued at $2,863,791 as of March 31, 1998. The
overall gross decrease of $57,189 is due primarily to depreciation recorded for
the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during the
third quarter ending March 31, 1999 was $943,361 primarily due to the Company's
continued research and development of the CTLM(TM) device and preparations for
FDA Clinical Trials including the manufacture of five (5) CTLM(TM) Breast
Imaging Systems, compared to net cash used by operating activities of research
and development of the CTLM(TM) device and related software development of
$736,395 in the same quarter ending March 31, 1998. At March 31, 1999, the
Company had a working capital of ($2,151,208) compared to a working capital of
$(1,223,761) at March 31, 1998. 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.
During the third quarter ending March 31, 1999, the Company was able to raise a
total of $350,000 less expenses through Regulation D private placements. On
April 6, 1999 the Company finalized a Convertible Debenture in the amount of
$1,100,000. See Section 5, Private Placements, Convertible Debentures. The
Company may continue to receive working capital from the exercise of stock
options, private placements and long term debt and operations. If the Company's
working capital is insufficient to fund its operations, it would have to explore
additional sources of financing. No assurances 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 has already granted a mortgage on its
corporate property as security for the convertible debenture and therefore, in
all likelihood, would be unable to use such property to collateralize any
additional financing. The Company's ability to effectuate its plan of and
continue operations is dependent on its ability to raise capital, structure a
profitable business, and generate revenues.
Capital expenditures for the third quarter ending March 31, 1999 were
approximately $53,682 as compared to approximately $690,677 for the third
quarter ending March 31, 1998. These expenditures were a direct result of
purchases of computer and other equipment, office, warehouse and manufacturing
fixtures, tradeshow equipment, computer software, laboratory equipment and other
fixed assets. The Company anticipates that the balance of its capital needs for
the fiscal year ending June 30, 1999 will be approximately $60,000.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. The Note bears interest at the rate of 12% per annum. The note, which
was originally due 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
9
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B. Grable, the Company's President. 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 September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. The Note bears interest at the rate of
12% per annum. The Note is personally guaranteed by Linda B. Grable, the
Company's President. The repayment of the Note, which was originally due on
October 2, 1998 was extended twice, 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. 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.
During the nine months ending March 31, 1999 there were no changes in the
Company's existing debt agreements, and the Company had no outstanding bank
loans as of March 31, 1998. The Company's fixed commitments, including salaries
and fees for current employees and consultants, rent, payments under license
agreements and other contractual commitments are substantial 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 testing, operating expenses,
regulatory processes, and manufacturing and marketing programs. 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
does not have sufficient cash to fund the Company's operations until the end of
the fiscal year ending June 30, 1998 requiring it to draw upon the second and
third tranche of the Convertible Debenture and, if necessary, to secure
additional funding through the private placement sale of debt or equity
securities.
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 dependant 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.
The Company is currently seeking additional capital to fund its future
operations through private debt or equity financing, or collaborative licensing
or other arrangements with strategic partners. There can be no assurance that
such financing can be obtained or, if it is obtained, that the terms thereof
will be acceptable. 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."
10
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
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 Item 2-"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 Item 2-"Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 1-"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 Item 2-"Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 1-"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.
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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
financing will be available when needed, or if available, will be available on
acceptable terms. The Company has already granted a mortgage on its corporate
property as security for the convertible debenture and therefore, in all
likelihood, would be unable to use such property to collateralize any additional
financing 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 Item 2-"Management's Discussion and Analysis of Financial
Condition and Results of Operations", Item 5-Other Information "Sale of
Unregistered Securities-Private Placement of Preferred Stock", "Sale of
Unregistered Securities-Debentures" and Item 1-"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 unforeseen problems at the Nassau County
facility which are discussed in detail in Part II, Item 5 "Other Matters- Nassau
County Investigational Clinical Trials", 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.
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.
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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
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.
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.
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 Part II Item 5- Other Matters "Sale of Unregistered 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
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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. Part II. Item 5 Other Information-"Sale of Unregistered
Securities-Private Placement of Preferred Stock", and "Sale of Unregistered
Securities-Debentures".
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 . Part II. Item 5 Other
Information-"Sale of Unregistered Securities-Private Placement of Preferred
Stock", and "Sale of Unregistered Securities-Debentures".
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).
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.
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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.
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.
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. 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.
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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
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.
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 Part II
Item 5-Other Information "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.
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.
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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.
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.
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 Asia with strategic marketing partners
who have established marketing capabilities and will continue to develop its
distribution network for overseas. There can be no assurance that the Company
will be able to further develop this distribution network on acceptable terms,
if at all or that any of the Company's proposed marketing schedules or plans can
or will be met. To the extent that the Company arranges with third parties to
market its products, the success of such products may depend on the efforts of
such third parties. There can be no assurance that any of the Company's proposed
marketing schedules or plans can or will be met.
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
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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.
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.
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
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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
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.
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
re-mediation 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 Part II. Item 5-Other Matters "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.
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
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<PAGE>
of shares outstanding that will be held by such holders upon conversion will
increase accordingly. The lower the market price the greater the number of
shares to be issued to such holders, upon conversion, thus increasing the
potential profits to the holder when the price per share increases and the
holder sells the Common Shares. The preferred stockholders and debenture
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
$1,080,000 in Series H Preferred Stock, the only Preferred Series outstanding at
that time. On January 28, 1999, the Company filed a Definitive Information
Statement with the Securities and Exchange Commission (the "Commission") with
regard to the Written Action. The Majority Shareholders' consent with respect to
the Amendment became effective on February 18, 1999. Prior to the Amendment, due
to the decrease in the Company's stock price, the Company did not have an
adequate number of shares authorized to meet is contractual obligations. In
addition, the Company believes that the Amendment will insure that there are a
sufficient number of shares of Common Stock available for issuance upon exercise
of outstanding stock options and warrants and enhance the ability of the Company
to attract and retain qualified employees, consultants, officers and directors
by enabling the Company to create stock option, incentives and rewards for their
contributions to the success of the Company. Moreover, until such time as the
Company is able to generate revenues, it is dependent on equity or other
financing to continue operations. The Company will require substantial
additional funds for its research and development programs, pre-clinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
marketing programs.
Based on the closing price of the Company's common stock as of May 14, 1999
($.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.. 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.
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.
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
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<PAGE>
warrants, options, or convertible preferred stock. Although Management owns less
than 50.1% of the outstanding common stock, since the Company does not have
cumulative voting, and since, in all likelihood the officers will be voting as a
block and will be able to obtain proxies of other shareholders, Management will
continue to remain in a position to elect all of 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.
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 Part II. Item 5-Other
Information "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 Part II Item 5-Other
Information "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
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
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<PAGE>
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.
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).
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.
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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. 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.
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.
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.
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.
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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 10, 1997, the Company filed an action in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, case no. 97-10533, against Dr. Valey
Kamalov ("Kamalov") and Irina Struganova. The complaint alleges that Kamalov, an
ex-employee of the Company, violated his employment agreement with the Company
while employed and after terminating his employment with the Company by
violating non-compete, confidentiality, and invention covenants of the
agreement. 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.
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.
ITEM 2. CHANGES IN SECURITIES.
In March 1999, the Board of Directors amended the Articles of Incorporation of
the Company in order to designate a class of shares as Series G Convertible
Preferred. The Series C Preferred is non-voting, can be converted into common
stock of the Company and has rights and preferences that materially limit or
qualify the rights of the holders of registered common stock, including a
liquidation preference of $10,000 per share. See Item 5 "Other Information -
Private Placements".
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In April 1999, the Board of Directors amended the Articles of Incorporation of
the Company in order to designate a class of shares as Series I Convertible
Preferred. The Series I Preferred is non-voting, can be converted into common
stock of the Company and has rights and preferences that materially limit or
qualify the rights of the holders of registered common stock, including a
liquidation preference of $10,000 per share. See Item 5 "Other Information
Private Placements".
In April 1999, the Board of Directors and the Series B Preferred Shareholders
amended the Certificate of Designation of the Series B Preferred to provide for
a conversion limitation of 4.99% or less. See Item 5 "Other Information -
Private Placements".
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company has not submitted any matters to a vote of Security Holders. As of
the 3rd day of December 1998, Austost Anstalt Schaan, Avalon Capital Ltd.,
Balmore Funds S.A., Steven Cohen, Canadian Capital Fund Ltd., Dominion Capital
Funds, Ltd. Linda B. Grable, Richard J. Grable, Deborah O'Brien, The Malcolm
Kanan Empire Trust and Allan L. Schwartz, (collectively "the Majority Common
Shareholders"), and Goodland International Investment Ltd., Weyburn Overseas
Limited, Austost Anstalt Schaan and Balmore Funds S.A (collectively "the
Majority Preferred Shareholders authorized by written action, the Company's
adoption of an amendment, 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>
% OF COMMON % OF SHARES
# OF COMMON SHARES # OF PREFERRED PREFERRED
NAME SHARES OUTSTANDING (1) SHARES OUTSTANDING (2)
- ---- ------ --------------- ------ ---------------
<S> <C> <C> <C> <C>
Austost Anstalt Schaan (4) 342,533 .9% 50 8.96%
Avalon Capital Ltd. 673,401 1.7%
Balmore Funds S.A. (5) 342,533 .9% 50 8.96%
Steve Cohen 396,700 1.0%
Canadian Capital Fund Ltd. 636,379 1.65%
Dominion Capital Funds Ltd. 1,334,996 3.5%
Goodland International
Investment Ltd. (3) 315 56.45%
Linda B. Grable 3,497,800 9.1%
Richard J. Grable 7,995,040 20.8%
Deborah O'Brien 287,000 .75%
Allan L. Schwartz 3,579,980 9.3%
The Malcolm Kanan Empire Trust 1,200,000 3.1%
Weyburn Overseas Limited (2) 135 24.19%
TOTAL 20,328,462 52.8% 550 98.56%
</TABLE>
- ----------------
1. This column sets forth the percentage of the total number of common shares
outstanding as of December 3, 1998 (38,510,399 shares), the date the final
written action was executed and presented to the Company's Board of
Directors. As of 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).
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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", and "Sale of Unregistered
Securities-Debentures". 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.
On January 28, 1999, the Company filed a Definitive Information Statement with
the Securities and Exchange Commission (the "Commission") with regard to the
Written Action. The Written Action became effective on February 18, 1999.
ITEM 5. OTHER INFORMATION
BACKGROUND
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
26
<PAGE>
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
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
27
<PAGE>
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 "Nassau County Investigational
Clinical Trials", 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
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
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.
NASSAU COUNTY INVESTIGATIONAL CLINICAL TRIALS
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
28
<PAGE>
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:
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
29
<PAGE>
of the clinical testing. As of May 20, 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.
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
------------------------ ----------------------- --------------------------------
30
<PAGE>
------------------------ ----------------------- --------------------------------
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>
PRIVATE PLACEMENTS
- ------------------
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.
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.
31
<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). 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.
(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 Report, 60 shares of Series B Preferred Stock have
been converted into 1,931,123 shares of common stock at a conversion price of
$.379 per share.
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
32
<PAGE>
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
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 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 approximately $725,795 in interest 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%.
33
<PAGE>
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.
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,
34
<PAGE>
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 trial expenses and working capital.
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
Report, one of the three Notes has been repaid.
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.
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
35
<PAGE>
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 were 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.
In May 1999, 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.
36
<PAGE>
YEAR 2000
The Company is reviewing its existing computer systems and its CTLM(TM) software
and hardware products to ensure these systems and products are adequately able
to address the issues expected to arise in the year 2000 and thereafter. In that
regard, the Company's Board of Directors has appointed a committee to draft and
implement a Year 2000 Compliance Plan. The Company has invested, and will
continue to invest, in improving its information technology infrastructure to
ensure that such infrastructure is Year 2000 compliant. The Company's
information technology system employs Microsoft Windows NT 4.0 Network on three
file servers and fifty workstations. The Company's product (the CTLM (TM)) and
its proprietary software comprise its non-information technology that is not
date dependent.
The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues and has spent approximately $2,500
for third party software upgrades and Microsoft Developers Network software
(MSDN). The MSDN software allows the Company's computer programmers to update
its software to Y2K compliance by recompiling the source code. The Company
renews its subscription to MSDN annually. The Company expects such modifications
to its CTLM(TM) products and internal computer systems will be made on a timely
basis; however there can be no assurance there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
future results of operations. The Company's Year 2000 Compliance Committee
estimates that an additional $35,000 will be spent to complete the Year 2000
Compliance Plan. The Company does not track the internal costs of its Year 2000
Compliance Plan. These costs are principally related payroll costs for its
computer-engineering group.
The Company has received the latest MSDN update from Microsoft and its software
engineers have recompiled all of the proprietary software used in the CTLM(TM).
The Company's proprietary software is now Y2K compliant. The Company is
dependent on the following software programs to conduct its business operations:
Accounting: Peachtree Complete, release 6.0
Manufacturing: Alliance Manufacturing Software, ver. 2.4a
Operating Systems: Windows NT 4.0 and Windows 95
Word Processor: Microsoft Office Professional 97
Database: Oracle7
The Peachtree Complete, Alliance Mfg., and the Oracle7 are Year 2000 compliant.
The Microsoft Windows NT 4.0 and Windows 95 are compliant with minor issues.
Office Professional 97 is compliant. The Company believes that these software
programs are Y2K compliant however there is a risk that some or all of these
programs will have minor Y2K issues. The Company has in place a disaster
recovery plan to deal with any software or hardware failure.
The Company has begun testing its servers and workstations for Y2K compliance.
All of its computers have Intel Pentium processors. During stand-alone tests,
the computers with Intel Pentium processors were Y2K compliant. Software has
been purchased to test and repair non-compliant systems. The testing and
re-mediation by the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.
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.
37
<PAGE>
The Company's Year 2000 Compliance Committee has prepared a worst case Y2K
scenario. It estimates that Internet access will be severely impaired including
the ability to send and receive e-mail, possible difficulty in connecting the
Company's computer to remote clinical sites, and delays in shipment and delivery
of parts, components and finished goods. Overall fear and confusion of the Y2K
problem may temporarily impair many companies, even those who are Y2K compliant.
The Company can fully function without the use of the Internet and e-mail.
Clinical data will be sent via overnight delivery from the clinical sites to the
Company. Fear and confusion will diminish in a few weeks as companies and
individuals learn that most companies are compliant and operating without any
major problems. Delays in shipping will be a minor inconvenience, as the Company
will have stockpiled critical parts and components in anticipation of Y2K. The
Company has a Disaster Recovery Plan in place to deal with software and hardware
failures. This plan provides that all computer workstations are backed up on
tape every night and a spare server is ready to be installed upon failure of any
server in service.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
3.13 Amended Certificate of Amendment-Series G Designation.*
3.14 Certificate of Amendment-Series I Designation*
3.15 Amended Certificate of Amendment-Series B Designation*
4.7 Instruments Defining the Rights of Security Holders - Amended
Designation of Series G Convertible Preferred Shares. (See Exhibit
3.13, above).*
4.8 Instruments Defining the Rights of Security Holders - Designation of
Series I Convertible Preferred Shares. (See Exhibit 3.14, above).*
4.9 Instruments Defining the Rights of Security Holders - Amended
Designation of Series B Convertible Preferred Shares. (See Exhibit
3.15, above).*
4.10 Convertible Debenture*
10.16 Form of Series I Preferred Stock Subscription Documents.
10.17 Form of Debenture Subscription Documents.
10.18 Form of Mortgage.
10.19 Form of Series G Subscription Documents.
*Incorporated by reference to the Company's Amendment number 2 to Registration
on Form S-2, File Number 333-60405.
(b) Reports on Form 8-K
NONE
38
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Dated: May 20, 1999 Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
--------------------
Allan L. Schwartz,
Executive Vice-President
Chief Financial Officer
39
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