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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 1999
COMMISSION FILE NO. 33360405
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________
AMENDMENT NO. 2.
TO FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
FLORIDA 3845 22-2671269
(State of Incorporation)(Primary Standard Industrial (IRS Employer I.D. Number)
Classification Code Number)
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
-----------------------------------
(Address, including zip code, and telephone number,
including area code of registrant's principal
executive offices)
LINDA B. GRABLE, PRESIDENT
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
(Name, address and telephone number of Agent for Service)
Please send a copy of all communications to:
REBECCA J. DEL MEDICO, ESQ.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholders after the effective date of
this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest annual report to Security Holders
or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this
Form, check the following box. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE REGISTRATION FEE
SHARE (1) OFFERING PRICE(1)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
COMMON STOCK, NO PAR VALUE 3,096,877 $.3838 $1,188,581.30 $360.18
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES B PREFERRED 14,298,605 $.3838 $5,487,804.50 $1,662.97
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES G PREFERRED 1,320,133 $.3838 $506,667.04 $153.54
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES H PREFERRED 3,578,253 $.3838 $1,373,333.30 $416,16
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES I PREFERRED 4,794,164 $.3838 $1,839,999.90 $557.58
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE CONVERTIBLE 9,553,587 $.3838 $3,666,666.60 $1,111.11
DEBENTURE(2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR VALUE, ISSUABLE 190,625 $.3838 $73,161.88 $22.17
UPON EXERCISE OF WARRANTS (2)(3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
TOTAL (4) (5) 36,832,244 $.3838 $14,136,215 $ 4,283.70
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the
average high ask and low bid prices of the Registrant's Common Stock on the
NASDAQ Electronic Bulletin Board on April 7, 1999.
(2) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, this Registration Statement also covers such indeterminable additional
shares of Common Stock as may be issuable, as a result of any future
anti-dilution adjustments made in accordance with the terms of the Company's
Series B, G, H and I Convertible Preferred Stock and the Warrants.
(3) Pursuant to the amended terms of the Registration Rights Agreement between
the Company and the Series H holder, and the Registration Rights Agreements with
the Series B, G and I holders and the Debenture holders, the amount being
registered is 100% of the number of shares that would be required to be issued
if the Preferred Stock and Debentures were converted on the day before the
filing of the Registration Statement.
(4) All of the shares of common stock registered herein will be sold by the
Selling Security Holders. (5) A filing fee of $1,239.51 was paid in connection
with the initial filing of the Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
CROSS REFERENCE SHEET
FORM S-2 ITEM NUMBERS AND CAPTION HEADING IN PROSPECTUS
- --------------------------------- ---------------------
<S> <C> <C>
1. FOREPART OF THE REGISTRATION STATEMENT AND
OUTSIDE FRONT COVER OF PROSPECTUS....................................OUTSIDE FRONT COVER PAGE
2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF
PROSPECTUS...........................................................INSIDE FRONT AND OUTSIDE BACK
COVER PAGES OF PROSPECTUS
3. SUMMARY INFORMATION AND RISK FACTORS...................................PROSPECTUS SUMMARY; RISK FACTORS
4. USE OF PROCEEDS........................................................NOT APPLICABLE
5. DETERMINATION OF OFFERING PRICE........................................PLAN OF DISTRIBUTION
6. DILUTION...............................................................NOT APPLICABLE
7. SELLING SECURITY HOLDERS...............................................SELLING SECURITY HOLDERS
8. PLAN OF DISTRIBUTION...................................................FRONT COVER PAGE; PLAN OF
DISTRIBUTION
9. DESCRIPTION OF SECURITIES TO BE REGISTERED.............................DIVIDEND POLICY, DESCRIPTION OF
SECURITIES
10. INTEREST OF NAMED EXPERTS AND COUNSEL..................................LEGAL MATTERS AND FINANCIAL
STATEMENTS
11. INFORMATION WITH RESPECT TO THE REGISTRANT.............................PROSPECTUS SUMMARY, RISK FACTORS,
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION, BUSINESS, MANAGEMENT,
CERTAIN TRANSACTIONS, MARKET PRICE OF
SECURITIES AND OTHER RELATED
STOCKHOLDER MATTERS, SALES OF
UNREGISTERED SECURITIES, PRINCIPAL
STOCKHOLDERS, DESCRIPTION OF CAPITAL
STOCK, FINANCIAL STATEMENTS
12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................DOCUMENTS INCORPORATED BY REFERENCE
13 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES...........................................INDEMNIFICATION OF OFFICERS AND
DIRECTORS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION............................PART II
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS..............................PART II
16. EXHIBITS...............................................................PART II
17. UNDERTAKINGS...........................................................PART II
18. FINANCIAL STATEMENTS AND SCHEDULES.....................................FINANCIAL STATEMENTS AND SCHEDULES
</TABLE>
iii
<PAGE>
SUBJECT TO COMPLETION, DATED ________________1999.
PROSPECTUS
36,832,244 SHARES
IMAGING DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
This prospectus ("Prospectus") relates to an aggregate of 36,832,244 shares (the
"Shares") of common stock, no par value (the "Common Stock"), of Imaging
Diagnostic Systems, Inc., a Florida corporation (the "Company"). Of the
36,832,244 shares of common stock, no par value (the "Common Stock") offered
hereby, all are being sold by the Selling Security Holders. See "Selling
Security Holders". The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Security Holders.
The Common Stock is traded on the OTC Bulletin Board under the symbol "IMDS". On
April 7, 1999, the closing bid and asked price of the Common Stock as reported
on the OTC Bulletin Board was $.375 and $.3906 respectively.
The Shares are held or will be acquired by certain persons ("Selling Security
Holders") named in this Prospectus. The Shares covered hereby include (i)
14,298,605 shares of Common Stock underlying the Series B Preferred; (ii)
1,320,132 shares of Common Stock underlying the Series G Preferred; (iii)
3,578,253 shares of Common Stock Underlying the Series H Preferred Stock; (iv)
4,794,164 shares of Common Stock underlying the Series I Preferred Stock; (v)
9,553,587 shares of Common Stock underlying the Convertible Debentures;
(vi);1,971,375 Shares of Common Stock that were issued upon conversion of
previously-issued shares of Series F Convertible Preferred Stock (the "Series F
Preferred") and (vii) 925,436 shares of common stock that were issued pursuant
to private placements (iv) 190,625 Shares of Common Stock which may be issued in
connection with the exercise of the Warrants. The number of Common Stock
underlying the Preferred Shares and Convertible Debenture were calculated as if
the Preferred Shares and Debenture were converted on the day before the filing
of the Registration Statement of which this Prospectus is a part (the
"Registration Statement")See "Risk Factors" and "Selling Security Holders".
The Common Stock, Preferred Shares, Debentures and Warrants, including the
underlying common stock were acquired or will be acquired by the Selling
Security Holders in various transactions, all of which were or will be exempt
from the registration provisions of the Securities Act of 1933, as amended (the
"1933 Act"), including sales by the Company in private placements and Regulation
S transactions, the exercise of warrants by certain of the Selling Security
Holders and the conversion of convertible Preferred Stock held by certain of the
Selling Security Holders.
The Selling Security Holders may, from time to time, sell the Shares on the OTC
Bulletin Board, or on any other national securities exchange or automated
quotation system on which the Common Stock may be listed or traded, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then current market price or at negotiated prices. The Shares may be sold
directly or through brokers, or dealers. See "Plan of Distribution."
The Company will receive no part of the proceeds of any sales made by the
Selling Security Holders hereunder. All expenses of registration incurred in
connection with this offering are being borne by the Company, but all selling
and other expenses incurred by the Selling Security Holders will be borne by the
Selling Security Holders. See "Selling Security Holders."
The Selling Security Holders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the 1933 Act, and any commissions or discounts paid or given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
1933 Act.
The Shares have not been registered for sale by the Company or by the Selling
Security Holders under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration thereof under the securities laws of the States in
which transactions occur or the existence of any exemption from registration.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
THE DATE OF THIS PROSPECTUS IS APRIL_, 1999
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The Shares are being offered on a continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the "Securities Act"). See "Selling
Security Holders," "Plan of Distribution" and "Description of Capital Stock".
The Company will not be responsible for the payment of any underwriting
discounts, commissions or expenses that may be payable or applicable in
connection with the sale of such Shares by the Selling Security Holders. The
Shares offered hereby will be sold from time to time at the then prevailing
market prices, at prices relating to prevailing market prices or at negotiated
prices.
This Prospectus may be used by the Selling Security Holders, or any
broker-dealer who may participate in sales of the Common Stock covered hereby.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD BE PREPARED TO SUSTAIN A LOSS OF THEIR ENTIRE
INVESTMENT. INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT
SHOULD NOT PURCHASE THESE SECURITIES. SEE "RISK FACTORS " BEGINNING ON PAGE 5 OF
THIS PROSPECTUS FOR A DISCUSSION OF MATTERS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THESE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus, which is Part I of the Registration Statement,
constitutes a part of the Registration Statement and does not contain all of the
information set forth therein. Any statements contained herein concerning the
provisions of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, with exhibits, may be obtained from the Commission's
office in Washington, DC (at the above address) upon payment of the fees
prescribed by the rules and regulations of the Commission, or examined there
without charge.
The Company is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed with the Commission can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, NW, Washington, DC 20549. Copies of this material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal office at 450 Fifth Street, NW., Washington, DC 20549. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission, such as the Company. The address of such
site is http://www.sec.gov.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents filed with
the Commission pursuant to the Exchange Act (the "34 Act"):
1. The Company's Quarterly Reports on Form 10-QSB/A for the
fiscal quarter ended December 31, 1998.
2. In addition, all documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14, or 15(d) of the
Exchange Act prior to the termination of the offering made by
this Prospectus shall be deemed to be incorporated by
reference into this Prospectus. Any statement contained in a
document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that
a statement contained in this Prospectus or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference in this Prospectus or in a
supplement hereto modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of
this Prospectus.
This Prospectus is accompanied by a copy of the Company's latest Form 10-QSB.
The Company will provide upon request, without charge, to each person to whom a
prospectus is delivered a copy of the additional documents listed above, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Such requests should be made to:
General Counsel, Imaging Diagnostic Systems, Inc., 6531 NW 18th Court,
Plantation, Florida 33313. Telephone number (954) 581-9800.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE INCORPORATED
BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED FOR PURPOSES OF
THIS PROSPECTUS TO THE EXTENT THAT A STATEMENT CONTAINED HEREIN MODIFIES OR
SUPERSEDES SUCH STATEMENT. ANY SUCH STATEMENT SO MODIFIED OR SUPERSEDED SHALL
NOT BE DEEMED, EXCEPT AS SO MODIFIED OR SUPERSEDED, TO CONSTITUTE A PART OF THIS
PROSPECTUS.
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. THESE FORWARD LOOKING
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN
THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS
INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN
THE COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY; (2) DELAYS, COSTS OR
DIFFICULTIES RELATED TO OBTAINING THE APPROVAL OF THE FOOD AND DRUG
ADMINISTRATION ("FDA") FOR THE SALE AND MARKETING OF THE COMPANIES COMPUTED
TOMOGRAPHY LASER MAMMOGRAPHY (CTLM(TM)) DEVICE ARE GREATER THAN EXPECTED; (3)
MARKET ACCEPTANCE OF THE CTLM(TM); AND (4) GENERAL ECONOMIC CONDITIONS ARE LESS
FAVORABLE THAN EXPECTED. FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT
THE FINANCIAL CONDITION OF THE COMPANY IS INCLUDED IN THE SECTION HEREIN
ENTITLED "RISK FACTORS".
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS OR IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. REFERENCE IS
MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN.
THE COMPANY
During the first year of operations, the Company researched the interaction
between high speed, rapid pulsed (Ti-Sapphire) laser technology and various
detection technologies associated with standard computed tomographic ("CT")
schemes. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first images
and filed a total of twelve ancillary United States patents from 1996 to October
1998, two additional patents were filed in November 1998. The Company intends to
file an additional patent application within the next six months.
Since its inception in December 1993, Imaging Diagnostic Systems, Inc. (the
"Company") has engaged principally in the development of a Computed Tomography
Laser Mammography ("CTLM(TM)") device for detecting breast cancer throuGH the
skin in a non-invasive and objective procedure. The CTLM(TM) employs high-speed
pico-second pulsed titaniUM sapphire laser and proprietary scanning geometry and
reconstruction algorithms to detect and analyze tissue in the breast for indicia
of malignancy or benignancy. The components of the laser system are purchase
from two unaffiliated parties and assembled and installed into the CTLM(TM) by
the Company. See "Business". The Company IS developing a clinical atlas of the
optical properties of benign and malignant tissues with respect to absorption
and scattering parameters as laser light pulses pass through the tissue. The
CTLM(TM) device is designed to proviDE the physician with objective data for
interpretation and further clinical work-up. Accordingly, the Company believes
that the CTLM(TM) will improve early diagnosis, reduce diagnostic uncertainty,
and decrease the number OF biopsies performed on benign lesions. See "Business".
On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLM(TM) device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need to submit an investigational device
exemption ("IDE") application to the FDA in order to commence human clinical
trials of the device.
The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November 1996, the Company installed its device
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and patients weRE scanned. As the
clinical trials at Strax began, there were further advances in laser technology
effecting the size and stability of the laser component. The IDE protocol at
Strax was halted, pending the receipt of the new laser manufactured by
Spectra-Physics, Inc., which was received in January 1999. Due to the purchase
of the new laser system, the Company had modify and redesign the CTLM(TM)
hardware and software in order to make it compatibLE with the new laser. Strax
was unwilling to wait until the modifications were completed unless it received
compensation for the CTLM(TM) remaining on its premises In November 1997 the
CTLM(TM) was removed from Strax anD, ON May 20, 1998, the Company's termination
of the IDE protocol and its final report was accepted by the FDA.
4
<PAGE>
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 study to Nassau
County Medical Center was conditionally approved. The Company immediately
supplied the additional documentation required by the FDA and the conditions
were complied with. This IDE application is limited to one institution (Nassau
County Medical Center) and 275 subjects. The Company had originally intended to
have the CTLM(TM) positioned at Nassau County Medical Center not later than mid
FebruaRY 1999, however due to renovations at Nassau County Medical Center, the
delivery of the CTLM(TM) was postponed untIL the renovations were complete. On
March 3, 1999 the CTLM(TM) System was shipped to Nassau County Medical Center
aND is currently being installed. The testing is designed to develop diagnostic
criteria for CTLM(TM) images. In ordER to acquire data that will be part of the
final pre-market application (PMA), the Company intends to expand the clinical
trials to hospitals in Miami, Chicago, Los Angeles, Boston, and New York. See
"Risk Factors-Government Regulation" and Business Government Regulations"
The Company's executive offices are located at 6531 NW 18th Court, Plantation,
Florida 33313. Its telephone number is (954) 581-9800.
THE OFFERING
SECURITIES OFFERED BY SELLING
SECURITY HOLDERS
COMMON STOCK(1) 36,832,244
EQUITY SECURITIES OUTSTANDING
COMMON STOCK 39,805,643(2)
SERIES B PREFERRED SHARES 450
SERIES G PREFERRED 38
SERIES H PREFERRED 103
SERIES I PREFERRED 138
WARRANTS 508,125(3)
OPTIONS 4,128,371(3)
- ---------------------
1) Pursuant to the terms of the Registration Rights Agreements between the
Company and the Preferred and Debenture holder, the amount being registered and
included herein is 100% of the number of shares that would be required to be
issued if the Preferred Stock and Debentures were converted on the day before
the filing of the Registration Statement. See "Sales of Unregistered
Securities".
2) Does not include shares of common stock underlying the conversion privileges
in the Series B, G, H and I Convertible Preferred Shares and the Debentures
which for the purpose of this Prospectus are estimated at 14,,298,605,
1,320,132, 3,578,253 4,794164 and 9,553,587 respectively, warrants and options
to purchase 508,125 and 4,128,371 shares respectively and 3,500,000 shares to be
issued is connection with the Patent Licensing Agreement. See "Sales of
Unregistered Securities".
3) The options were issued in connection with the Company's Stock Option Plan
and/or in connection with Employment Agreements. The exercise price of the
options range from $.55 to $4.35 per share. The warrants were issued to
consultants, finders, and private placement investors. The exercise price of the
warrants range from $1.09 to $5.00.
5
<PAGE>
TRADING SYMBOL IMDS
USE OF PROCEEDS The Company will not receive any proceeds
from the sale of common stock by the Selling
Shareholders.
RISK FACTORS AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD REVIEW CAREFULLY
AND CONSIDER THE FACTORS DESCRIBED
IN "RISK FACTORS."
RISK FACTORS
IN MAKING AN INVESTMENT DECISION, PROSPECTIVE PURCHASERS SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THOSE DESCRIBES ELSEWHERE HEREIN.
ALSO SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING
STATEMENTS".
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY; GOING CONCERN. The Company has a limited history of operations.
Since its inception in December 1993, the Company has engaged principally in the
development of the CTLM(TM). The Company currently has no source of operating
revenue and hAS incurred net operating losses since its inception. At December
31, 1999, the Company had an accumulated deficit of approximately $ $19,830,138
before discounts and dividends. Such losses have resulted principally from costs
associated with the Company's operations. The Company expects operating losses
will increase for at least the next several years as total costs and expenses
continue to increase due principally to the anticipated commercialization of the
CTLM(TM), development of, and clinical trials for, the CTLM (TM)and other
research AND development activities. The Company's ability to achieve
profitability will depend in part on its ability to obtain regulatory approvals
for its CTLM(TM), develop the capacity to manufacture and market the CTLM(TM),
eithER BY itself or in collaboration with others and market acceptance of the
CTLM(TM). There can be no assurance if and whEN the Company will receive
regulatory approvals for the development and commercial manufacturing and
marketing of the CTLM(TM) or achieve profitability. 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations and "Financial
Statements".
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. See "Business-NASDAQ Listing" and "Market Price of Securities and Related
Stockholders Matters".
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AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK/BARRIERS TO TAKEOVER
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 event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. The Company has, in the past,
issued Convertible Preferred Stock and Convertible Debentures without a limit on
the number of shares that can be issued upon conversion and may continue to do
so in the future. See "Sale of Unregistered Securities" and "Description of
Securities"
The Company's outstanding Preferred Shares and Debentures are convertible based
upon discounts of 75% from the market price except for the Series B shares which
are discounted 82%. Since the conversion price of the Preferred and the
Debentures are based on a percentage of the market price, WITHOUT A LIMIT ON THE
NUMBER OF SHARES THAT CAN BE ISSUED UPON CONVERSION, in the event that the price
of the Company's common stock decreases, the percentage of shares outstanding
that will be held by the Preferred and Debenture Holders upon conversion will
increase accordingly. See "Sale of Unregistered Securities-Private Placement of
Preferred Stock", "Sale of Unregistered Securities-Debentures" and "Sale of
Unregistered Securities-Equity Line of Credit".
Due to the fact that, when converting Convertible securities issued without
limitations on conversion, including those issued by the Company, the lower the
market price the greater the number of shares to be issued to the holders of
such securities upon conversion, thus increasing the potential profits to the
Holder when the price per share increases and the Holder sells the Common
Shares. The preferred stock and Debenture's potential for increased share
issuance and profit in addition to a stock overhang of an undeterminably amount
may depress the price of the Company's common stock. See "Sale of Unregistered
Securities-Private Placement of Preferred Stock", "Sale of Unregistered
Securities-Debentures" and "Sale of Unregistered Securities-Equity Line of
Credit".
EXTENSIVE GOVERNMENT REGULATION.
Many aspects of the medical industry in the United States, including the
Company's business, are subject to extensive federal and state government
regulation. Although the Company believes that its operations comply with
applicable regulations, there can be no assurance that subsequent adoption of
laws or interpretations of existing laws will not regulate, restrict, or
otherwise adversely affect the Company's business.
The manufacture and sale of medical devices, including the CTLM(TM), are subject
to extensive regulation by numeroUS governmental authorities in the United
States, principally the FDA and corresponding state agencies, and in other
countries. In the United States, the CTLM(TM) is regulated as a medical device
and is subject to the FDA'S pre-market clearance or approval requirements.
Securing FDA clearances and approvals may require the submission of extensive
clinical data and supporting information. The Company cannot file its PMA
application for the CTLM(TM) until its clinical trials are completed. There can
be no assurance, however, that the clinical trials will be successfully
completed, or if completed, will provide sufficient data to support a PMA
application for the CTLM(TM). Nor can there be any assurance that the FDA will
not require the Company to conduct additional clinicAL trials for the CTLM(TM).
The process for obtaining FDA and other required regulatory approvals is
lengthY, expensive and uncertain and can require as long as one to several years
from the date of FDA submission, if pre-market approval is obtained at all. See
" Business- Government Regulation-United States" and "Business- Regulatory and
Clinical Status".
Sales of medical devices outside the United States may be subject to
international regulatory requirements that vary from country to country. The
time required to gain approval for sale internationally may be longer or shorter
than that required for FDA approval and the requirements may differ. In Europe,
the Company will be required to obtain the certifications necessary to enable
the CE mark to be affixed to the Company's products in order to conduct sales in
member countries of the European Union. The Company is currently preparing the
necessary documentation for the CE certification, which is a lengthy process and
could take up to eight months, and evaluating notifying bodies in various
countries in Europe. A notifying body ("NB") is a regulatory body from the
private sector, who is responsible for the review and approval of the
documentation submitted by the Company in order to enable the CE mark to be
affixed to products. The Company has not obtained such certificates and there
can be no assurance it 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
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numerous other requirements with which other medical device manufacturers must
comply. FDA enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. Product approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. The third-party manufacturers upon which
the Company will depend to manufacture its products(GMPs) are required to adhere
to applicable FDA regulations regarding GMPs and similar regulations in other
countries, which include testing, control and documentation requirements.
Ongoing compliance with GMP regulations and other applicable regulatory
requirements will be monitored by periodic inspections by the FDA and by
comparable agencies in other countries. Failure to comply with applicable
regulatory requirements, including marketing and promoting products for
unapproved use, could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant pre-market
clearance or approval for devices, withdrawal of approvals and criminal
prosecution. Changes in existing regulations or adoption of new government
regulations or polices could prevent or delay regulatory approval of the
CTLM(TM).. Certain material changes to medical devices also are subject to FDA
review and clearance or approval. See " Business- Government Regulation-Foreign"
"Business- Regulatory and Clinical Status
There can be no assurance that the Company will be able to obtain FDA approval
of a PMA application for the CTLM(TM) on a timely basis, or at all, and delays
in receipt of or failure to obtain such approvals or clearances, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON PATENT LICENSED BY FOUNDER; DEPENDENCE ON PATENTS AND OTHER
PROPRIETARY INFORMATION The Company owns the rights, pursuant to an exclusive
patent licensing agreement, for the use of the patent for the CTLM(TM)
technology. The patent is owned by Richard Grable, the Company's Chief Executive
Officer. SEE "Business-Patent License Agreement". In addition, the Company has
12 additional United States patents pending with regard to Optical Tomography.
Neither the Company nor Mr. Grable hold foreign patents, however patents have
been applied for in several foreign countries. See "Business-Patents". The
Company intends to file for patents on products, including the CTLM(TM), for
which it feels the cost of obtaining a patent is economically reasonable IN
relation to the expected protection obtained. There can be no assurances that
any patent that the Company applies for will be issued, or that any patents
issued will protect the Company's technology. If the patents the Company license
or obtains are infringed upon, or if the Company is required to defend any
patent infringement cases brought against it, it will require substantial
capital, the expenditure of which the Company might not be able to afford. See
"Business-Patents" and "Business-Patent Licensing Agreement".
EARLY STAGE PRODUCT DEVELOPMENT.
The Company's proposed products and future product development efforts are at an
early stage. Accordingly, there can be no assurance that any of the Company's
proposed products will be found to be safe and effective, can be developed into
commercially viable products, can be manufactured on a large scale or will be
economical to market, or will achieve or sustain market acceptance. There is,
therefore, a risk that the Company's product development efforts will not prove
to be successful. See "Business"
DEPENDENCE UPON SUPPLIERS
Although the Company believes that there are a number of possible suppliers for
most of the components and subassemblies required for the CTLM(TM), certain
components for it laser system are provided by two unaffiliatED suppliers (the
"Laser Suppliers"). Although these components are provided by a limited number
of other suppliers, the Company believes its Laser Suppliers and their products
are the most reliable. The Company has no agreement with its Laser Suppliers and
purchases the laser components on an as needed basis. The disruption or
termination of the Company's Laser Suppliers, at present, could have a
short-term adverse effect on the Company's ability to manufacture the CTLM(TM).
Once the Company begins to produce the CTLM(TM) in larger quantities, THE
disruption or termination of the Company's Laser Suppliers could disrupt
production schedules or delay or curtail production, all of which could
materially adversely affect the Company's business and results of operations.
See "Business- CTLM(TM).
DEPENDENCE UPON UNITED STATES PRE-MARKET APPROVAL.
Under the provisions of the Federal Food and Cosmetic Act ("the FDC Act"), the
Company must obtain pre-market approval from the FDA prior to commercial use of
the CTLM(TM) in the United States. There can be no assurance if OR when the
Company will receive any such clearances or approvals. Obtaining FDA pre-market
approval may impose costly requirements on the Company and may delay for a
considerable period of time, or prevent, the commercialization of the CTLM(TM).
See " Business- Government Regulation-United States" and "BusineSS- RegulatoRY
and Clinical Status".
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DEPENDENCE ON MARKET ACCEPTANCE.
There can be no assurance that physicians or the medical community in general
will accept and utilize the CTLM(TM) device. The extent that, and rate of which,
the CTLM(TM) achieves market acceptance and penetration will depend ON many
variables including, but not limited to, the establishment and demonstration in
the medical community of the clinical safety, efficacy and cost-effectiveness of
the CTLM(TM), the advantage of the CTLM(TM) over exiSTING technology and cancer
detection methods, third-party reimbursements practices and the Company's
manufacturing, quality control, marketing and sales efforts. Failure of the
Company's products to gain market acceptance would have a material adverse
effect on the Company's business, financial condition, and results of
operations. See "Business".
LIMITED MARKETING AND SALES CAPABILITY.
In order to market any products it may develop, the Company will have to develop
a marketing and sales force with technical expertise and distribution
capability. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or that the Company will be successful in
gaining market acceptance for any products it may develop. The Company has
already entered into contract for the distribution of the CTLM(TM) in the United
Kingdom, Ireland,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 with strategic marketing partners who have established
marketing capabilities and will continue to develop its distribution network for
overseas. There can be no assurance that the Company will be able to further
develop this distribution network. on acceptable terms, if at all or that any of
the Company's proposed marketing schedules or plans can or will be met. To the
extent that the Company arranges with third parties to market its products, the
success of such products may depend on the efforts of such third parties See
"Business-Sales and Marketing".
LIMITATION ON THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies, and other organizations) may
affect the pricing or relative attractiveness of the Company's products by
regulating the level of reimbursement provided by such payors to the physicians
and clinics utilizing the CTLM(TM) or by refusing reimbursement. If examinations
utiliziNG the Company's products were not reimbursed under these programs, the
Company's ability to sell its products may be materially and adversely affected.
There can be no assurance that third-party payors will provide reimbursement for
use of the Company's products. Several states and the U.S. government are
investigating a variety of alternatives to reform the health care delivery
system and further reduce and control health care spending on health care items
and services, limit coverage for new technology and limit or control the price
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have material adverse effect on the Company's business, financial
condition, and results of operations. In international markets, reimbursement by
private third-party medical insurance providers, including governmental insurers
and independent providers varies from country to country. In certain countries,
the Company's ability to achieve significant market penetration may depend upon
the availability of third-party governmental reimbursement. Revenues and
profitability of medical device companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce the cost of
health care through various means. See "Business-Third-Party Reimbursement;
health Care Reform".
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Sale of Unregistered Securities-Private Placement of Preferred
Stock", "Sale of Unregistered Securities-Debentures" "Sale of Unregistered
Securities-Private Placement of Common Stock", and "Sale of Unregistered
Securities-Equity Line of Credit", "Sale of Unregistered Securities-Equity Line
of Credit", "Description of Securities" and "Financial Statements".
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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 no assurances can be
made, the Company anticipates that it will need approximately $8,000,000 over
the next two year period to complete all necessary stages in order to enable it
to market the CTLM(TM) in the United States and foreiGN countries. If the need
should arise for capital in excess of the Equity Line of Credit or if Company
declines to use the Equity Line of Credit the Company may seek such additional
funding through public or private financing or collaborative, licensing and
other arrangements with corporate partners. If the Company utilizes the Equity
Line of Credit or additional funds are raised by issuing equity securities,
especially Convertible Preferred Stock, dilution to existing Shareholders will
result and future investors may be granted rights superior to those of existing
Shareholders. There can be no assurance, however, that additional financing will
be available when needed, or if available, will be available on acceptable
terms. Insufficient funds may prevent the Company from implementing its business
strategy or may require the Company to delay, scale back, or eliminate certain
of its research and product development programs or to license to third parties
rights to commercialize products or technologies that the Company would
otherwise seek to develop itself. See "Market Price of Securities and Related
Stockholder Matters-Financing/Equity Line of Credit, "Risk Factors-Sale of
Unregistered Securities-Financing/Equity Line of Credit" and "Sale of
Unregistered Securities-Financing/Equity Line of Credit.
POSSIBLE ADVERSE IMPACT OF Y2K
The Company has begun testing its servers and workstations for Y2K compliance.
All of its computers have Intel Pentium processors. During stand-alone tests,
the computers with Intel Pentium processors were Y2K compliant. Software has
been purchased to test and repair non-compliant systems. The testing and
remediation by the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.
The Company has not fully determined the extent to which the Company's systems
may be impacted by third parties' systems, which may not be Year 2000 compliant.
While the Company has begun efforts to seek reassurance from its suppliers,
there can be no assurance that the systems of other companies, which the Company
deals with, will be Year 2000 compliant. Third parties' non-compliance could
have an adverse effect on the Company. At this time the Company is unable to
estimate the cost of its Year 2000 compliance, if any. Failure of third party
vendors to deliver parts and components timely could materially affect the
Company's ability to manufacture and deliver CTLM(TM) Systems. Because of this
potential risk, the Company has expanded its vendor and sub-contractor base TO
safeguard itself against this uncertainty. A checklist of Y2K compliant vendors
and sub-contractors will be compiled with a projected completion date of June
30, 1999. See "Business-Year 2000".
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependent on it ability to
issue stock for services. Since July 1, 1996, the Company has issued an
aggregate of 1,190,200 shares of common stock pursuant to Registration
Statements on Form S-8. The aggregate fair market value of the shares was
$2,069,259 The issuance of large amounts of common stock for services rendered
or to be rendered and the subsequent sale of such shares may depress the price
of the common stock. In addition, since each new issuance of common stock
dilutes existing shareholders, the issuance of substantial additional shares may
effectuate a change of control of the Company. See "Sale of Unregistered
Securities and Issuance of Stock for Services" and "Note 16 to Financial
Statements".
ADDITIONAL SALES OF UNREGISTERED SECURITIES; POSSIBLE ABSENCE OF LIMITATIONS ON
CONVERSION
The Company has had to rely on the private placement of Preferred and common
stock and convertible Debentures to obtain working capital and will continue to
do so in the future. In deciding to issue Preferred Shares and Debentures
pursuant to the private placements, the Company took into account the number of
common shares authorized and outstanding, the market price of the common stock
at the time of each Preferred or Debenture sale and the number of common shares
the Preferred shares would have been convertible into at the time of the sale.
At the time of each private placement there were enough shares, based on the
price of the Company's common stock at the time of the sale of the Preferred to
satisfy the Preferred conversion requirements. Although the Company's Board of
Directors tried to negotiate a floor on the conversion price of each series of
Preferred Stock and the Debentures prior to sale, it was unable to do so. In
order to obtain working capital the Company will continue to seek capital
through debt or equity financing which may include the issuance of Convertible
Preferred Stock whose rights and preferences are superior than those of the
common stock holders. The Company will endeavor to negotiate the best
transaction possible taking into account the impact on its shareholders,
dilution, loss of voting power and the possibility of a change of control.
However, in order to satisfy its working capital needs, the Company may be
forced to issue convertible securities with no limitations on conversion.
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In the event that the Company issues convertible preferred stock or convertible
debentures without a limit on the number of shares that can be issued upon
conversion and the price of the Company's common stock decreases, the percentage
of shares outstanding that will be held by such holders upon conversion will
increase accordingly. The lower the market price the greater the number of
shares to be issued to such holders, upon conversion, thus increasing the
potential profits to the holder when the price per share increases and the
holder sells the Common Shares. The preferred stockholders and debenture
holder's potential for increased share issuance and profit, including profits
derived from shorting the Company's common stock, in addition to a stock
overhang of an undeterminable amount, may depress the price of the Company's
common stock. In addition, the sale of a substantial amount of preferred stock
to relatively few holders could effectuate a possible change of control.
Moreover, in the event of a voluntarily or involuntarily liquidation of the
Company while the preferred stock is outstanding, the holders will be entitled
to a preference in distribution of the Company's property available for
distribution $10,000 per share
SUBSTANTIAL INCREASE IN AUTHORIZED COMMON STOCK
The Company pursuant to a Written Action of a majority of its shareholders has
amended its Articles of Incorporation, to increase its authorized common stock
from 48,000,000 shares to 100,000,000 common shares in order to facilitate the
conversion of approximately $4,500,000 in Series B Convertible Stock and
$1,080,000 in Series H Preferred Stock, the only Preferred Series outstanding at
that time. On January 28, 1999, the Company filed a Definitive Information
Statement with the Securities and Exchange Commission (the "Commission") with
regard to the Written Action. The Majority Shareholders' consent with respect to
the Amendment became effective on February 18, 1999. See "Market Price of
Securities and Related Stockholder Matters". Prior to the Amendment, due to the
decrease in the Company's stock price, the Company did not have an adequate
number of shares authorized to meet is contractual obligations. In addition, the
Company believes that the Amendment will insure that there are a sufficient
number of shares of Common Stock available for issuance upon exercise of
outstanding stock options and warrants and enhance the ability of the Company to
attract and retain qualified employees, consultants, officers and directors by
enabling the Company to create stock option, incentives and rewards for their
contributions to the success of the Company. Moreover, until such time as the
Company is able to generate revenues, it is dependent on equity or other
financing to continue operations. The Company will require substantial
additional funds for its research and development programs, pre-clinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
marketing programs.
Based on the closing price of the Company's common stock as of April 7,1999
($.375) 14,441,591 shares would be required to convert the Series B shares,
1,320132 shares would be required to convert the Series G shares, 3,684,211
shares would be required to convert the Series H shares, 4,842,105 would be
required to convert the Series I shares and, although the Company is
contractually prohibited from doing so, 9,649,123 shares would be required to
convert the Debenture and 52,631,578 shares would be required to draw down the
entire Equity Line of Credit. See ", "Sale of Unregistered Securities-Private
Placement of Preferred Stock", "Sale of Unregistered Securities-Debentures"
"Sale of Unregistered Securities-Private Placement of Common Stock", and "Sale
of Unregistered Securities-Equity Line of Credit". In addition, 4,570,871 shares
would be required for the exercise of options and warrants, and 3,500,000 shares
are required to be issued to Mr. Grable in July 1999 pursuant to the Patent
Licensing Agreement. Based upon the foregoing, as of April 6, 1999, the Company
would need in excess of 127 million authorized shares to effectuate all
conversion, utilize the total Equity Line of Credit and fulfill its remaining
stock related obligations. See "Patent Licensing Agreement", "Equity Line of
Credit", and "Certain Transactions".
DEPENDENCE ON QUALIFIED PERSONNEL.
Due to the specialized scientific nature of the Company's business, the Company
is highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel. Therefore the Company has entered into
employment agreements with certain of its executive officers and key employees.
The loss of the services of existing personnel, especially Mr. Grable, the
inventor of the CTLM(TM), as well as the failure TO recruit key scientific,
technical and managerial personnel in a timely manner would be detrimental to
the Company's research and development programs and could have an adverse impact
upon the business affairs or finances of the Company. The Company's anticipated
growth and expansion into areas and activities requiring additional expertise,
such as marketing, will require the additional of new management personnel.
Competition for qualified personnel is intense and there can be no assurance
that the Company will be able to continue to attract and retain qualified
personnel necessary for the development of its business. See "Management".
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CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS/POSSIBLE CHANGE OF CONTROL
Management of the Company beneficially owns 27.1%, including options, of the
outstanding common stock of the Company assuming no exercise of outstanding
warrants, options, or convertible preferred stock. This does not include shares
to be issued to the directors as follows; Linda Grable-445,000 shares, Richard
Grable-831,743 shares, and Allan Schwartz-820,000 shares. These shares are to be
issued as replacement shares for shares the Directors sold to fund the Company's
operations through February 28, 1999. See "Certain Transactions". Upon issuance
of these shares Management will own 25.5%. 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 15.4%. This additional dilution to Management's ownership percentage could
effectuate a change in control of the Company. See "Management", "Principal
Shareholders", and "Description of Securities".
POSSIBLE CONFLICT OF INTEREST
Richard Grable and Linda Grable hold a majority of the seats on the Company's
Board of Directors (the "Board"). Consequently, they are in a position to
control their own compensation and to approve affiliated transactions, if any.
From time to time Linda Grable, the Company's President, has personally
guaranteed promissory notes issued by the Company to third parties. Ms. Grable
received no compensation for these guarantees. In June 1998, the Company
finalized an exclusive Patent License Agreement with Richard Grable, the
Company's Chief Executive Officer. Mr. Grable is the owner of the Patent, which
encompasses the technology for the CTLM(TM) device. SEE "Description of
Business-Patent Licensing Agreement" and "Certain Transactions".
The Board's policy is to obtain unanimous consent for affiliated transaction and
compensation issues. Although the Company's Board intends to act fairly and in
full compliance with their fiduciary obligations, there can be no assurance that
the Company will not, as a result of the conflict of interest described above,
possibly enter into arrangements under terms less favorable than it could have
obtained had it been dealing with unrelated persons.
In February 1999, the Company's Board of Directors voted to compensate Messrs.
Grable, Schwartz and Ms. Grable for the shares they sold on behalf of the
Company, "See Certain Transactions".
HIGHLY COMPETITIVE MARKET.
The market in which the Company intends to participate is highly competitive.
Many of the companies in the cancer diagnostic and screening markets have
substantially greater technological, financial, research and development,
manufacturing, human and marketing resources and experience than the Company.
Such companies may succeed in developing products that are more effective or
less costly than the Company's products or such companies may be successful in
manufacturing and marketing their products than the Company. Physicians using
imaging equipment such as x-ray mammography equipment, ultrasound or high
frequency ultrasound systems, Magnetic Resonance Imaging (MRI) systems, and
thermography, diaphonography and transilluminational devices may not use the
Company's products. Currently mammography is employed widely and the Company's
ability to demonstrate the Company's ability to sell the CTLM(TM) to medical
facilities will, in part, be dependent on the Company's ability TO demonstrate
the clinical utility of the CTLM(TM) as an adjunct to mammography and physical
examination and iTS advantages over other available diagnostic tests. The
competition for developing a commercial device utilizing computed TOMOGRAPHY
techniques and laser technology is difficult to ascertain given the proprietary
nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's
CTLM(TM) utilizes. The most prestigious of these institutions includes the
University of Pennsylvania, The City College of New York, and University College
London. Two of these institutions have granted licenses on certain patented
technologies to two companies: University of Pennsylvania - Non-Invasive
Technologies; City College of New York - MediScience, Inc. See
"Business-Competition".
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. Although the Company
is aware of no substantial technological changes pending, should such change
occur, there can be no assurance that the Company will be able to acquire the
new or improved systems which may be required to update the CTLM(TM). SEE
"Business-Competition".
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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, certain problems became evident, solutions to these problems had to be
found and adjustments had to be made to the CTLM(TM) to correct such problems.
The Company anticipates that tHE first distributions of the CTLM(TM) will occur
in its fourth fiscal quarter beginning April 1999, however NO assurance can be
given in this regard.
RELIANCE ON INTERNATIONAL SALES.
The Company intends to commence international sales of the CTLM(TM) in Europe
and Asia prior to commenciNG commercial sales in the United States, where sales
cannot occur unless and until the Company receives pre-market approval from the
FDA. See "Business-Government Regulation". Thus, until the Company receives
pre-market approval from the FDA to market the CTLM(TM)in the United States, as
to which there can be no assurance, the CompaNY revenues, if any, will be
derived from sales to international distributors. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economical and political instability, shipping
delays, fluctuation of foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact on the Company's ability to deliver products on a timely
basis. Future imposition of, or significant increases in the level of customs
duties, export quotas or other trade restrictions could have a material adverse
effect on the Company's business, financial condition and results of operations.
The regulation of medical devices, particularly in Europe, continues to develop
and there can be no assurance that new laws or regulations will not have an
adverse effect on the Company. See "Business-Sale and Marketing" and
"Business-International Distributors".
In order to minimize the risk of doing business with distributors in countries
which hare having difficult financial times, the Company's International
Distribution Agreements all require payment via an irrevocable letter of credit
drawn on a United States bank prior to shipment of the CTLM(TM).
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
CTLM(TM) device is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability. The Company presently carries product liability
insurance in the amount of $3,000,000. See "Business-Product Liability".
LACK OF FEASIBILITY STUDY
The Company has not performed any market or feasibility study to assess the
interest, demand, or need for the CTLM(TM). There can be no assurance that any
such study would support Management's belief that sufficient demaND will exist.
See generally "Business" and Business-Competition".
LACK OF DIVIDENDS
The Company has not paid a dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future. See "Dividend Policy".
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with the Company's
Financial Statements and the Notes thereto, included elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997.
- ----------------------------------------------------
General and administrative expenses in the aggregate during the twelve months
ended June 30, 1998, were $4,478,055 representing an increase of $1,474,313 from
$3,003,742 during the twelve months ended June 30, 1997. General and
administrative expenses in the aggregate are derived from deducting compensation
and related benefits, research and development expenses, depreciation and
amortization and adding interest income to the net loss as presented on the
Statement of Operations. The increase is due primarily to substantial increases
in amortization of deferred compensation expense and consulting expenses. The
increase in amortization of deferred compensation is a result of the issuance of
stock options to the officers at a discount which are amortized over the term of
their employment contracts. The increase in consulting expenses is due primarily
to the expanded use of outside consultants needed for special non-recurring
projects required prior to placing CTLM(TM) units inTO clinical trials. Selling,
general and administrative expenses during the twelve months ended June 30,
1998, were $396,752 representing a decrease of $132,001 from $528,753 during the
twelve months ended June 30, 1997. The decrease is primarily due to one time
expenses regarding the move into the Company's new building in Plantation,
Florida.
Compensation and related benefits during the twelve months ended June 30, 1998,
were $1,987,104 representing a decrease of $1,477,020 from $3,464,124 during the
twelve months ended June 30, 1997. The decrease in compensation and related
benefits is due to the additional compensation recorded in 1997 on the
compensatory stock options. The increase in compensation recorded in 1997 on the
compensatory stock options is a result of the provisions of APB No. 25 whereby
the Company records the discount from fair market value on the non-qualified
stock options as a charge to deferred compensation at the date of grant and
credits additional paid-in capital.
Research and development expenses during the twelve months ended June 30, 1998,
were $254,722 representing a decrease of $810,456 from $1,065,178 during the
twelve months ended June 30, 1997. This decrease is due primarily to finalizing
certain components of the CTLM(TM) device.
Advertising and promotion expenses during the twelve months ended June 30, 1998,
were $329,446 representing an increase of $162,926 during the twelve months
ended June 30, 1997. The increase was due primarily to the costs associated with
additional advertising in domestic and foreign medical imaging and medical
device publications.
Consulting expenses during the twelve months ended June 30, 1998, were
$1,220,676 representing an increase of $456,312 during the twelve months ended
June 30, 1997. The increase was due primarily to the hiring of outside
consultants needed for special non-recurring projects required prior to placing
CTLM(TM) units into clinicAL trials.
Insurance costs during the twelve months ended June 30, 1998, were $162,549
representing an increase of $41,262 during the twelve months ended June 30,
1997. The increase was due primarily to additional premiums for Workers' Comp.,
Health Insurance, and Property and Casualty Insurance.
Professional expenses during the twelve months ended June 30, 1998, were
$454,730 representing an increase of $276 during the twelve months ended June
30, 1997. The increase was due primarily to additional legal fees regarding the
NASDAQ appeal and the legal action taken against a former employee. See
"Business-Legal Proceedings".
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Stockholder expenses during the twelve months ended June 30, 1998, were $75,608
representing an increase of $54,706 from during the twelve months ended June 30,
1997. The increase was due to the costs associated with preparing and mailing
the Company's annual report and Proxy Statement.
Tradeshow expenses during the twelve months ended June 30, 1998, were $216,182
representing an increase of $61,400 from during the twelve months ended June 30,
1997. The increase is due to the costs of preparing for (including changes and
modifications required to the Company's exhibit) and attending the 1997
Radiological Society of North America's 84th Scientific Assembly and Annual
Meeting in Chicago, IL.
Travel and subsistence costs during the twelve months ended June 30, 1998, were
$111,559 representing a decrease of $84,026 during the twelve months ended June
30, 1997. This decrease was primarily due to reduced travel and housing expenses
for consultants.
Rent expense during the twelve months ended June 30, 1998, was $26,213
representing a decrease of $22,684 during the twelve months ended June 30, 1997.
This decrease was primarily due to the purchase of equipment during the fiscal
year that was previously leased and the relocation to a Company owned facility.
Interest expense during the twelve months ended June 30, 1998, were $55,543
representing an increase of $52,799 during the twelve months ended June 30,
1997. The increase was due to interest paid on short-term loans used for working
capital for the Company.
Interest income during the twelve months ended June 30, 1998, was $22,137
representing a decrease of $94,835 from during the twelve months ended June 30,
1997. This decrease was due to a decrease of funds invested by the Company.
Depreciation and amortization expenses during the twelve months ended June 30,
1998, were $283,966 representing an increase of $53,919 from $230,047 during the
twelve month period ended June 30, 1997. This increase is due primarily to the
purchase of additional laboratory equipment and manufacturing fixtures.
Comparative fiscal year June 30, 1997 numbers have been changed to reflect
restatement as per Financial Statement, Notes to Financial Statements, (3)
Restatements, Page F15.
BALANCE SHEET DATA
The Company has financed its operations since inception by the issuance of
equity securities with aggregate net proceeds of approximately $17,746,206 and
through loan transactions in the aggregate amount of $520,407. During Fiscal
1998, the Company received net proceeds of approximately $1,879,500 from the
private placement of its Series C Convertible Preferred Stock and Warrants,
approximately $495,000 from the private placement of its Series D Convertible
Preferred Stock and Warrants, approximately $495,000 from the private placement
of its Series E Convertible Preferred Stock and Warrants, approximately $700,000
from the private placement of its Series F Convertible Preferred Stock, all
pursuant to Regulation S of the Securities Act of 1933, as amended, and
approximately $990,000 from the private placement of its Series H Convertible
Preferred Stock and Warrants pursuant to Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.
The Company's combined cash and cash equivalents totaled $310,116 at June 30,
1998, representing a decrease of $73,107 from $383,223 at June 30, 1997. The
decrease in cash and cash equivalents is due to continuing operations.
The Company does not expect to generate a positive internal cash flow for at
least the next several years due to the expected increase in spending for
research and development and the expected costs of commercializing its initial
product, the CTLM(TM) device.
The Company's prototype equipment totaled $-0- at June 30, 1998 and $1,216,585
at June 30, 1996. All direct costs associated with the prototype equipment have
been capitalized. The Company has reclassified the prototype equipment into
inventory as the development of the Computed Tomography Laser Mammography
(CTLM(TM)) device has been, for the most part, completed and the manufacture of
five (5) devices to be placed into clinical sites has commenced.
15
<PAGE>
The Company's property and equipment, net, totaled $2,920,980 at June 30, 1998
and $3,293,297 at June 30, 1997. This decrease is due to depreciation and
retirement of certain equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sales of its product
begins, the Company is totally dependent upon debt and equity funding. In the
event that the Company is unable to obtain debt or equity financing or is unable
to obtain such financing on terms and conditions acceptable to the Company, the
Company may have to cease or severely curtail its operations. This would
materially impact the Company's ability to continue as a going concern.
The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during fiscal
1998 was $3,540,001 primarily due to the Company's continued research and
development of the CTLM(TM) and preparations for FDA Clinical Trials including
the manufacture of five (5) CTLM(TM) Breast Imaging Systems aND the hiring of
six additional employees, compared to net cash used by operating activities of
research and development of the CTLM(TM) device and related software development
of $4,532,866 in fiscal 1997. At June 30, 1998, the Company had a working
capital of $(257,166) compared to a working capital of $(294,433) at June 30,
1997. During fiscal 1998, the Company was able to raise a total of $5,399,599
less expenses through Regulation S and Regulation D transactions. The Company
will continue to seek equity or debt financing in order to meet its working
capital needs. The Company does not expect to generate a positive internal cash
flow for at least the next twelve-months due to the expected increase in
spending for research and development and the expected costs of commercializing
it initial product, the CTLM(TM). The Company will require additional funds for
its research aND development, clinical testing, operating expenses, Food and
Drug Administration regulatory processes, and manufacturing and marketing
programs. Accordingly, the Company will be required to raise additional funds
prior to the end of calendar year 1998 in order to continue operations. The
Company plans to raise additional funds by either equity or debt financing,
including entering into a transaction(s) to privately place equity, either
common or preferred stock, or debt securities, or combinations of both; or by
placing equity into the public market through an underwritten secondary offering
or obtaining mortgage financing on it real property and improvements. If
additional funds are raised by issuing equity securities, dilution to existing
stockholders will result, and future investors may be granted rights superior to
those of existing stockholderS.
No assurances, however, can be given that future financing would be available or
if available, that it could be obtained at terms satisfactory to the Company.
The Company's ability to effectuate its plan of and continue operations is
dependent on its ability to raise capital, structure a profitable business, and
generate revenues. If the Company's working capital were insufficient to fund
its operations, it would have to explore additional sources of financing.
Although the Company has a firm commitment for a $15 million Equity line of
Credit, it must first register the shares to be issued pursuant to the credit
line. At present, the Company has no plans to register such share, but may do so
in the future. See "Sale of Unregistered Stock-Financing/Equity Line of Credit".
Capital expenditures for the fiscal 1998 were approximately $115,738 as compared
to approximately $2,815,923 for fiscal 1997. These expenditures were a direct
result of purchases of computer and other equipment, office, warehouse and
manufacturing fixtures, tradeshow equipment, computer software, laboratory
equipment, and other fixed assets. The Company anticipates that its capital
expenditures for fiscal 1999 will be approximately $100,000.
16
<PAGE>
During the six months ending December 31, 1998 there were no changes in the
Company's existing debt agreements, and the Company had no outstanding bank
loans as of December 31, 1998. The Company's annual fixed commitments, including
salaries and fees for current employees and consultants, rent, payments under
license agreements and other contractual commitments are approximately
$9,000,000 as of the date of this Prospectus and are likely to increase as
additional agreements are entered into and additional personnel are retained.
The Company will require substantial additional funds for its research and
development programs, pre-clinical and clinical investigational studies,
operating expenses, regulatory processes, and manufacturing and marketing
programs, which are presently estimated at approximately $500,000. The foregoing
projections are subject to many conditions most of which are beyond the
Company's control. The Company's future capital requirements will depend on many
factors, including the following: the progress of its research and development
projects; the progress of pre-clinical and clinical testing; the time and cost
involved in obtaining regulatory approvals; obtaining regulatory approvals; the
cost of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; competing technological and market developments;
changes and developments in the Company's existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish; and the development of
commercialization activities and arrangements. The Company does not expect to
generate a positive internal cash flow for at least several years due to
expected increases in capital expenditures, working capital and ongoing losses,
including the expected cost of commercializing the CTLM(TM) device. The Company
has sufficient cash to fund the Company'S operations until the end of the fiscal
year ending June 30, 1999. Thereafter the Company may require additional funding
through the private debt or equity financing, or collaborative licensing or
other arrangements with strategic partners. There can be no assurance that such
financing can be obtained or, if it is obtained, that the terms thereof will be
acceptable. The Company plans to continue its policy of investing excess funds,
if any, in a daily cash management account at First Union National Bank. See
"Cautionary Statements Regarding Forward-Looking Statements Uncertainties as to
Future Profitability."
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependent on it ability to
issue stock for services. Since July 1, 1996 to the filing date of this
Prospectus, the Company has issued an aggregate of 1,806,500 shares of common
stock pursuant to Registration Statements on Form S-8. The aggregate fair market
value of the shares was $2,327,151. The issuance of large amounts of common
stock for services rendered or to be rendered and the subsequent sale of such
shares may depress the price of the common stock. In addition, since each new
issuance of common stock dilutes existing shareholders, the issuance of
substantial additional shares may effectuate a change of control of the Company.
See `Issuance of Stock for Services" and "Note 16 to Financial Statements".
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Prospectus under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as in the
Company's press releases or oral statements that may be made by the Company or
by officers, directors or employees of the Company acting on the Company's
behalf, that are not historical fact constitute "forward-looking statements".
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that could cause the actual results of the Company to be
materially different from the historical results or from any results expressed
or implied by such forward-looking statements. Factors that might cause such a
difference include, without limitation, the information set forth below. In
addition to statements which explicitly describe such risks and uncertainties,
statements labeled with the terms "believes", "belief', "expects", "plans" or
"anticipates" should be considered uncertain and forward-looking. All cautionary
statements made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear.
17
<PAGE>
UNCERTAIN ABILITY TO MEET CAPITAL NEEDS. The Company will require substantial
additional funds for clinical testing of the CTLM(TM) Device, research and
development programs, pre-clinical and clinical testing of othER proposed
products, regulatory processes, manufacturing and marketing programs and
operating expenses (including general and administrative expenses). The
Company's future capital requirements will depend on many factors, including the
following: the progress of its research and development projects; the progress
of pre-clinical and clinical testing; the time and cost involved in obtaining
regulatory approvals; the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights; competing
technological and market developments; changes and developments in the Company's
existing collaborative, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that the Company may
establish; and the development of commercialization activities and arrangements.
Moreover, the Company's fixed commitments, including salaries and fees for
current employees and consultants, equipment rent, payments under license
agreements and other contractual commitments, are substantial and would increase
if additional agreements are entered into and additional personnel are retained.
The Company does not expect to generate a positive internal cash flow for at
least several years due to expected increases in capital expenditures, working
capital needs, and ongoing losses, including the expected cost of
commercializing the CTLM(TM) Device . However, tHE Company's cash requirements
may vary materially from those now planned due to the progress of research and
development programs, results of clinical testing, relationships with strategic
partners, if any, changes in the focus and direction of the Company's research
and development programs, competitive and technological advances, the FDA and
foreign regulatory processes and other factors.
The Company needs additional capital to fund its operations, and is seeking to
obtain additional capital through debt or equity financing, or collaborative
licensing or other arrangements with strategic partners. If additional funds are
raised by issuing equity securities, further dilution to existing stockholders
will result, and future investors may be granted rights superior to those of
existing stockholders. There can be no assurance, however, that additional
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 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.
UNCERTAINTY OF FDA MARKETING CLEARANCE FOR THE CTLM(TM) DEVICE. 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 is authorized to scan 20
patients at the Company's in-house facilities in Plantation, Florida and upon
FDA approval, at three additional clinical sites. On September 1 and September
10, 1998, the Company formally submitted the first and second series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.
On 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 is currently being installed. The testing is
designed to develop diagnostic criteria for CTLM(TM) images. In order to acquire
data that will be part of the final pre-market application (PMA), the Company
intends to expand the clinical trials to hospitals in Miami, Chicago, Los
Angeles, Boston, and New York.
At the conclusion of the clinical trials the Company will submit the PMA, if and
when accepted for filing by the FDA, it will be designated for review under the
FDA's Expedited Review policy. There can be no assurance, however, that such
Expedited Review status will be maintained or result in a more expeditious
approval, or approval at all. See "Government Regulation; No Assurance of
Regulatory Approval."
Conducting clinical trials will require the expenditure of substantial
additional funds, which the Company does not currently have available.
Furthermore, there can be no assurance (i) that results obtained in any
additional trials will be consistent with the results obtained in trials
conducted by the Company to date, (ii) that results obtained in any clinical
trial or series of clinical trials will be consistent among all study sites,
(iii) that results obtained in clinical trials conducted with U.S. study
populations will be consistent with results obtained in studies conducted in
Europe or other locations outside of the U.S., or (iv) that any such results, or
the filing of the PMA will be accepted by the FDA. There can be no assurance
that the FDA or other regulatory approvals for the CTLM(TM) Device will be
granted on a timely basis, or at all. Failure to obtain FDA clearance TO market
the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, caSH flows, and results of operations.
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<PAGE>
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) Device, 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 December 31, 1998, the Company had an
accumulated deficit of approximately $19,830,138 before discounts and dividends
on convertible preferred stock issuance since inception. Such losses have
resulted principally from costs 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 to 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
proposed commercialization of the CTLM(TM) Device, development of, and clinical
trials for, other medical imaging devices and other research and development
activities.
UNCERTAINTIES AS TO FUTURE PROFITABILITY. The Company's ability to achieve
profitability will depend in part on its ability to obtain regulatory approvals
for the CTLM(TM) Device and any other proposed products, and to develOP the
capacity to manufacture and market any products either by itself or in
collaboration with others. There can be no assurance if or when the Company will
receive required regulatory approvals for the development and commercial
manufacturing and marketing of the CTLM(TM) Device or any other proposed
products, or achieVE profitability. Accordingly, the extent of future losses and
the time required to achieve profitability are highly uncertain.
EARLY STAGE OF PRODUCT DEVELOPMENT. The Company's proposed products, other than
the CTLM(TM) Device, are at AN early stage of development and 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.
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 the rate at
which, the CTLM(TM) Device 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) Device, the advantages of the CTLM(TM) Device
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
reimbursement 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, cash
flows, and results of operations.
LIMITED MARKETING AND SALES EXPERIENCE. The Company has limited internal
marketing and sales resources and personnel. In order to market the CTLM(TM)
Device or any other products it may develop, the Company will have TO develop a
marketing and sales force with technical expertise and distribution
capabilities. 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 intends to pursue distribution arrangements in Europe and Asia with
strategic marketing partners who have established marketing and service
capabilities. There can be no assurance that the Company, either on its own or
through arrangements with others, will be able to enter into such arrangements
on acceptable terms, if at all. 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.
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LIMITED MANUFACTURING HISTORY. The Company will have to ramp up its CTLM(TM)
manufacturing and assembLY capabilities and contract for the manufacture of the
CTLM(TM) components in the volumes that will be necessary fOR the Company to
achieve significant commercial sales in the event it begins foreign sales and/or
obtains regulatory approval to market its products in the United States. The
Company has limited experience in the manufacture of medical products for
clinical trials or commercial purposes. Should the Company manufacture its
products, the Company's manufacturing facilities would be subject to the full
range of the current Quality System Regulation ("QSR") (formerly the Good
Manufacturing Practices (GMP) regulation) and similar risks of delay or
difficulty in manufacturing, and the Company would require substantial
additional capital to establish such manufacturing facilities. In addition,
there can be no assurance that the Company would be able to manufacture any such
products successfully or cost-effectively.
DEPENDENCE ON THIRD PARTIES. The Company has used certain third parties to
manufacture and deliver the components of the CTLM(TM) Device and intends to
continue to use third parties to manufacture and deliver suCH components and any
other products, which the Company may seek to develop. Such third parties must
adhere to the QSR enforced by the FDA through its facilities inspection program
and such third parties' facilities must pass a plant inspection before the FDA
will grant pre-market approval of the Company's products. There can be no
assurance that the third-party manufacturers on which the Company depends for
the manufacture of CTLM(TM) componenTS will be in compliance with the QSR at the
time of the pre-approval inspection or will maintain such compliance. Such
failure could significantly delay FDA approval of the PMA application for the
CTLM(TM) Device, and such delAY would have a material adverse effect on the
Company's business, financial condition, cash flows, and results of operations.
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.
COMPETITION. The medical device industry generally, and the cancer diagnostic
imaging segments in particular, are characterized by rapidly evolving
technology-and intense competition. Other companies in the medical device
industry may be developing, or could in the future attempt to develop,
additional products that are competitive with the CTLM(TM) Device. Many of the
Company's potential competitors have substantially greater capital resourcES and
name recognition than the Company. Many of these companies also have
substantially greater expertise than the Company in research and development,
manufacturing and marketing and obtaining regulatory approvals. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Additionally, there can be no assurance
that the Company will be able to compete against such competitors and potential
competitors in terms of manufacturing, marketing, and sales. Although the
Company believes that its products may offer certain technological advantages
over its competitors' currently-marketed products, earlier entrants in the
market for a diagnostic application often obtain and maintain significant market
share relative to later entrants. Physicians using imaging equipment such as
x-ray mammography equipment, ultrasound or high frequency ultrasound systems,
MRI systems, thermography, diaphonography, electrical impedance and
transillumination devices may not use the CTLM(TM) Device OR any other products
that the Company may develop. Currently, mammography is employed widely and the
Company's ability to sell the CTLM(TM) Device to medical facilities will, in
part, be dependent on the Company's ability TO demonstrate the clinical utility
of the CTLM(TM) Device as a diagnostic adjunct to mammography or physicAL
examination and its advantages over other available diagnostic tests.
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RISK OF TECHNOLOGICAL OBSOLESCENCE. Methods for the detection of cancer are
subject to rapid technological innovation and there can be no assurance that
technological changes will not render the Company's proposed products obsolete.
There can be no assurance that the development of new types of diagnostic
medical equipment or technology will not have a material adverse effect on the
marketability of the CTLM(TM) Device or any othER products developed by the
Company. 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.
POTENTIAL RELIANCE ON INTERNATIONAL SALES. The Company intends to commence
commercial sales of the CTLM(TM) DeviCE 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 marketing clearance from the FDA for the
CTLM(TM) Device, as to which there can be no assurance, tHE Company's revenues,
if any, will be derived from international sales. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economic or political instability, shipping
delays, fluctuations in 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 competitive
and 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, cash
flows 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.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS. The manufacture and
sale of medical devices, including the CTLM(TM) Device, 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
Company's products are regulated as medical devices and are 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, 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."
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain 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,
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. The Company will be required to obtain CE Mark Certification
for the CTLM(TM) Device.
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.
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Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed. In addition, to obtain
such approvals, the FDA and certain foreign regulatory authorities may impose
numerous other requirements with which 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 depends to manufacture its products are required to adhere to applicable
FDA regulations regarding the QSR and similar regulations in other countries,
which include testing, control and documentation requirements. Ongoing
compliance with the QSR and other applicable regulatory requirements will be
monitored by periodic inspection by the FDA and by comparable agencies in other
countries. Failure to comply with applicable regulatory requirements, including
marketing or 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 governmental regulations or policies 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.
There can be no assurance that the Company will be able to obtain, on a timely
basis, or at all, FDA approval of the PMA for the CTLM(TM) Device, foreign
marketing clearances for the CTLM(TM) Device or regulatory approvalS OR
clearances for other products that the Company may develop, 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 a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. 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 payers (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 payers to the physicians, hospitals, clinics and
imaging centers utilizing the CTLM(TM) Device or any other products that the
Company may develop or by refusing reimbursement. IF examinations utilizing the
Company's products are not reimbursed under these programs, the Company's
ability to sell its products may be materially adversely affected.
There can be no assurance that third-party payers will provide reimbursement for
use of the CTLM(TM) Device or aNY other products that the Company may develop.
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 international markets, reimbursement by 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 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.
UNCERTAINTIES REGARDING HEALTH CARE REFORM. Several states and the U.S.
government are investigating a variety of alternatives to reform the health care
delivery system and further reduce and control health care spending. These
reform efforts include proposals to limit spending on health care items and
services, limit coverage for new technology and limit or control the prices
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, cash flows, and results of 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's proprietary
products and technology are the subject of one U.S. patent licensed to the
Company, and eleven additional applications owned by the Company pending with
the United States Patent and Trademark Office ("PTO") and certain foreign
patents. The Company has filed, and intends to continue to file, patent
applications in certain foreign jurisdictions covering the patent claims that
are the subject of U.S. patents and patent applications. There can be no
assurance that the PTO or foreign jurisdictions will grant the Company's pending
patent applications or that the Company will obtain any additional patents or
other protection for which it has applied. There can be no assurance that
patents issued to or licensed by or to the Company 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.
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. 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.
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. The
loss of the services of existing personnel as well as the failure to recruit key
scientific, technical and managerial personnel in a timely manner would be
detrimental to the Company's research and development programs and to its
business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as engineering, manufacturing,
and marketing, will require the addition of new 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.
POTENTIAL 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 allegations of false negative
diagnoses of cancer. While the CTLM(TM) Device does not purport to diagnose any
patient, there can be no assurance that the Company wiLL not be subjected to
future claims and potential liability. 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.
POTENTIAL FOR ENVIRONMENTAL LIABILITY. Although the Company's manufacturing
processes do not currently involve the use of potentially hazardous materials,
it may use such materials in the future. The Company may, in the future, become
subject to stringent federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of such materials. There can be no
assurance that the Company will not incur significant future costs to comply
with environmental laws, rules, regulations and policies, or that the business,
financial position, cash flows or results of operations of the Company will not
be materially and adversely affected by current or future environmental laws,
rules, regulations and policies or by any releases or discharges of hazardous
materials.
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AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK/BARRIERS TO
TAKEOVER. The Company's Articles of Incorporation authorize the issuance of up
to 2,000,000 shares 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 event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. The Company has, in the past, issued Convertible Preferred Stock
without a limit on the number of shares that can be issued upon conversion and
may continue to do so in the future. See "Sale of Unregistered Securities" and
"Description of Securities"
Since the conversion price of the Preferred is based on 75% of the Average
Price, without a limit on the number of shares that can be issued upon
conversion, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series H Holders
upon conversion will increase accordingly. See "Sale of Unregistered
Securities-Series H Preferred" and "Sale of Unregistered Securities-Equity Line
of Credit".
Due to the fact that, when converting Convertible securities issued without
limitations on conversion, including the Series H Preferred Shares, the lower
the market price the greater the number of shares to be issued to the holders,
holders of such preferred 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. See "Sale of Unregistered Securities-Series
H Preferred" and "Sale of Unregistered Securities-Equity Line of Credit".
No Dividends. The Company has never declared or paid any cash dividends on its
capital stock and does not intend to pay any cash dividends in the foreseeable
future. The Company currently anticipates that it will retain all its earnings
for use in the operation and expansion of its business and, therefore, does not
anticipate that it will pay any cash dividends in the foreseeable future
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. 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. The Company's failure
to meet such requirements could result in the de-listing of the Common Stock
from trading on the NASDAQ SmallCap Market. If, however, the Company did not
meet the requirements of the NASDAQ SmallCap Market, trading of the Common Stock
would be conducted on an electronic bulletin board (OTC BB) established for
securities that do not meet the NASDAQ listing requirements or in what is
commonly referred to as the "pink sheets." De-listing may restrict investors'
interest in the Common Stock and materially adversely affect the trading market
and prices for the Common Stock and the Company's ability to issue additional
securities or to secure additional financing. Also see "Risk Factors".
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BUSINESS
OVERVIEW
Imaging Diagnostic Systems, Inc. (the "Company") is a medical technology company
that has developed and is testing a Computed Tomography Laser Mammography
("CTLM(TM)") device for detecting breast cancer through the skin IN a
non-invasive procedure. The CTLM(TM) employs a high-speed pico-second pulsed
titanium sapphire laser aND proprietary scanning geometry and reconstruction
algorithms to detect and analyze tissue in the breast for indicia of malignancy
or benignancy. The components of the laser system are purchased from two
unaffiliated parties and assembled and installed into the CTLM(TM) by the
Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters as
laser light pulses pass through the tissue. The CTLM(TM) device IS designed to
provide the physician with objective data for interpretation and further
clinical work-up. Accordingly, the Company believes that the CTLM(TM) will
improve early diagnosis, reduce diagnostic uncertainty, aND decrease the number
of biopsies performed on benign lesions.
HISTORY
During the first year of operations, the Company researched the interaction
between high speed, rapid pulsed (Ti-Sapphire) laser technology and various
detection technologies associated with standard computed tomographic ("CT")
schemes. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first images
and filed a total of twelve ancillary United States patents from 1996 to dateand
two additional patents were filed in November 1998. The Company intends to file
an additional patent application within the next six months. During this period
of time there were further advances in laser technology effecting the size and
stability of the laser component. The Company incorporated these changes by
purchasing a laser package manufactured by Spectra-Physics, Inc.
On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLM(TM) device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need to submit an investigational device
exemption ("IDE") application to the FDA in order to commence human clinical
trials of the device.
The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November 1996, the Company installed its device
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and patients weRE scanned. 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 the CTLM(TM) was reMOVED from Strax and, on May 20, 1998, the Company's
termination of the IDE protocol and its final report was accepted by the FDA.
The Company was granted, in June 1998, its second investigational device
exemption ("IDE") to conduct clinical trials. An IDE allows a company to conduct
human clinical trials without filing an application for marketing clearance. The
Company 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 study to Nassau
County Medical Center was conditionally approved. The Company immediately
supplied the additional documentation required by the FDA and the conditions
were complied with. This IDE application is limited to one institution (Nassau
County Medical Center) and 275 subjects. The Company had originally intended to
have the CTLM(TM) positioned at Nassau County Medical Center not later than mid
FebruaRY 1999, however due to renovations at Nassau County Medical Center, the
delivery of the CTLM(TM) was postponed untIL the renovations were complete. On
March 3, 1999 the CTLM(TM) System was shipped to Nassau County Medical Center
aND is currently being installed. The testing is designed to develop diagnostic
criteria for CTLM(TM) images. In ordER to acquire data that will be part of the
final pre-market application (PMA), the Company intends to expand the clinical
trials to hospitals in Miami, Chicago, Los Angeles, Boston, and New York.
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On June 12, 1997, the Company was advised by patent counsel that Mr. Grable's
patent, filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus" was
granted with 4 independent and 24 subordinate claims. The independent claims
serve to provide an overall outline of the disclosure of the invention. The
subordinate claims provide additional information to identify pertinent details
of the invention as they relate to the respective specific independent claim.
In May 1998, the Company, realizing that it had no formal written agreement in
place with Mr. Grable, immediately began negotiating with Mr. Grable for the
exclusive use of the patent. In June 1998, a written agreement was entered into.
See "Risk Factors-DEPENDENCE ON PATENT LICENSED BY FOUNDER; DEPENDENCE ON
PATENTS AND OTHER PROPRIETARY INFORMATION", "Business-Patent" and
"Business-Patent License Agreement".
BREAST CANCER
Breast cancer is one of the most common cancers among women and, notwithstanding
the currently available detection modalities, is the leading cause of death
among women aged 35 to 45. According to the American Cancer Society ("ACS"),
approximately one in eight women in the United States will develop breast cancer
during her lifetime. Nationwide, it is estimated that in 1998, approximately
178,700 new cases of invasive breast cancer will be diagnosed among women in the
United States, and an estimated 43,500 women will die from this disease.
Excluding skin cancers, the breast is the most frequent site of cancer among
American women accounting for 32% of incident cancers and 17% of cancer deaths.
It is the second leading cause of death for American women following lung cancer
and is the leading cause of cancer death among women aged 40 to 55. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
98% to 72% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. Extensive
documentation demonstrates that mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommend as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, ACS has published guidelines for breast cancer
screening including: (i) monthly breast self-examinations for all women over the
age of 20; (ii) a baseline mammogram for women by the age of 40; (iii) a
mammogram every one to two years for women between the ages of 40 and 49; (iv)
an annual mammogram for women age 50 or older. As a result of family medical
histories and other factors, certain women are at "high risk" of developing
breast cancer during their lifetimes. For these women, physicians often
recommend close monitoring, particularly if an abnormality posing increased risk
factors has been detected.
Each year, approximately eight million women in the United States require
diagnostic testing for breast cancer due to a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend
further diagnostic procedures, including diagnostic mammography and ultrasound,
a minimally invasive procedure such as fine needle aspiration or large core
needle biopsy. In each case, the potential benefits of additional diagnostic
testing must be balanced against the costs, risks and discomfort to the patient
associated with undergoing the additional procedures. Each of the currently
available non-surgical modalities for breast cancer detection has various
clinical limitations. While the minimally invasive procedures provide more
diagnostic information, there is still present a 4% miss-rate factor.
Due in part to the limitations of the currently available modalities to identify
malignant lesions, a large number of patients with suspicious lesions proceed to
surgical biopsy, an invasive and expensive procedure. Approximately 800,000
surgical biopsies are performed each year in the United States, of which
approximately 700,000 result in the surgical removal of benign breast tissue.
The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000
per procedure. Thus biopsies of benign breast tissue cost the U.S. health care
system approximately $2.45 billion annually. In addition, biopsies result in
pain, scarring, and anxiety to patients. Patients who are referred to biopsy
usually are required to schedule the procedure in advance and generally must
wait up to 48 hours for their biopsy results.
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SCREENING AND DIAGNOSTIC MODALITIES
PHYSICAL EXAMINATION
Physical examinations may be conducted by a physician or clinician as part of a
medical examination, or by a woman performing a breast self-examination;
however, a physical examination of the breast can only detect relatively large
lesions, which may be advanced cancers. Furthermore, physical examination of the
breast does not reliably distinguish between malignant and benign tissue. More
than half the women who menstruate will have a lump in a breast at some point,
but fewer than 10% of such lumps will be malignant.
MAMMOGRAPHY
Mammography is a non-invasive x-ray modality commonly used for both routine
breast cancer screening and as a diagnostic tool. A mammogram produces an image
of the internal structure of the breast that is intended to display lesions as
white spots against the black and/or white background of normal tissue. In a
screening mammogram, radiologists seek to detect suspicious lesions, while in a
diagnostic mammogram radiologist seek to characterize suspicious lesions.
Mammograms require subjective interpretation by a radiologist and are often
uncomfortable for the patient. Because x-ray mammography exposes the patient to
radiation, ACS recommends that mammograms be limited to once per year. In
addition, x-ray mammography is considered to be less effective for women under
the age of 50 who generally have radiographically dense breast tissue. The
average cost of a diagnostic mammogram is approximately $55 to $200 per
procedure (an average of $113), and requires the use of capital equipment
ranging in cost from approximately $75,00 to $225,000. It is expected that the
CTLM(TM) deviCE will cost approximately $300,000 and the cost of a bilateral
exam will be $125 to $150. Due the high capital costs associated with
mammography equipment and the specialized training necessary to operate the
equipment and to interpret radiographic images, mammography is usually available
only at specialty clinics or hospitals.
ULTRASOUND
Ultrasound uses high frequency sound waves to create an image of soft tissues in
the body in a non-invasive manner. Like mammography, this image requires
interpretation by a physician. Ultrasound's principal role in breast cancer
diagnosis has been to assist the physician in determining whether a palpable
lesion is likely to be a cyst (usually benign) or a solid mass (potentially
cancerous). The average cost for an ultrasound of the breast is approximately
$125 to $500 per procedure (an average of $235) and requires the use of capital
equipment ranging in cost from approximately $60,000 to $200,000. Again, it is
expected that the CTLM(TM) device will coST approximately $350,000 and the cost
of an exam will be $125 to $150. Like mammography, ultrasound is generally
performed at specialty clinics or hospitals.
BIOPSY
Other currently available minimally invasive diagnostic techniques include fine
needle aspirations or core needle biopsy employing either the stereotactic or
hand held method. In each of these procedures a physician seeks to obtain either
cellular or tissue samples of suspicious lesions for cytodiagnosis or
histodiagnosis. Inadequate sampling can render these tests invalid. These
procedures are invasive, require follow-up, and range in cost from approximately
$370 to $1,000 per procedure.
THE COMPANY
The Company has a limited history of operations. Since its inception in December
1993, the Company has engaged principally in the development of the CTLM(TM).
The Company currently has no source of operating revenue and has incurred net
operating losses since its inception. At December 31, 1998, the Company had an
accumulated deficit of $19,830,138, before discounts and dividends . Such losses
have resulted principally from costs associated with the Company's operations.
The Company expects operating losses will increase for at least the next several
years as total costs and expenses continue to increase due principally to the
anticipated commercialization of the CTLM(TM), development of, and clinical
trials for, the CTLM(TM) and other research and development activities. The
Company's ability to achieve profitability will depend in part on its ability to
obtain regulatory approvals for its proposed products and develop the capacity
to manufacture and market any approved products either by itself or in
collaboration with others. There can be no assurance if and when the Company
will receive regulatory approvals for the development and commercial
manufacturing and marketing of its proposed products, or achieve profitability.
See "Management's Discussion and Analyses of Financial Condition and Results of
Operations."
27
<PAGE>
CTLM(TM)
Since its inception in December 1993, the Company has been engaged in the
research, development and testing of its CTLM(TM) device. The CTLM(TM) is a
system for detecting breast cancer through the skin in a non-invasiVE procedure
that does not require compression or x-ray. The CTLM(TM) employs a high-speed
pico-second pulsed titaniUM sapphire laser and proprietary scanning geometry and
reconstruction algorithms that create contiguous cross sectional slice images of
the breast which are used in the detection and analysis of changes in the breast
for indicia of malignancy or benignancy. The components of the laser system are
purchase from two unaffiliated parties and assembled and installed into the
CTLM(TM) by the Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters of as
it passes through the tissue. The CTLM(TM) is designed to provide tHE physician
with objective data for interpretation and further clinical work-up.
Accordingly, the Company believes that the CTLM(TM) will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsiES
performed on benign lesions. Further, the CTLM(TM) does not expose the patient
to
ionizing radiation or painful compression, which the Company believes are
contributing factors to a portion of the patient population not obtaining a
conventional mammogram.
A breast exam utilizing the CTLM(TM) is non-invasive and can be performed by a
medical technician in less than 15 minutes. A patient lies face down on the
scanning table with a breast hanging pendulously in the scanning chamber. Once
the entire breast is scanned the other breast is placed in the chamber for
scanning. A bilateral breast scan (both breasts) takes approximately 15 minutes.
Each scan takes approximately 6-8 minutes. The CTLM(TM) has been designed in
such a way as to provide the physician and patient with quick access to
information concerning the probability that an identified lesion is malignant or
benign. The procedure is designed to provide the physician and patient with an
objective, on-site, immediate diagnostic decisions, including whether or not to
proceed to surgical biopsy. Further, the CTLM(TM) is designed to archive and
compare scans and proviDE the patient with a computer disc (CD) with images
produced from the date of her scan.
COMPARISON TO EXISTING DIAGNOSTIC MODALITIES
The CTLM(TM) differs from currently available breast imaging modalities employed
for the detection of breast cancer in that the CTLM(TM) will generate more
precise information for the clinician or doctor. The CTLM(TM) is designED TO
generate, depending on the size of the breast, approximately 20 cross-sectional
images of a breast. A conventional screening mammography exam generates two
images of the breast. Cross-sectional imaging will allow a doctor or clinician
to isolate the location of the abnormality within the breast. By doing so, there
is greater resolution of the area where the specific abnormality resides.
Clinical efficacy of conventional mammography diminishes proportionately with
the abundance of fibroglandular breast tissue. Based upon this fact, limited
interpretability of a mammogram increases the risk that a lesion may be
overlooked, and diagnosis and treatment may be delayed; thus threatening the
patient's survival probability. Forceful compression of breast tissue in order
to aid in the distinction between so-called normal and abnormal breast tissue is
fairly effective, but is uncomfortable, and often painful. This discomfort level
poses an obstacle for many women in deciding to have their first mammogram or
deciding whether to ever return for an annual screening mammogram.
Scanning of the breast with the CTLM(TM) utilizes no compression of tissue. The
laser and detector array orbits 360 degrees around the breast gathering data
that is used to reconstruct multiple cross-sectional images of the breast's
internal structures. The Company believes that such images will provide the
physician with increased accuracy in lesion location, as well as determination
of the extent and involvement of breast disease. The CTLM(TM) will also be able
to produce a near three-dimensional view.
Breast augmentation through the use of either silicone or saline implants
renders another difficult situation when employing conventional mammography for
imaging. Although radiographic and positioning techniques have vastly improved
the ability to compress and image more breast tissue than ever before, there
still remains a certain amount of breast tissue unable to be imaged due to its
placement around the implant. This is not the case with CTLM(TM) scans. Due to
the free suspension of the breast in the CTLM(TM) scanning chamber, and the
abILITY of the CTLM(TM) to image the breast from the chest wall to the nipple,
data can be collected from around the entiRE breast. The scanning capacity of
the CTLM(TM) laser light transmission through the breast is not impeded BY
silicone or saline implants.
28
<PAGE>
The Company believes that the shortcomings of current breast cancer management,
which include discomfort and exposure to radiation, represent a significant
market opportunity for an objective technology that does not have these
shortcomings. The use of the CTLM device to detect breast cancer is believed to
be especially promising for women between the ages of 20 to 50 (over 50 million
women in the United States) for whom x-ray mammography has lower efficacy. These
women often present diffuse palpable benign breast conditions, which can mask
malignancies or pre-malignant conditions.
GOVERNMENT REGULATION
UNITED STATES REGULATION
The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(TM) device in
the United States. Because the CTLM(TM) is a medical device, IT IS subject to
the relevant provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act")
and implementing its regulations. Pursuant to the FD&C Act, the Food and Drug
Administration ("FDA") regulates, among other things, the manufacture, labeling,
distribution, and promotion of the CTLM(TM) in the United States. The FD&C Act
requirES that a medical device must (unless exempted by regulation) be cleared
or approved by the FDA before being commercially distributed in the United
States. The FD&C Act also requires that manufacturers of medical devices, among
other things, comply with the labeling requirements and to manufacture devices
in accordance with Good Manufacturing Practices ("GMPs"), which require that
companies manufacture their products and maintain related documentation in a
conformed manner with respect to manufacturing, testing, and quality control
activities. The FDA inspects medical device manufacturers and distributors, and
has broad authority to order recalls of medical devices, to seize non-complying
medical devices, to enjoin and/or impose civil penalties, and to criminally
prosecute violators.
Pursuant to the FD&C Act, the FDA classifies medical devices intended for human
use into three classes: Class I, Class II, and Class III. In general, Class I
devices are products the safety and effectiveness of which the FDA determines
can be reasonably assured by general controls under the FD&C Act relating to
such matters as adulteration, misbranding, registration, notification, records
and reports, and GMPs. Class II devices are products for which the FDA
determines that these general controls are insufficient to provide reasonable
assurance of safety and effectiveness, and that require special controls such as
the promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
are devices for which the FDA has insufficient information to conclude that
either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a potential
unreasonable risk of illness or injury. Devices in Class III, such as the
Company's CTLM,(TM) require pre-market approval, as described below.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. There are two review procedures by
which medical devices can receive such approval or clearance. Some devices may
qualify for clearance under a Section 510(k) procedure, which is not applicable
to the CTLM(TM) since it is a Class III devicE. Since the CTLM(TM) does not
qualify for the 510(k) procedure it must apply to the FDA for pre-marketing
approvAL ("PMA") before marketing can begin. PMA applications must demonstrate,
among other matters, that the medical device is safe and effective. A PMA
application is typically a complex submission, usually including the results of
clinical studies, and preparing an application is a detailed and time consuming
process.
Upon receipt of the PMA application, the FDA makes a threshold determination
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the PMA is sufficiently complete to permit a
substantive review, the FDA will file the application. Once a PMA application
has been filed, the FDA has by regulation 180 days to review it; however the
review time may be extended significantly by the FDA asking for more information
or clarification of information already provided in the submission. During the
review period, an advisory committee may also evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
In addition, the FDA will inspect the manufacturing facility to ensure
compliance with the FDA's GMP requirements prior to approval of a PMA. While the
FDA has responded to PMA applications within the allotted time period, PMA
29
<PAGE>
reviews generally take approximately 12 to 18 months or more from the date of
filing to approval. The PMA process is a lengthy and expensive one, and there
can be no assurance that a PMA application will be reviewed within 180 days or
that a PMA application will be approved by the FDA. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing. The Company intends to file for expedited review of its PMA
application. See "Regulatory and Clinical Status, United States/FDA". The
inability of the Company to obtain FDA approval would have a material adverse
effect on the Company's business and financial condition and could result in
postponement of the commercialization of the CTLM.(TM) See "Business- Regulatory
and Clinical Status".
Any products manufactured or distributed by the Company pursuant to a PMA are or
will be subject to pervasive and continuing regulation by the FDA. The FDA Act
also requires that the Company's products be manufactured in registered
establishment and in accordance with GMP regulations. Labeling, advertising and
promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The export of medical devices is
also subject to regulation in certain instances. In addition, the marketing and
use of the Company's products may be regulated by various state agencies.
All lasers manufactured for the Company are subject to the Radiation Control for
Health and Safety Act administered by the Center for Devices and Radiological
Health of the FDA. The law requires laser manufacturers to file new product and
annual reports and to maintain quality control, product testing and sales
records, to comply with laveling and certification requirements. Various warning
labels must be affixed to the laser, depending on the class for the product
under the performance standard.
The Company and the manufacturers of the Company's products may be inspected on
a routine basis by both the FDA and the individual states for compliance with
current GMP regulations and other requirements.
In addition to the foregoing, the Company is subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection and fire hazard control. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations and that such compliance will not
have a material adverse effect upon the Company's ability to conduct business.
FOREIGN REGULATION
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter that that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit the
Company to begin marketing the CTLM(TM) device in Europe aND Asia before
marketing would be permitted in the United States. In Europe, the Company must
obtain certification necessary to enable the "CE" Mark to be affixed to the
CTLM(TM) device, which will allow the Company to market tHE systems throughout
Europe. The process to obtain a CE mark is lengthy and time consuming. Following
are the listed standards and steps that must be complied with in order to obtain
a CE Mark in order to distribute the CTLM(TM) device in the European Economic
Area (EEA). The listed standards are for the EEA market only and additionAL
document/standards exists for other markets. These standards may have direct or
indirect reference to additional standards and additional standards may apply:
SAFETY (ELECTRICAL/MECHANICAL) The safety of operators, patients and
maintenance persons are of great concern. The medical industry has
developed standards (as listed below) to maintain a high level of
safety for the protection from electrical and mechanical hazards. The
industry has also specified laser safety requirements for products that
incorporate laser-emitting devices. The standards listed below are very
similar to the guidelines utilized in the USA. for the same purpose.
EN 60 601-1: Medical electrical equipment. Part 1: General
requirements for safety.
EN 60 601-1-1: Medical electrical equipment. Part 1:
General requirements for safety 1. Collateral standard:
Safety requirements for medical electrical systems.
EN 60 601-2-22: Medical electrical equipment. Part 2:
Particular requirements for the safety of diagnostic and
therapeutic laser equipment.
30
<PAGE>
IEC 825-1: Safety of laser products. Part 1: Equipment
classification, requirements, and user's guide.
EN 60 950: Safety of Information Technology Equipment
Including Business Equipment.
SAFETY (EMC) An aspect of medical product safety that the medical
industry has also determined to be a safety factor is the
electromagnetic compatibility (EMC) of a product. EMC is basically the
ability of a product to exist in the presence of other products without
the functionality of either device being effected. The standard listed
is currently some of the most stringent requirements for products in
this area.
EN 60 601-1-2: Medical electrical equipment. Part 1: General
requirements for safety 2. Collateral standard:
Electromagnetic compatibility - requirements and tests.
Programmable Electrical Systems (Software) The medical industry has
recently determine that the software that runs the safety features of
medical devices is as much a function of the safety features as the
hardware. For this reason, standards have been created to allow
evaluation of such software. As the CTLM does utilize software in some
aspects of such safety devices, evaluation in accordance with the most
recent software standards is required. These requirements are ones
similar to the requirements adopted by the FDA for the same purpose.
EN 60 601-1-4: Medical electrical equipment. Part 1: General
requirements for safety 4. C collateral standard: Programmable
electrical medical systems.
QUALITY ASSURANCE SYSTEMS In efforts to assure quality processes, he
Company is utilizing the most recent quality control standards in the
development of our quality assurance program. The standards listed are
particular to the medical industry.
EN 29001 : Quality Systems - Model for Quality Assurance in
design/development, production, installation, and servicing.
EN 46001 : Specification for Application of EN 29001 to the
manufacture of medical devices.
CLINICAL EVALUATIONS As clinical evaluations are required for the CTLM
and almost every country has a different way for the evaluations to be
performed and documented, the Company is required to perform our
evaluations in accordance with the most recent requirements. These
documents state these requirements.
EN 540: Clinical investigation of medical devices for human
subjects.
Medical Devices Directive (93/42/EEC) Annex X: Clinical
evaluations.
RISK ASSESSMENT Most safety requirements (especially requirements for
software) are driven from possible safety hazards. These hazards are
uncovered by a proper risk assessment as outlined in this standard.
prEN 1441: Medical devices - risk analysis.
ADDITIONAL MARKINGS/SYMBOLS/TERMINOLOGY/DOCUMENTATION These standards
list additional aspects of the CTLM that require additional information
not covered by the requirements listed above.
prEN 980: Terminology, symbols, and information provided with
medical devices. Graphical symbols for use in the labeling of
medical devices.
prEN 1041: Terminology, symbols, and information provided with
medical devices. Information supplied by the manufacturer with
medical devices.
Medical Devices Directive (93/42/EEC) Annex X: Clinical
evaluations.
31
<PAGE>
Although the Company has begun the process for application of regulatory
approval marks and showing compliance with the Medical Devices Directive (MDD)
which allows placement of the CE mark, there can be no assurance that such
approval will be received on a timely basis, or at all. See "Business-Regulatory
and Clinical Status".
REGULATORY AND CLINICAL STATUS
UNITED STATES/FDA
On March 19, 1998 the Company submitted the final Report for the Company's IDE.
Also on March 19, 1998 the Company met with representatives of the FDA. The
purpose of the meeting was to describe several options to the Company's IDE and
to get the FDA's perspective on these approaches. It was decided that the
Company will conduct clinical trials under the IDE with 20 patient studies
performed in-house and monitored by an Institutional Review Board ("IRB")
established by the Company. The information obtained from the study will be
submitted to the FDA to enable the Company to commence the clinical studies at
three unaffiliated clinical sites.
In April 1998 the Company appointed seven physicians and one physicist who are
specialists in the following fields: Gynecology/Obstetrics and Mammography (4),
breast surgery (1), Neurology (1), Radiology (1), and optics and laser
engineering (1), to serve on the IRB. The IRB was appointed to review, to
approve the initiation of, and to conduct periodic review of the Company's
research involving human subjects. The primary purpose of the IRB is to assure,
both in advance and by periodic review, that appropriate steps are taken to
protect the rights and welfare of humans participating as subjects of the
research. To accomplish this purpose, IRB's use a group process to review
research protocols and related materials (e.g., informed consent documents and
investigator brochures) to ensure that:
(i) Risks to subjects are minimized by using procedures that are
consistent with sound research design and that do not unnecessarily expose
subjects to risk, and whenever appropriate, by using procedures already
being performed on the subjects for diagnostic or treatment purposes.
(ii) Risks to subjects are reasonable in relation to anticipated benefits
(if any) to subjects, and the importance of the knowledge that may be
expected to result.
(iii) Selection of subjects is equitable.
(iv) Informed consent will be sought from each prospective subject or the
subject's legally authorized representative and will be documented in
accordance with, and to the extent required, by the FDA's informed consent
regulation.
(v) Where appropriate, the research plan makes adequate provision for
monitoring the data collected to ensure the safety of subjects.
(vi) There are adequate provisions to protect the privacy of subjects and
to maintain the confidentiality of data.
(vii) Appropriate additional safeguards have been included in the study to
protect the rights and welfare of subjects who are members of a vulnerable
group.
The IRB is not responsible for nor does it participate in obtaining data, the
interpretation of data or clinical results, or the approval of the CTLM(TM). The
IRB does not receive any compensation for its services; however, IF pursuant to
FDA requirements, one of the members should supervise the actual scanning of
women, they are paid a supervisory clinical honorarium of $250 per day. The
optics and laser engineer IRB member also serves and has served for the past
three years, as a consultant to the Company on an "as needed" basis. He receives
a consulting fee from the Company of $700 per month. The Neurology IRB member is
married to one of the Company's engineers. Pursuant to FDA regulations, these
type of relationship between an IRB member and the Company and an IRB member and
a Company employee are not prohibited.
On May 15, 1998 the Company submitted a supplemental safety report to the FDA
which encompasses all of the modifications and upgrades since the initial safety
report was filed.
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<PAGE>
In order to collect the clinical data for the PMA, the Company was granted, in
June 1998, its second investigational device exemption ("IDE") to conduct
clinical trials. An IDE allows a company to conduct human clinical trials
without filing an application for marketing clearance. The Company was
authorized to scan 20 patients at its in-house facilities in Plantation,
Florida. On September 1 and September 10, 1998, the Company formally submitted
the first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA. In December 1998, the Company
completed the 20 patient in-vivo images and submitted them to the FDA..
The Company has selected Nassau County Medical Center (NCMC) of East Meadow,
Long Island, New York, to be its first independent clinical site. On January 14,
1999, the Company received notice that the IDE application to extend the in-vivo
study to Nassau County Medical Center was conditionally approved. The Company
received final approval to conduct the investigational study on February 26,
1999. This IDE application is limited to one institution (Nassau County Medical
Center) and 275 subjects. The Company 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 is in the process of being installed. THE Company
will continue its investigational device studies in accordance with the approved
IDE protocol. The Company is still evaluating sites in Miami, Chicago, Los
Angeles, and Boston. Once the 400 case investigational clinical study is
completed, the Company plans to file a Pre-Market Approval application (PMA)
with the FDA to obtain marketing clearance.
The IRB for the Nassau County Study is comprised of twenty-three members, none
of which are affiliated with 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.
------------------------ ----------------------- -----------------------
Highest Degree Earned Professional Specialty Affiliation With NCMC
General - Specific
------------------------ ----------------------- -----------------------
M.D. Neurology Yes
------------------------ ----------------------- -----------------------
M.D. Surgery Yes
------------------------ ----------------------- -----------------------
M.D. Pediatrics Yes
------------------------ ----------------------- -----------------------
Reverend Other Fields, Religion Yes
------------------------ ----------------------- -----------------------
M.D. Obstetrics & Yes
Gynecology
------------------------ ----------------------- -----------------------
Ph.D Psychiatry; Yes
Behavioral Scientist
------------------------ ----------------------- -----------------------
M.D. Pathology Yes
------------------------ ----------------------- -----------------------
M.D., Medicine- Yes
Ph.D. Allergy/Immunology
------------------------ ----------------------- -----------------------
M.B. Administrator No
------------------------ ----------------------- -----------------------
J.D. Other Fields, Law No
------------------------ ----------------------- -----------------------
M.D. Psychiatry Yes
------------------------ ----------------------- -----------------------
M.D. Pediatrics Yes
------------------------ ----------------------- -----------------------
Ph.D. Obstetrics & Yes
Gynecology
------------------------ ----------------------- -----------------------
M.D. Psychiatry Yes
------------------------ ----------------------- -----------------------
Ph.D. Biostatistician Yes
------------------------ ----------------------- -----------------------
Ph.D. Anesthesiology Yes
------------------------ ----------------------- -----------------------
B.S., Pharmacy Yes
R.Ph.
------------------------ ----------------------- -----------------------
Ph.D. Medicine - Yes
Biochemistry
------------------------ ----------------------- -----------------------
Ph.D. Pediatrics Yes
-Microbiology
------------------------ ----------------------- -----------------------
Ph.D. Administrative Yes
------------------------ ----------------------- -----------------------
M.D. Director for Academic Yes
Affairs
------------------------ ----------------------- -----------------------
Ph.D. Pathology Yes
------------------------ ----------------------- -----------------------
M.D. Academic Affairs
------------------------ ----------------------- -----------------------
In order to sell the CTLM(TM) device commercially in the United States, the
Company must obtain marketing clearanCE from the FDA. A PMA application must be
supported by extensive data, including pre-clinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.
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<PAGE>
The FDA has adopted a policy of expedited review that is available to medical
devices satisfying one or more of the following criteria:
o The device addresses a condition, which is serious or life
threatening or presents a risk of serious injury for which no
alternative legally marketed diagnostic/therapeutic modality
exists.
o The device addresses a condition, which is life threatening or
irreversibly debilitating, and provides for clinically important
earlier diagnosis or significant advances in safety and/or
effectiveness over existing alternatives.
o The device represents a clear clinically meaningful advantage over
existing technology, defined as having major (not incremental)
increased effectiveness or reduced risk compared to existing
technology.
o The availability of the device is otherwise in the best interest
of the public health.
Although the Company believes that it qualifies for expedited review, there can
be no assurance that any such review will be granted of if granted that the PMA
will be approved or that such approval will be received on a timely basis. See "
Business-Government Regulation".
FOREIGN
The Company has begun the process of evaluating the CTLM(TM) for application of
regulatory approval marks aND showing compliance with the MDD which allows
placement of the CE Mark. Many steps need to be taken into consideration with
the end goal of accessing the EEA market. The following is a brief explanation
of the steps the Company has taken or is currently taking to achieve this goal.
EVALUATING AND SECURING A NOTIFIED BODY ("NB") - The role of an NB is to assist
manufacturers (domestic and international) in showing compliance with the
governmental regulations that govern that specific category. Each country's
government is able to designate a Competent Authority, which, among other
things, is responsible for the evaluation of regulatory non-governmental
agencies for designation as a NB.
An agency can be approved to be a NB for different categories (i.e. electrical
products, machinery, medical, etc.).. For instance, the NB that the Company will
choose will be one that is approved to assist manufacturers in showing
compliance with MDD. As MDD is very encompassing (product safety, quality
assurance, EMC, software, etc.) some NBs are only approved to assist
manufacturers in certain areas (i.e. quality assurance evaluations) and the
manufacturer will need to look to another NB for assistance in the other areas.
The Company is in the process of evaluating applicable NBs and intends to select
a NB that can assist it in all matters of the MDD.
The evaluation and acceptance of an appropriate NB is critical since changing an
NB once chosen is a costly matter. Great care must be taken in finding a NB with
a reputation for educated interpretation of requirements and excellent customer
service. The Company believes that they have found a NB that will provide this
type of service and has notified them of its intent to utilize them. The
proposed NB has provided the Company with information on the necessary steps in
accessing the market of the EEA, however no contracts have been entered into at
this time.
PRODUCT SAFETY EVALUATION - The Company believes that one of the most important
aspects of product safety is the design of the product. If safety standards are
not considered through the design of the product, the product safety evaluation
may require that the mechanical and electrical parts of the product be
re-designed. The Company has made every effort to confirm throughout the
CTLM(TM) design process that it is in compliance with aLL domestic and
international safety standards. In this manner, the Company is very much
involved in the product safety evaluation and, although the Company has not
entered into contract with a NB for this purpose, it is in contact with several
regulatory agencies on a regular basis for guidance. There are, however, some
considerations that cannot be anticipated, such as electrical magnetic
compatibility ("EMC"), which requires equipment that is not cost effective for
the Company to purchase in order to evaluate. There is also the consideration of
new requirements, or new interpretations of existing requirements, that may
effect the CTLM(TM).
QUALITY ASSURANCE - The Company's current goal is to implement a full quality
system at the Company's corporate offices. The Company's Quality Assurance
Manager ("QAM") has begun the process of implementation in accordance with the
required standards. After implementation of the quality system, auditors are
required to review a history of the system in particular how it works and how
the normal difficulties that occur in design and manufacturing were overcome.
The Company's QAM and the NB will need to determine how much history is required
for proper proof that the system is adequate.
34
<PAGE>
SOFTWARE EVALUATION - The preparations for software evaluation are headed by the
Company's Software Manager. Because the standards in this area are relatively
new to the industry, regulatory agencies will be very cautious in the
evaluation. Through advice from the proposed NB, the Company has begun document
preparation for evaluation submission. One of the larger steps in documentation
preparation for this evaluation is the risk analysis for the device. Although
there may be changes to the CTLM(TM) that may effect the report, the Company hAS
completed a risk analysis for the CTLM(TM) and is ready to proceed with the
remainder of the documentation.
EFFICACY - Almost any market will require the proof of the effectiveness of a
medical device. This is done by clinical trials and is a process that is
basically the same for the United States as for the EEA, however reporting
methods may differ. As the Company continues with clinical trials in the U. S.,
these efforts will also benefit it in the EEA market.
SALES AND MARKETING
The Company presently employs a Director of Sales. At present, his job consists
of locating, obtaining and coordinating with strategic marketing and
distribution companies who have established marketing capabilities, both
domestic and international. The target domestic market includes most of the over
10,000 mammography centers across the United States, which exist in both large
and small hospitals and private clinics. The international target market is
large government and private hospitals.
Since the field of Medical Optical Imaging is relatively new to most
radiologists and mammographers and to the extent that, and rate of which, the
CTLM(TM) achieves market acceptance and penetration will depend on many
variables. These include, but are not limited to, the establishment and
demonstration in the medical community of the clinical safety, efficacy, and
cost-effectiveness of the CTLM(TM), and the advantage of the CTLM(TM) device
over existing technology and cancer detection methods. The Company has focused
its efforts on establishing a presence at major Breast Imaging Conferences that
are held each year. Failure of the Company's products to gain market acceptance
would have a material adverse effect on the Company's business, financial
condition, and results of operations. There can be no assurance that physicians
or the medical community in general will accept and/or utilize the CTLM(TM).
In order to market any products it may develop, the Company will have to develop
a marketing and sales force with technical expertise and distribution
capability. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or that the Company will be successful in
gaining market acceptance for any products it may develop.
RELIANCE ON INTERNATIONAL SALES.
The laws of certain European and Asian countries may permit the Company to begin
marketing the CTLM(TM) device IN Europe and Asia before marketing would be
permitted in the United States. See "Business-Government Regulation." The
Company intends to commence international sales of the CTLM(TM) in Europe and
Asia prior to commenciNG commercial sales in the United States, where sales
cannot occur unless and until the Company receives pre-market approval from the
FDA. Thus, until the Company receives pre-market approval from the FDA to market
the CTLM(TM) IN the United States, as to which there can be no assurance, the
Company revenues, if any, will be derived from sales to international
distributors. A significant portion of the Company's revenues, therefore, may be
subject to the risks associated with international sales, including economical
and political instability, shipping delays, fluctuation of foreign currency
exchange rates, foreign regulatory requirements and various trade restrictions,
all of which could have a significant impact on the Company's ability to deliver
products on a timely basis. Future imposition of, or significant increases in
the level of customs duties, export quotas or other trade restrictions could
have a material adverse effect on the Company's business, financial condition
and results of operations. The regulation of medical devices, particularly in
Europe, continues to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company. See "Risk
Factors-Government Regulation".
35
<PAGE>
INTERNATIONAL DISTRIBUTORS
In January 1998, the Company entered into an International Distribution
Agreement with Emtron, a leading medical equipment distributor based in the
Republic of Turkey. Emtron currently represents products for companies such as
Summit Technology, Sunrise Medical Technology, Iris Medical Instruments, Telsar,
and Medlab, among many others, in the Republic of Turkey. Emtron appears to have
a strong presence in the industry, marketing to the 30 university hospitals, the
Social Security System (which has over 100 hospitals) and larger private
hospitals in Turkey.
Pursuant to the Agreement, Emtron will have exclusive rights to market the
CTLM(TM) device in the Republic of TurkEY for a term of 18 months with an option
to renew for an additional one-year term. The Company believes that this
alliance with Emtron will give the CTLM(TM) a tremendous exposure in the
Republic of Turkey.
In April 1998, the Company entered into an exclusive International Distribution
Agreement with Focus Surgical LTD., to distribute the CTLM(TM) device to
hospitals and clinics throughout the United Kingdom and Ireland. THE term of the
Agreement is three years, with a minimum purchase requirement of 10, 12, and 15
CTLM(TM) devices in tHE first, second, and third year(s) of the Agreement,
respectively. For the purpose of the Agreement, the first year is deemed to
begin when the Company obtains PMA acceptance from the FDA. See "Risk
Factors-Government Regulation, "Risk Factors-Reliance ON International Sales"
AND Description of Business -Government Regulation. Focus Surgical currently
distributes non-competitive laser products for companies such as Sunrise Medical
Technologies and Baltec, among many others.
In December 1998, the Company entered into distribution agreements with
Consultronix and Iberadac to distribute the CTLM(TM) through out Poland and
Portugal and Spain, respectively. The Agreements are for a term of 3 yearS, with
a renewal option by the Company for an additional one year, provided that each
distributor sells at least one CTLM(TM) per year.
Consultronix was established in 1987 and employs 22 persons and markets medical
equipment throughout Poland in the field of Ophthalmology, Image Diagnostic and
Urology. Iberadac distributes Radiology and Ultrasound equipment for Americare,
Capintec, Acuson and Fisher Imaging throughout Portugal and Spain.
The Company has already secured exclusive distributors as follows:
<TABLE>
<CAPTION>
INTERNATIONAL DISTRIBUTORS BY COUNTRY
RENEWAL OPTION
COUNTRY TERM EXPIRATION BY THE COMPANY RENEWAL PERIOD
<S> <C> <C> <C> <C>
Australia 3 years 3/13/00 Yes 2 years
Austria 3 years 3/11/00 Yes 2 years
Belgium 1 year 2/9/2000 Yes 1 year
Brunei 3 years 3/13/00 Yes 2 years
China 3 years 3/13/00 Yes 2 years
Ecuador 3 years 10/12/00 Yes 3 years
France 29 months 12/31/98 Yes 2 years
Germany 3 years 3/11/00 Yes 2 years
Holland 1 year 2/9/2000 Yes 1 year
Hong Kong 3 years 3/13/00 Yes 2 years
India 3 years 3/13/00 Yes 2 years
Indonesia 3 years 3/13/00 Yes 2 years
Ireland 3 years 3/29/01 Yes 1 year
Israel 2 years 12/31/98 Yes 2 years
Luxembourg 1 year 2/9/2000 Yes 1 year
Macau 3 years 3/13/00 Yes 2 years
Malaysia 3 years 3/13/00 Yes 2 years
New Zealand 3 years 3/13/00 Yes 2 years
Philippines 3 years 3/13/00 Yes 2 years
Poland 3 years 12/3/02 Yes 1 year
Portugal 3 years 12/3/02 Yes 1 year
Russia 3 years 3/11/00 Yes 2 years
San Marino 29 months 11/30/98 Yes 2 years
Singapore 3 years 3/13/00 Yes 2 years
South Korea 2 years 2/10/99 Yes 2 years
Spain 3 years 12/3/02 Yes 1 year
Switzerland 3 years 3/11/00 Yes 2 years
Turkey 18 months 7/19/99 Yes 1 year
United Kingdom 3 years 3/29/01 Yes 1 year
Vatican City 29 months 11/30/98 Yes 2 years
</TABLE>
36
<PAGE>
To date, the Company has not marketed, or generated revenues from the
commercialization of the CTLM(TM). OriginalLY the Company anticipated that the
CTLM(TM) would be ready for distribution in the summer of 1998, however during
tHE course of clinical trials, certain problems became evident, solutions to
these problems had to be found and adjustments had to be made to the CTLM(TM) to
correct such problems. The Company anticipates that the firST distributions of
the CTLM(TM) will occur in its fourth fiscal quarter beginning April 1999,
however no assurance cAN be given in this regard.
THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of the Company's products by regulating
the level of reimbursement provided by such payors to the physicians and clinics
utilizing the CTLM(TM) or by refusing reimbursement. If examinations utilizing
the Company's products were not reimbursed under these programs, the Company's
ability to sell its products may be materially and/or adversely affected. There
can be no assurance that third-party payors will provide reimbursement for use
of the Company's products. Several states and the U.S. government are
investigating a variety of alternatives to reform the health care delivery
system and further reduce and control health care spending on health care items
and services, limit coverage for new technology and limit or control the price
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have material adverse effect on the Company's business, financial
condition and results of operations. In international markets, reimbursement by
private third-party medical insurance providers, including governmental insurers
and independent providers, varies from country to country. In certain countries,
the Company's ability to achieve significant market penetration may depend upon
the availability of third-party governmental reimbursement. Revenues and
profitability of medical device companies may be affected by the continuing
efforts of governmental and third party payers to contain or reduce the cost of
health care through various means. See "Risk Factors- Limitation on Third Party
Reimbursement; Health Care Reform".
PRODUCT LIABILITY
The Company's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing, and marketing of cancer detection
products. Significant litigation, not involving the Company, has occurred in the
past based on the allegations of false negative diagnoses of cancer. While the
CTLM(TM) device is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability. At present, the Company carries $3,000,000 in
product liability insurance. See "Risk Factors-Risk of Product Liability.
COMPETITION
The market in which the Company intends to participate is highly competitive.
Many of the companies in the cancer diagnostic and screening markets have
substantially greater technological, financial, research and development,
manufacturing, human and marketing resources and experience than the Company.
Such companies may succeed in developing products that are more effective or
less costly than the Company's products or such companies may be successful in
manufacturing and marketing their products than the Company. See "Risk
Factors-Competition"
To a great extent, the CTLM(TM) will be competing with established imaging
equipment such as x-ray mammography equipment, ultrasound or high definition
ultrasound systems, Magnetic Resonance Imaging ("MRI") systems, and
thermography, diaphonography and transilluminational devices. Physicians
presently using these customary types of imaging equipment may not use the
Company's products. Currently, mammography is employed widely and the Company's
ability to sell the CTLM(TM) device to medical facilities will, in part, be
dependent on the Company's ability to demonstrate the clinical utility of the
CTLM(TM) device as an adjunct to mammography and physical examination and its
advantages over other available diagnostic tests.
37
<PAGE>
The competition for developing a commercial device utilizing computed
tommography techniques and laser technology is difficult to ascertain given the
proprietary nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's
CTLM(TM) device utilizes. A brief list of the most prestigious of these
institutions includes the University of Pennsylvania, The City College of New
York, and University College London. Two of these institutions have granted
licenses on certain patented technologies to two companies: University of
Pennsylvania - Non-Invasive Technologies; City College of New York -
MediScience, Inc.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's CTLM(TM) obsolete. There can be no assurance that the development
of new types of diagnostic medical equipment or technology will not have a
material adverse effect on the Company's business, financial condition and
results of operations
PATENTS
In December 1997, the patent for the CTLM(TM) was issued by the United States
Department of Commerce Patent and Trademark Office under Patent Number 5692511
(the "Patent"). The Patent has a total of 4 independent claims and 24
subordinate claims. The independent claims serve to provide an overall outline
of the disclosure of the invention. The subordinate claims provide additional
information to identify pertinent details of the invention as they relate to the
respective specific independent claim.
The Company owns the rights, to the Patent pursuant to an exclusive patent
licensing agreement, for the use of the Patent for the CTLM(TM) technology. The
life of a Patent is 17 years. The Patent is owned by Richard GrablE, the
Company's Chief Executive Officer. In addition, the Company has twelve
additional United States patents pending with regard to Optical Tomography, as
follows:
<TABLE>
<CAPTION>
U.S. PATENTS PENDING
<S> <C> <C> <C> <C> <C> <C>
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Diagnostic Tomographic Laser Imaging 6356 08/484,904 6/7/95 5,692,511 12/2/97
Apparatus
(Electronics & Imaging)
Yes Diagnostic Tomographic Laser Imaging 6356-US 08/952,821 7/31/98 Pending
Apparatus
(Patient Support Striker) in addition to
above
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Device for Determining the Contour of the 6558-1 08/965,148 11/6/97 Pending
Surface
of an Object Being Scanned
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Device for Determining the Perimeter of the 6559-1 08/965,149 11/6/97 Pending
Surface of an Object Being Scanned and for
Limiting Reflection from the Object Surface
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Data Acquisition Technique 6570 60/032,592 11/29/96 Pending
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Data Acquisition Technique Using Wall Eye 6571 60/032,593 11/29/96 Pending
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Detector Array with Variable Amplifiers for 6572-1 08/979,328 11/26/97 Pending
Use
in a Laser Imaging Device
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Detector Array for Use in a Laser Imaging 6573-1 08/963,760 11/4/97 Pending
Apparatus
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Method for Reconstructing the Image of an 6574-1 08/979,624 11/28/97 Pending
Object
Scanned with a Laser Imaging Apparatus
38
<PAGE>
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Fluorescent Imaging 6585 60/036088 1/17/97 Pending
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Laser Imaging Apparatus Using Biomedical 6647 09/008,477 1/16/98 Pending
Markers That Bind to Cancer Cells
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Phantom for Optical and Magnetic Resonance 6648 09/096,521 6/12/98 Pending
Imaging Quality Control
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Time-Resolved Breast Imaging Device 6707 09/199,440 11/25/98 Pending
</TABLE>
Neither the Company nor Mr. Grable hold foreign patents, however the table below
sets forth certain information with regard to the patents that have been applied
for.
<TABLE>
<CAPTION>
FOREIGN PATENT APPLICATIONS PENDING
<S> <C> <C> <C> <C> <C>
AUSTRALIA
INV. DATE INVOICE# DESCRIPTION FOR INTL. APPL. # FILING DATE
12/29/97 C974248JD National Phase in Diagnostic Tomographic PCT/US95/08225 7/10/95
Australia Laser Imaging Apparatus
of PCT Appl.
CANADA
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
2/4/98 C984481JPD National Phase in Diagnostic Tomographic PCT/US95/08225 7/10/95
Canada Laser Imaging Apparatus
of PCT Appl.
CHINA
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
5/27/98 PM986040JD Chinese Patent Appl. Diagnostic Tomographic PCT/US95/08225 7/10/95
Laser Imaging Apparatus
For Invention
EUROPEAN
PATENT OFFICE
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
1/28/98 C984270JD National Stage in Diagnostic Tomographic PCT/US95/08225 7/10/95
Europe Laser Imaging Apparatus
of PCT Appl.
JAPAN
2/5/98 C984482JPD Natl. Phase in Japan Diagnostic Tomographic PCT/US95/08225 7/10/95
Laser Imaging Apparatus
of PCT Appl.
MEXICO
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
9/2/98 C987553JD National Phase in Diagnostic Tomographic PCT/US95/08225 7/10/95
Mexico Laser Imaging Apparatus
of PCT Appl.
39
<PAGE>
PCT COVERS
EUROPEAN
COUNTRIES
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
1/3/97 P970502JD PCT Appl. For RJG Diagnostic Tomographic PCT/US95/08225 7/10/95
Imaging Apparatus
2/19/98 C984498JPD PCT Intl. Appl of IDSI Detector Array for Use in a PCT/US97/20970 11/28/97
Laser Imaging Apparatus
2/19/98 C984497JPD PCT Intl. Appl of IDSI Method for Reconstructing PCT/US97/23160 11/28/97
the Image of an Object
Scanned with a Laser
Imaging Apparatus
3/18/98 C985531JPD PCT Intl. Appl. Of Device for Determining the PCT/US97/19615 11/7/97
Wake, Perimeter of the Surface
Grable & Rohler of an Object Being Scanned
and for Limiting
Reflection from the Object
Surface
5/13/98 C986209JPD PCT Intl. Appl of IDSI Apparatus for Determining PCT/US97/19614 11/7/97
the Perimeter of the
Surface of an Object Being
Scanned
</TABLE>
The Company intends to file for patents on products, including the CTLM(TM), for
which it feels the cost of obtaining a patent is economically reasonable in
relation to the expected protection obtained. There can be no assurances that
any patent that the Company applies for will be issued, or that any patents
issued will protect the Company's technology. If the patents the Company license
or obtains are infringed upon, or if the Company is required to defend any
patent infringement cases brought against it, it will require substantial
capital, the expenditure of which the Company might not be able to afford. See
"Risk Factors-Patents"
PATENT LICENSING AGREEMENT
BACKGROUND
In December of 1993 Richard Grable, Linda Grable and Allan L. Schwartz (the
"Founders"), Imaging Diagnostic Systems, Inc., which at that time was a
privately held Florida corporation (the "Private Company"). The sole purpose of
the Private Company was to further develop Richard Grable's invention, a CT
laser breast-imaging device (the "Mammoscan(TM)"). The Mammoscan(TM) had already
been exhibited at the RSNA 89' session and held the promise of a new, emerging
technology for the detection of breast abnormalities without compression or
ionizing X-rays. This device used a laser diode for its energy source and a 386
processor that was extremely slow. Once the technology required to speed up the
processing became available the Founders believed that this device would be a
major breakthrough in the early detection of breast cancer.
It was unanimously decided that the Private Company should merge with a public
shell and raise its initial seed funding through the sale of common stock
pursuant to Regulation D, Rule 504. On April 14, 1994 the Company merged with
Alkan Corp., a New Jersey public company. Alkan Corp.'s name was changed to
Imaging Diagnostic Systems Inc. and the privately held Company was dissolved.
Since inception, the Company and Mr. Grable had an understanding that the
Company would have the exclusive license for use of the Patent and Mr. Grable
would be paid a royalty, however the amount to be paid for the license and other
terms and conditions of the license were never discussed and the exclusive
license for the patent was never memorialized in written form. It was understood
at the time of the merger that Mr. Grable would be compensated for his patent,
when issued and that he would receive a development royalty based on sales of
the device. In February 1995, pursuant to an amendment to his July 5, 1994
employment agreement (the "Employment Agreement") he was granted a development
royalty based on the net sales of the CTLM(TM). The Company still did not have a
binding agreement with regard to its use of the Patent.. When Mr. Grable filed
the patent application in June of 1995, the Board instructed the Company's
General Counsel to draft an Exclusive Patent License Agreement. The Company's
prior General Counsel was involved with funding agreements, Federal filings,
employment contracts and other legal issues which are inherent to a development
stage Company and never prepared the Patent License Agreement and the Company
did not realize that a formal agreement had not been executed.
40
<PAGE>
NEGOTIATIONS
In September 1997 the Company hired new general counsel. In her review of the
records of the Company she discovered that no agreement for the use of the
Patent had been executed and apprised the Board of Directors of this fact that
the Company had no binding agreement for the use of the Patent. Since it was
always the intent of Mr. Grable to grant the Company an exclusive license to the
Patent, a licensing agreement was negotiated The Company's General counsel
represented the Company and Mr. Grable retained separate counsel for himself.
Mr. Schwartz negotiated the terms of the Patent License Agreement on behalf of
the Company. The Company did not seek the services of a financial advisor to
issue a fairness opinion with regard to the Patent License
Even though Mr. Schwartz and Mr. Grable are both founders of the Company, the
Company believes that the parties negotiating the transaction were independent
of each other and on equal footing. Mr. Schwartz had full knowledge of the
patent, had physically seen the original prototype, Mammoscan, operate in May of
1990 and recognized the CTLM's(TM) potential to generate revenues for the
Company upon receiving FDA marketing clearance.
Moreover, the Company believes that the terms of the Patent License Agreement
are fair to the Company and comparable to terms that would have been required by
an unaffiliated third party holding the Patent, given the same circumstances and
conditions that existed at the time the Patent License was negotiated. The
Company's belief is based on the following facts and circumstances;(i) an oral
understanding with Mr. Grable already existed from the inception of the Company
regarding the Patent License; (ii) a Royalty Agreement was already included in
Mr. Grable's Employment Agreement; (iii)the negotiations were conducted to agree
on the number of shares to be issued as consideration for the Patent License, to
modify the terms of the royalty, and memorialize the agreed upon terms in a
written contract; (iv) the Company had expended substantial funds for the
development of the CTLM(TM)and technically had no legal right for its use; (v).
Mr. Grable and Mr. Schwartz both had a fiduciary duty to the Company and its
Shareholders to formalize, in writing, the oral agreement regarding the Patent
and (vi) the value of the Patent to the Company was determined by the
preparation of a confidential three year pro-forma statement of operations
beginning with fiscal year June 30, 1998 and ending with fiscal year ended June
30, 2000. This statement reflected an average of $35,615,732 Net Revenues over
the last two fiscal years assuming that the Company received FDA marketing
clearance in the latter part of calendar 1998. Although no assurances can be
given, the Company now anticipates FDA Marketing clearance in the very latter
part of calendar 1999. Since all of the revenues and the Company's existence
were totally dependent on Mr. Grable's patent, it was determined that a
reasonable one-time license fee would be 10% of that average over the two-year
period. That amount, $3,561,573 was approximately the value of the shares
ultimately agreed upon by both parties.
Due to the foregoing and because, under Mr. Grable's guidance, the development
of the CTLM(TM) was nearing completion, FDA clinical trials were underway, and
three external clinical sites at hospitals in the United States were being
planned, and because the Board believed that the transaction was fair, the lack
of a fairness opinion by a financial advisor did not affect the decision of the
Board. This situation placed Mr. Grable in better bargaining position, which
strengthened as the CTLM(TM) moved closer to being a marketable medical imaging
device.
Initially, Mr. Grable's counsel advised him to request 15 million shares of
common stock that would be immediately registered in order to afford Mr. Grable
protection against dilution. The Company rejected that offer and continued
negotiating. After several offers and counter offers and several discussions,
Mr. Grable accepted a lesser number of shares (7,000,000) with anti-dilution
provisions and agreed to payment of the licensing fee in two installments, one
year apart and agreed to accept restricted shares with no registration rights.
In addition, a new royalty structure, based upon the net selling price of all
products and goods in which the Patent is used, before taxes and after deducting
the direct cost of the product and commissions or discounts paid was agreed to.
Once the Company begins to generate revenues, it is contractually obligated to
pay, until July 4, 1999 (the expiration date of Mr. Grable's Employment
Agreement), Development Royalties set forth below pursuant to Mr. Grable's
Employment Agreement and the Licensing Royalties set forth below pursuant to the
Patent Licensing Agreement until such time as the Patent Licensing Agreement is
ratified by the shareholders.
See "The Agreement" below.
Pursuant to the License Royalty structure, the percentage of Royalties to be
paid is in a declining scale as opposed to the ascending scale contained in the
Amendment to Mr. Grable's Employment Agreement. Although the License Royalty
structure is higher on every level than the Development Royalty structure, the
Company believes that in the long run it is more advantageous for the Company to
pay a higher Royalty and have the legal and exclusive right to use the patent as
opposed to being obligated to pay a lower development Royalty pursuant to an
41
<PAGE>
Employment Agreement, with no right to the Patent. Moreover, at the $10,000,000
plus level (the level which represents the sale of approximately 29 machines per
year) the difference in the Royalty structure is only 1%. The following is a
comparison of the Development and License Royalty structures:
<TABLE>
<CAPTION>
DEVELOPMENT ROYALTY STRUCTURE LICENSING ROYALTY STRUCTURE
GROSS SALES PERCENTAGE GROSS SALES PERCENTAGE
------------------------- ----------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
$0 to $999,999 2.5% $0 to $1,999,999 10%
------------------------- ----------------- ---------------------- ------------------
$1,000,000 to $1,999,999 3% $2,000,000 to 9%
$3,999,999
------------------------- ----------------- ---------------------- ------------------
$2,000,000 to $3,999,999 3.5% $4,000,000 to 8%
$6,999,999
------------------------- ----------------- ---------------------- ------------------
$4,000,000 to $9,999,999 4% $7,000,000 to 7%
$9,999,99
------------------------- ----------------- ---------------------- ------------------
Greater than $10,000,000 5% Greater than 6%
$10,000,000
------------------------- ----------------- ---------------------- ------------------
</TABLE>
AGREEMENT
In June 1998, the Company and Mr. Grable, entered into the Patent Licensing
Agreement. Pursuant to the terms of the Patent Licensing Agreement, the Company
was granted the exclusive right to modify, customize, maintain, incorporate,
manufacture, sell, and otherwise utilize and practice the Patent, all
improvements thereto and all technology related to the process, throughout the
world. This license shall apply to any extension or re-issue of the Patent. The
term of the license is for the life of the Patent (17 years) and any renewal
thereof, subject to termination, under certain conditions. As consideration for
the License, on June 5, 1998, the Company issued to Mr. Grable 3,500,000 shares
of common stock and is required to issue and additional 3,500,000 shares in June
1999. The market price of the Shares at the time of issuance was $.54 per Share.
In addition, the Company has agreed to pay to Mr. Grable, a royalty based upon
the net selling price (the dollar amount earned from the sale by the Company,
both international and domestic, before taxes minus the cost of the goods sold
and commissions or discounts paid), of all products and goods in which the
Patent is used, before taxes and after deducting the direct cost of the product
and commissions or discounts paid (the "Royalty"). During the second year of the
Agreement there is a minimum cash royalty provision of $250,000 payable at the
end of the second year.
The Board of Directors did not submit the matter for a shareholder's vote prior
to the execution of the Patent License Agreement or the issuance of the shares,
since shareholder approval was not required by the Florida Business Corporation
Act. Pursuant to the Patent License Agreement, the Company is required to have
the Patent License Agreement ratified by its Shareholders at its next special or
annual meeting of Shareholders in order for the Licensing Royalties set forth
above, to take the place of the Development Royalties set forth in the Amendment
to Mr. Grable's Employment Agreement, and for such Amendment to become void and
have no effect. The ratification by the shareholders was requested by Mr.
Grable, based upon advice from his counsel. If shareholder ratification is not
obtained, the Company would contractually be required to pay Development
Royalties until July 4, 1999 (the expiration date of Mr. Grable's Employment
Agreement) in addition to the Patent License Royalties. If ratification is
received, in the event that litigation is instituted with regard to the validity
of the Patent License Agreement, the Company or Mr. Grable could and may assert
as a defense that shareholders approved the Patent License. All shareholders
will be entitled to vote on the ratification.
The Patent Licensing Agreement also contains anti-dilution protection upon the
occurrence of any stock dividend, stock split, combination or exchange of
shares, reclassification or re-capitalization of the Company's common stock,
reorganization of the Company, consolidation with or merger into or sale or
conveyance of all or substantially all of the Company's assets to another
corporation or any other similar event which serves to decrease the number of
Shares issued pursuant to the Patent Licensing Agreement. See "Risk
Factors-Possible Conflict of Interest" and "Certain Transactions". The Patent
has generated no revenues to date. The Company anticipates that it will receive
revenues related to the Patent its fourth fiscal quarter beginning April 1999,
however no assurance can be given in this regard.
42
<PAGE>
OEM AGREEMENT
In January 1998, the Company entered into an Original Equipment Manufacturer
Agreement (OEM) with Imation Corp. ("Imation"). In December 1998, Imation's
medical imaging business in North America, Latin America, and Asia was purchased
by the Eastman Kodak Company. Immediately after the purchase by Kodak, the
Company received correspondence from Kodak, which confirmed that the Company's
OEM agreement would not be changed by the acquisition of Imation. At that the
time, the Company issued a purchase order for a new Dry View Imager which was
delivered on April 5, 1999. The Imation Dry View Imager on loan to the Company
as a demonstrator was shipped to Nassau County Medical Center on April 7, 1999.
Pursuant to the OEM Agreement, the Company has been granted a limited,
nonexclusive, worldwide, royalty-free license to use Imation's proprietary
information with regard to technical interface, and timing diagrams,
specification, definitions, and drawings defining such technical interface (the
"Dry View Technology").
The OEM Agreement also gives the Company the right to market the Dry View
Technology directly or indirectly through its Distributors. The DryView(TM)
imagesetting film is a hard-dot quality film that requirES NO CHEMIcal
PROCESSING, which traditional image processors require. It also eliminates the
need for a dark room. This dry film product was developed by Imation based on
the same technology used to develop Imation's DryView(TM) Laser Imaging System
for the medical imaging market. The dry image setting film is used in a number
of dry film imagesetters developed by systems developers including Scitex
Corporation Ltd., ECRM Incorporated, Ultre Division of Linotype-Hell Company and
Exxtra Corporation. Due to the fact that the processing procedure for the
DryView(TM) does not use chemicals and therefore eliminates the possibility of
environmental contamination, eliminates the need for a dark room and eliminates
the cost of chemical processing, the Company believes that the Dry View
Technology will provide the Company's end uses with the most efficient,
economical, and ecological product in the medical industry.
It was originally believed that the OEM agreement could provide the Company with
immediate revenues from direct sale of the Dry View Technology. As a result of
local marketing efforts in the immediate market of South Florida, it was quickly
determined that the marketing of this product would not be cost effective since
the Company would be competing with Imation's (now Kodak's own sales force) and
others who have vaster resources and personal than the Company. Due to this
competition factor, the Company has not marketed any DryView to date and will
use the technology as a Value-added option to the CTLM(TM) device when sold.
NASDAQ LISTING
On March 24, 1996, the Company filed its application with Nasdaq to be listed on
the Small Cap Market. The Company's request for listing was subsequently denied
after a hearing before the Listing Qualifications Panel (the "Panel"). The
denial was based upon the fact that one of the Company's outside shareholders
(the "Shareholder"), who had no control or relationship with the Company, other
than as a minority shareholder, had a questionable background and owned a 5%
interest in the Company.
As a result, the Company appealed the denial decision to the Nasdaq Listing and
Hearing Review Committee (the "Committee") which on February 5, 1997, reversed
the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying initial
inclusion be reversed and the case be remanded to the Staff with
instructions to implement the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th provided
Nasdaq with copies of all documentation necessary to satisfy any concerns that
the Panel had regarding the Shareholder. On March 31, 1997, prior to the time
Nasdaq acted on the proposal, Barron's published an inaccurate article stating
that a Nasdaq spokesman indicated that the listing would be denied. For the 36
trading day period prior to the date of this article the Company's stock traded
at $3.00 and above. The article had a predictable negative impact on the
Company's stock and the price dropped below $3.00 and did not recover , despite
a retraction from Barron's on April 7, 1997. See "Market Price of Securities.
Based upon this decline the Nasdaq staff refused to approve the Company's
application for listing. ". On April 7, 1999, the Company's common stock closed
at $.375.
43
<PAGE>
The Company appealed the denial of the listing at an oral hearing before the
Nasdaq Qualification Hearing Panel (the "Panel") in Washington D.C. on January
22, 1998. On February 10, 1998, the Panel issued its decision which stated, in
part that despite the Company's argument, the Panel was of the opinion that the
Company must satisfy the $4.00 per share bid price requirement as well as all
other requirements for initial listing. The Panel noted that there were in
excess of 25,000,000 total shares outstanding which it stated, would allow the
Company to effect a reverse split sufficient to raise the bid price above the
$4.00 minimum. The Panel was of the opinion that the Company was in compliance
with the net tangible assets requirement, however the Panel expressed concern
relating to the Company's ability to maintain compliance with the $2,000,000 net
tangible assets requirement over the long term. The Panel granted the Company's
request for initial inclusion on the Nasdaq Small Cap Market, subject to the
following conditions:
1. On or before May 11, 1998, the Company must effect a reverse stock
split sufficient to raise its bid price to, or above $4.00 per share for the
opening of one trading day or in the alternative, on or before May 11, 1998, the
Company must have and retain for 10 consecutive trading days a $4.00 bid price
through natural forces.
2. On or before May 11, 1998, the Company must make a public filing
with the SEC and Nasdaq evidencing a minimum of $5,000,000 in net tangible
assets.
Due to the substantial amount of preferred shares outstanding at the time, the
Board of Directors determined that a reverse split at this time would be
detrimental to the interests of its shareholders and vetoed the proposal for the
reverse split. The conditional listing expired on May 11, 1998.
The Company immediately appealed this decision to the Nasdaq Listing and Hearing
Review Council (the "Council"). On May 19, 1998 the Company received the
Decision of the Council which affirmed the decision of the Panel. The Council
stated that:
"In making this decision, we find unpersuasive the Company's argument that
on remand, it was not required to satisfy the initial inclusion bid
requirement, or by implication, any of the other listing requirements. In
fact the purpose of a remand and the continuing role of the staff in the
process is to provide assurance that the Company satisfied Nasdaq listing
requirement at the time it was listed, a fact that the Company likely
understood when it went through the re-application process following
remand."
The Company contends that this determination is incorrect in that the Company
never went through a re-application process following remand. The Council went
on to state, in part, that:
"The Company could have no reasonable expectation that it received a
waiver of Nasdaq listing standard. The decision merely determines that the
ownership of the shareholder at issue would not prevent listing, given the
Company's plan to insulate itself. We believe that the Panel's exception,
which appears to be within the Company's control to achieve, was
appropriate. While the incorrect Barron's article was unfortunate, we note
that a retraction was later printed and sufficient time has passed to
allow the Company's stock to be fairly priced in the market. We note that
at the time of our consideration, the bid price for the Company's was 1
1/16. This is well below Nasdaq's initial inclusion standards.
The Council also agreed with the Panel's determination to require a heightened
net tangible assets requirement based upon the Company's history of losses which
have increased on a quarterly basis.
On June 11, 1998, the Company filed an Application for Review before the United
States Securities and Exchange Commission to appeal the Decision of the Council.
The basis for the appeal was that the Council erred in affirming the Panel's
decision placing conditions upon the Company's initial inclusion. The Company
contends that: (i) it did satisfy all the listing requirements on a timely basis
but was initially rejected for listing by the Nasdaq Staff and Panel on grounds
that were ultimately reversed by the Committee in the first appeal; (ii) that
the Company satisfied the listing requirement and this fact was so recognized in
the Committee's Decision in the first appeal; (iii) that due to the four month
delay cased by the Nasdaq Staff; dilatory review process, and the irresponsible
remarks made by a Nasdaq Staff member to Barron's; the price of the Company's
stock declined below the initial listing requirement (but remained well above
the maintenance requirement). Based upon price deficiency alone, the Company was
denied listing.
On August 8, 1998, the Company filed it's Brief in Support of Application for
Review. Nasdaq's brief was due on September 10, 1998 and filed on September 15,
1998. On September 25, 1998, the Company filed its Reply Memorandum to the Brief
of the Nasdaq Stock Market. As of April 8, 1999 no hearing has been scheduled or
decision rendered.
44
<PAGE>
EMPLOYEES
As of As of April 7, 1999, the Company had 33 full-time employees, including its
three executive officers, and 2 part-time employees. A majority of the Company's
employees (22) are employed in the areas of scientific and product research and
development. The Company's ability to provide its services is dependent upon the
Company recruiting, hiring and retaining qualified technical personnel. To date,
the Company has been able to recruit and retain sufficient qualified personnel.
None of the Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers its relations with its
employees to be good.
Due to the specialized scientific nature of the Company's business, the Company
is highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel. Therefore the Company has entered into
employment agreements with certain of its executive officers and employees. The
loss of the services of existing personnel as well as the failure to recruit key
scientific, technical and managerial personnel in a timely manner would be
detrimental to the Company's research and development programs and to its
business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as marketing, will require the
additional of new management personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business See. "Directors, Executive Officers, Promoters and Control Persons; and
Compliance with Section 16(a) of the Exchange Act".
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
45
<PAGE>
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
remediation by the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.
The Company has not fully determined the extent to which the Company's systems
may be impacted by third parties' systems, which may not be Year 2000 compliant.
While the Company has begun efforts to seek reassurance from its suppliers,
there can be no assurance that the systems of other companies, which the Company
deals with, will be Year 2000 compliant. Third parties' non-compliance could
have an adverse effect on the Company. At this time the Company is unable to
estimate the cost of its Year 2000 compliance, if any. Failure of third party
vendors to deliver parts and components timely could materially affect the
Company's ability to manufacture and deliver CTLM(TM) Systems. Because of this
potential risk, the Company has expanded its vendor and sub-contractor base to
safeguard itself against this uncertainty. A checklist of Y2K compliant vendors
and sub-contractors will be compiled with a projected completion date of June
30, 1999.
The Company's Year 2000 Compliance Committee has prepared a worst case Y2K
scenario. It estimates that Internet access will be severely impaired including
the ability to send and receive e-mail, possible difficulty in connecting the
Company's computer to remote clinical sites, and delays in shipment and delivery
of parts, components and finished goods. Overall fear and confusion of the Y2K
problem may temporarily impair many companies, even those who are Y2K compliant.
The Company can fully function without the use of the Internet and e-mail.
Clinical data will be sent via overnight delivery from the clinical sites to the
Company. Fear and confusion will diminish in a few weeks as companies and
individuals learn that most companies are compliant and operating without any
major problems. Delays in shipping will be a minor inconvenience as the Company
will have stockpiled critical parts and components in anticipation of Y2K. The
Company has a Disaster Recovery Plan in place to deal with software and hardware
failures. This plan provides that all computer workstations are backed up on
tape every night and a spare server is ready to be installed upon failure of any
server in service.
PROPERTY
The Company's facilities are located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by the Company and comprise a 24,000-sq. ft.
building located on a 5 acre landscaped tract. The Company believes that its
facility is adequate for its current and reasonably foreseeable future needs.
The Company will assemble the device at its facility from hardware components
that will be made by vendors to Company specifications. The software components
of the device are developed by the Company.
LEGAL PROCEEDINGS
On July 10, 1997, the Company filed an action in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, case no. 97-10533, against Dr. Valey
Kamalov ("Kamalov") and Irina Struganova. The complaint alleges that Kamalov, an
ex-employee of the Company, violated his employment agreement with the Company
while employed and after terminating his employment with the Company by
violating non-compete, confidentiality, and invention covenants of the
agreement. Due to the substantial legal expenses incurred and to be incurred by
the Company in proceeding with the litigation, the Company entered into a
settlement in December 1998. Pursuant to the settlement the Company was required
to and paid the sum of $90,000 to the Defendants.
46
<PAGE>
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. In April 1999, the Series B
Preferred Stock was purchased from the Series B Holders by an unaffiliated third
party, Charlton Avenue LLC ("Charlton"). On April 6, 1999, the Company entered
into a Subscription Agreement with Charlton whereby the Company agreed to issue
to Charlton 138 shares of its Series I, 7% Convertible Preferred Stock. The
Company's Board of Directors established the value of the Series I Preferred at
$10,000 per share. Consideration for the subscription was paid as follows:
(1) Forgiveness of 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.
(3) Cancellation of 112,500 Warrants that were issued with the
Series B Convertible Preferred Stock; and
(4) The amendment of the Series B Preferred designation to impose
a limitation on the owner(s) of the Series B Convertible
Preferred Stock to ownership of not more than 4.99% of the
Company's outstanding common stock at any one time.
The Company is not aware of any other material legal proceedings, pending or
contemplated, to which the Company is, or would be, a party or of which any of
its property is, or would be, the subject. See "Sale of Unregistered
Securities-Preferred Stock-Series B".
MANAGEMENT
The following table sets forth certain information concerning directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard J. Grable 56 Chief Executive Officer and Director
Linda B. Grable 61 Chairman of the Board and President
Allan L. Schwartz 57 Executive Vice-President, Chief
Financial Officer and Director.
</TABLE>
Richard Grable, Allan Schwartz and Linda Grable are founders of the Company and
as such may be deemed "promoters" and "parents" as defined in the Rules and
Regulations promulgated under the Securities Act, as those terms are defined in
the rules and regulations promulgated under the Securities Act. Directors serve
until the next meeting of shareholders. Officers serve at the pleasure of the
board of directors.
RICHARD J. GRABLE
Richard J. Grable has been Chief Executive Officer and a director of the Company
since 1994 and is primarily responsible for the development of the CTLM(TM)
device. From January, 1994, to February, 1994: Mr. Grable was vice-president,
research and development, for Lintronics Technologies, Inc., Tampa, Florida, a
manufacturer of breast imaging systems. From March, 1992, to December, 1993: Mr.
Grable was a an engineering consultant for Lintronics Technologies, Inc., Tampa,
Florida, a manufacturer of breast imaging systems. From August, 1991 to
February, 1992: Mr. Grable was an engineering consultant for Audio Intelligence
Devices, Inc., Ft. Lauderdale, Florida, a manufacturer of surveillance devices.
From May, 1990, to July, 1991: Mr. Grable was an engineering consultant for
Telmed, Inc., Ft. Lauderdale, Florida, a software and electronic design company.
LINDA B. GRABLE
Linda B. Grable has been President and Chairman of the Board of Directors of the
Company since 1994. From September 1991, to February, 1994, Mrs. Grable was
President and Director of VCC Communications, Inc., Tampa, Florida, a
manufacturer of voltage controlled oscillators (VCO). From August, 1988, to
April, 1991: Mrs. Grable was President of Lintronics International Ltd., Inc.,
Plantation, Florida, a manufacturer of breast imaging systems.
47
<PAGE>
ALLAN L. SCHWARTZ
Allan L. Schwartz has been Executive Vice-President, Chief Financial Officer,
and a Director of the Company since 1994. From April 1993, to February 1994: Mr.
Schwartz was President and Director of DynaMed Technologies, Inc., Coral
Springs, Florida, a company that developed neural network software for use with
laser imaging systems. From August, 1991, to April, 1993: Mr. Schwartz was
President and Director of Tron Industries, Inc., North Lauderdale, Florida, a
developer of low voltage neon novelty products. From April 1991, to July 1991:
Mr. Schwartz worked as a manufacturing consultant for SE Enterprises, Miami,
Florida, a manufacturer of prototype homes.
Directors of the Company hold office until the next annual meeting of
shareholders and the election and qualification of their successors. Officers
serve at the discretion of the board.
KEY EMPLOYEE
Robert H. Wake is the Company's Director of Engineering and has been employed as
such since April 1995. From January, 1994 to March, 1995, Mr. Wake was a
consultant to various companies in 3-D computer imaging. From October, 1986, to
December, 1993: Mr. Wake founded and was President of Reality Imaging
Corporation, Solon, Ohio, a manufacturer of 3-D computer imaging systems. Mr.
Wake invented the Voxel Flinger 3-D imaging technology.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership, furnishing the Company with copies of all
Section 16(a) forms they file. To the best of the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company, all
Section 16(a) filing requirements applicable to its officers and directors were
complied with during the year ended June 30, 1998. The Company has not received
copies of amended Form 13 D from Goodland International Investments Limited and
Weyburn Overseas Limited indicating their ability to convert and/or the
conversion of the Series B Preferred Shares into common shares in excess of 10%
of the outstanding shares.
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or paid to
the Company's Chief Executive Officer and other executive officers for services
rendered to the Company during 1998 and 1997. No other person, who, during 1997
and 1996 served as an executive officer of the Company, had a total annual
salary and bonus in excess of $100,000. Also see "Stock Option Plan-Option/SAR
Grants in Last Fiscal Year".
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
Name & Principal
Position Year Salary Other Annual Restricted Securities/Underlying
Compensation(3)Stock Awards Option/SARs (1) (2)
- ------------------------- ------- ---------------- -------------- --------------- ------------------
<S> <C> <C>
Richard J. Grable, CEO 1996 $183,333
and Director 1997 $289,779 $115,000 $268,000 22,883
1998 $286,225 534,602 (3)
- ------------------------- ------- ---------------- -------------- --------------- ------------------
Linda B Grable, 1996 $91,000
President and Director 1997 $97,451 $115,000 $268,000 22,883
1998 $119,070 534,602(4)
- ------------------------- ------- ---------------- -------------- --------------- ------------------
Allan L. Schwartz, 1996 $124,000
Exec. V.P., CFO and 1997 $111,534 $115,000 $268,000 130,410
Director 1998 $119,070 534,602 (3)
- ------------------------- ------- ---------------- -------------- --------------- ------------------
</TABLE>
(1) The aggregate dollar value of the 1997 and 1998 options, based on the
averaged high and low price on June 30, 1998 are as follows: Richard J.
Grable -$225,781.42; Linda B. Grable-$225,781; and Allan L.
Schwartz-$269,329.86.
(2) Does not include qualified options to purchase 208,333 shares a $.48 per
share (110% of fair market value on day of issuance) and non-qualified
options to purchase 250,000 shares at $.17 per share (35%) of fair market
value on day of grant) issued to each of Messrs. Grable and Schwartz and
Ms Grable on July 6, 1998.
(3) On April 15, 1997, the Company paid addition alone-time compensation to
the three officers to cover Federal Income Taxes on stock options
exercised in f/y 1996. The officers, based on information provided by
the General Counsel to the Company at that time, believed that the
exercise of said options were not taxable until the shares were sold.
Upon review by the outside auditors, it was determined that the
exercise of those options must be treated as additional wages and
subject to Federal Income Taxes. If the officers were correctly advised
they would have not exercised the options and would not have been
subject to Federal Income Taxes. The Board of Directors, considering
the above circumstances, decided to pay each officer one-time
additional compensation to cover the coast of the additional Federal
Income Taxes due.
(4) Includes 250, 000 non-qualifies options that were required, by
contract, to be issued in July 1997 but were not issued until January
2, 1998.
48
<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into five-year employment agreements with each of Mr.
Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B. Grable that expire
July 6, 1999. Pursuant to the terms of the employment agreements, base annual
salaries, after giving effect to cost of living adjustments, are as follows:
Richard J. Grable: $286,224.96; Linda B. Grable: $119,069.52 and Allan L.
Schwartz $119,069.52. During the Company's operational stage the salary of Allan
L. Schwartz salary will increase to $156,000. In addition, in fiscal 1998
Messrs. Grable and Schwartz and Ms. Grable each receive a car allowance of $500
per month. Each employment agreement provides for bonuses, health insurance, car
allowance, and related benefits, and a cost of living adjustment of 7% per
annum. The bonuses are equal to 5% of the adjusted consolidated net earnings of
the Company. No bonuses have been paid to date. In addition, pursuant to each
Agreement, Mr. Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B.
Grable each have an option to purchase 250,000 shares of common stock each
calendar year at 35% of the fair market value of the common stock of the Company
at the time of grant.
Richard Grable will receive a royalty bonus of 2.5% to a maximum of 5%, based
upon varying levels of gross sales of the CTLM(TM) device. Upon ratification of
the Patent Licensing Agreement at the next annual meeting of shareholders, the
royalties as outlined in that agreement will take the place of those set forth
in the original employment agreement. See "Risk Factors-Possible Conflict of
Interest" and "Business-.Patent Licensing Agreement" and "Certain Transactions".
The following table sets forth certain information with regard to the
Options/SAR grants by the Company to Management for the fiscal year ended June
31, 1998.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No. of Securities %of Total Options Exercise or Market Price
Underlying Options Granted to Employees Base Price On Date of Expiration
Name Granted ` In Fiscal Year ($/Share) Grant Date
- -------------- ---------------- -------------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Richard J. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- -------------- ---------------- -------------------- ----------------- ----------- --------------
Linda B. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- -------------- ---------------- -------------------- ----------------- ----------- --------------
Allan L. 250,000 14% $.31 $.85 1/2/02
Schwartz (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- -------------- ---------------- -------------------- ----------------- ----------- --------------
</TABLE>
(1) In January 1998, pursuant to employment agreements dated July 4, 1994,
Richard Grable, Linda Grable, and Allan Schwartz were granted options to
purchase and aggregate of 500,000 Common Shares each. The grants for were for
the July 1996 and July 1997 anniversary dates of their employment and were never
issued by prior counsel for the Company. The options are non-qualified stock
options, vesting one year from the grant date and exercisable at an exercise
price of $0.31 per share (35% of the fair market value on the date of issuance).
In January 1998, Richard Grable, Linda Grable, and Allan Schwartz were granted
options to purchase 22,883 and 34,602 shares of Common Shares each pursuant to
the Company's incentive stock option plan. These options were earned in July
1996 and July 1997 but never issued due to the oversight by prior counsel,
however the options for the 22,883 shares were disclosed in the Company's Proxy
Statement last year. These shares are exercisable at any time at an exercise
price of $4.37 and $2.63 per share, respectively (110% of the fair market value
on the contractual date of issuance). Does not include qualified options to
purchase 208,333 shares at $.48 per shares (110% of the fair market value on
July 5, 1998) and 250,000 shares at $.. 17 per share (35% of fair market value
($.435) on day of grant) issued to each of Richard Grable Linda Grable and Allan
Schwartz on July 5, 1998 pursuant to their employment and stock option
agreements. None of these options have been exercised to date.
- -----------------------
STOCK OPTION PLANS
The Company has established an incentive stock option plan, as defined by
Section 422, Internal Revenue Code of 1986. For the fiscal year ended June 30,
1998, all of the executive officers were participants in this plan. The plan was
approved by the Board of Directors and adopted by the shareholders at the March
29, 1995 annual meeting. The plan provides for the granting, exercising and
issuing of incentive option pursuant to Internal Revenue Code Section 422. The
Company may grant incentive stock options to purchase up to 5% of the issued and
outstanding common stock of the Company at any time. The Board of Directors has
direct responsibility for the administration of the plan.
49
<PAGE>
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock, as of the date of
grant. The exercise price of incentive options to officers, or affiliated
persons, must be at least 110% of the fair market value as of the date of grant.
Pursuant to sock option agreements, Mr. Richard J. Grable, Mr. Allan L. Schwartz
and Mrs. Linda B. Grable each have an option to purchase that number of shares
equal to $100,000 divided by 110% of the fair market value of the shares on July
6th of each year. The Stock Option Agreement terminates on September 1, 1999.
The Company intends to establish a new stock and option plan and present it for
shareholder approval at its next annual meeting.
CERTAIN TRANSACTIONS
Richard J. Grable and. Linda B. Grable are husband and wife. Further, Richard J.
Grable and Linda B. Grable are each "Control Persons" as a result of their
control of a majority voting power of the Company's outstanding stock. Both
parties disclaim, however, any beneficial interest or ownership in the shares
owned by the other party.
In September and October 1999 Linda Grable, the Company's President, personally
guaranteed three promissory notes issued by the Company to third parties. Ms.
Grable received no compensation for these guarantees. As of the date of this
prospectus, one of the three Notes has been repaid. "Sale of Unregistered
Securities-Private Placement of Common Stock".
In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, the Company's Chief Executive Officer. Mr. Grable is the owner
of the Patent, which encompasses the technology for the CTLM(TM) device. The
Company and Mr. Grable has previously entered into an oral agreement for the
exclusive license for the patent that was never memorialized in written form.
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
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 and lent the aggregate proceeds of
approximately $347,775 directly to the Company.
In January 1999 and February 1999, Linda Grable, the Company's President,
director and founder sold an aggregate of 445,000 shares of the Company's common
stock owned by her and lent the aggregate proceeds of approximately $138,093
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 and lent the aggregate proceeds of approximately $359,707 directly to the
Company.
In February 1999, the Company's Board of Director voted to compensate Messrs.
Grable, Schwartz, and Ms. Grable (the "Founders") for the shares they sold on
behalf of the Company due to the following financial loss. incurred by the
Founders.
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.
50
<PAGE>
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.
Messrs. Grable, Schwartz and Ms. Grable are entitled to receive 831,743,
820,000, and 445,000 shares of the Company restricted common stock, respectively
as share for share replacement for the shares sold through February. Additional
Shares were sold in March 1999 and the Company is awaiting confirmation of such
sales. Upon receipt of the additional confirmations, the Company will calculate
the additional shares and options to be issued. No shares or option certificates
have been issued to date.
Since October 1998, the Company has accrued $109,243 in salaries payable to its
executive officers and directors, Richard J. Grable, Allan L. Schwartz, Linda B.
Grable, due to the Company's lack of working capital. These salaries will be
paid as soon as the Company determines that the funds are available.
MARKET PRICE OF SECURITIES AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ over-the-counter bulletin
board market under the symbol IMDS. There has been trading in the Company's
Common Stock since September 20, 1994. The following table sets forth, for each
of the fiscal periods indicated, the high and low trade prices for the Common
Stock, as reported on the OTC Bulletin Board. These per share quotations reflect
inter-dealer prices in the over-the-counter market without real mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
51
<PAGE>
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 1996
September 1995 $ .78 $ .71
December 1995 $3.15 $ .75
March 1996 $8.25 $8.00
June 1996 $3.90 $3.87
FISCAL YEAR 1997
September 1996 $3.93 $2.25
December 1996 $3.93 $1.43
March 1997 $4.12 $2.43
June 1997 $3.08 $2.62
FISCAL YEAR 1998
September 1997 $2.25 $1.87
December 1997 $1.61 $1.22
March 1998 $1.65 $1.02
June 1998 $0.78 $0.67
FISCAL YEAR 1999
September 1998 $0.58 $0.50
December 1998 $0.62 $0.54
March 31, 1999 $0.4930 $0.4435
On April 7, 1999, the closing trade price of the Common Stock as reported on the
OTC Bulletin Board was $.375. As of such date, there were approximately 745
holders of record of the Company's Common Stock.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to a vote of Security Holders. As of
the 3rd day of December 1998, Austost Anstalt Schaan, Avalon Capital Ltd.,
Balmore Funds S.A., Steven Cohen, Canadian Capital Fund Ltd., Dominion Capital
Funds, Ltd. Linda B. Grable, Richard J. Grable, Deborah O'Brien, The Malcolm
Kanan Empire Trust and Allan L. Schwartz, (collectively "the Majority Common
Shareholders"), and Goodland International Investment Ltd., Weyburn Overseas
Limited, Austost Anstalt Schaan and Balmore Funds S.A (collectively "the
Majority Preferred Shareholders authorized by written action, the Company's
adoption of an amendment, in the form of Exhibit A hereto (the "Amendment"), to
the Company's Certificate of Incorporation, as amended, to increase the
authorized common stock, no par value per share ("Common Stock"), of the Company
from 48,000,000 shares to 100,000,000 shares (the "Written Action"). Taking into
account such provisions, the Majority Common Shareholders and the Majority
Preferred Shareholders (collectively, "the Majority Shareholders") were entitled
to and voted the number of shares set forth opposite their names:
<TABLE>
<CAPTION>
NAME # OF COMMON % OF COMMON # OF PREFERRED % OF
SHARES SHARES SHARES PREFERRED
OUTSTANDING (1)
SHARES
OUTSTANDING (2)
-------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
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>
52
<PAGE>
- ----------------
1. This column sets forth the percentage of the total number of common shares
outstanding as of December 3, 1998 (38,510,399 shares), the date the final
written action was executed and presented to the Company's Board of
Directors. As of April 7, 1999, there are 39,805,643 shares of common stock
outstanding.
2. This column set forth the percentage of the total number of Preferred
Shares outstanding as of December 3, 1998 (558 Shares).
3. Everest Capital Limited, is the investment manager for Weyburn Overseas
Limited and Goodland International Investments, Ltd. Mr. John Malloy is
the Managing Director of Everest Capital Limited, a British Virgin
Island corporation.
4. Thomas Hackl and Peter Nakowitz are the Directors of and have voting
control over Austost Anstalt Schaan, a British Virgin Island corporation.
5. Francois Morax and Matityahu Kaniel are the Directors of and have voting
control over Balmore Funds S.A., a Liechtenstein corporation.
Pursuant to Section 607.0704 Florida Statutes, any action to be taken at an
annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote if the action is taken by a majority of
the holders of outstanding stock of each voting group entitled to vote. In
addition the voting rights provided to the common stock holders, the
Certificates of Designation of the Series B, D, E, and H Preferred Stock (the
"Certificates"), provide that, in the event there are insufficient shares to
effect a conversion, the Company is required to increase the number of
authorized shares to effect such conversion. Preferred Holders, pursuant to the
Certificates, are granted voting right, and voted solely for the purpose of
increasing the number of authorized shares to accommodate the conversion of
their preferred shares into common shares. Due to the decrease in the Company's
stock price, the Company did not have an adequate number of common shares
authorized to meet its contractual obligations with regard to the conversion of
the Preferred Stock. In addition, the Amendment will insure that there are a
sufficient number of shares of Common Stock available for issuance upon exercise
of outstanding stock options and warrants and enhance the ability of the Company
to attract and retain qualified employees, consultants, officers and directors
by enabling the Company to create stock option, incentives and rewards for their
contributions to the success of the Company. Moreover, until such time as the
Company is able to generate revenues, it is dependent on equity or other
financing to continue operations. The Company will require substantial
additional funds for its research and development programs, pre-clinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
marketing programs.
The issuance of large amounts of common stock upon conversion of the preferred
and the subsequent sale of such shares may further depress the price of the
common stock. In addition, since each new issuance of common stock dilutes
existing shareholders, the issuance of substantial additional shares may
effectuate a change of control of the Company. As of April 7, 1999, there are
39,805,643 shares outstanding. Based on the closing price of the Company's
common stock as of as of April 7,1999 ($.375) 14,441,591 shares would be
required to convert the Series B shares, 1,320132 shares would be required to
convert the Series G shares, 3,684,211 shares would be required to convert the
Series H shares, 4,842,105 would be required to convert the Series I shares and,
although the Company is contractually prohibited from doing so, 9,649,123 shares
would be required to convert the Debenture and 52,631,578 shares would be
required to draw down the entire Equity Line of Credit. See ", "Sale of
Unregistered Securities-Private Placement of Preferred Stock", "Sale of
Unregistered Securities-Debentures" "Sale of Unregistered Securities-Private
Placement of Common Stock", and "Sale of Unregistered Securities-Equity Line of
Credit". In addition, 4,570,871 shares would be required for the exercise of
options and warrants, and 3,500,000 shares are required to be issued to Mr.
Grable in July 1999 pursuant to the Patent Licensing Agreement. Based upon the
foregoing, as of April 7, 1999, the Company would need in excess of 127 million
authorized shares to effectuate all conversion, utilize the total Equity Line of
Credit and fulfill its remaining stock related obligations. See "Patent
Licensing Agreement", "Equity Line of Credit", and "Certain Transactions".
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.
53
<PAGE>
SALE OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT OF PREFERRED STOCK
The Company has had to rely on the private placement of Preferred and common
stock to obtain working capital. In deciding to issue Preferred Shares pursuant
to the private placements, the Company took into account the number of common
shares authorized and outstanding, the market price of the common stock at the
time of each Preferred sale and the number of common shares the Preferred share
would have been convertible into at the time of the sale. At the time of each
private placement of Preferred Stock there were enough shares, based on the
price of the Company's common stock at the time of the sale of the Preferred to
satisfy the Preferred conversion requirements. Although the Company's Board of
Directors tried to negotiate a floor on the conversion price of each series of
Preferred Stock prior to sale, it was unable to do so. In order to obtain
working capital the Company will continue to seek capital through debt or equity
financing which may include the issuance of Convertible Preferred Stock whose
rights and preferences are superior than those of the common stock holders. The
Company will endeavor to negotiate the best transaction possible taking into
account the impact on its shareholders, dilution, loss of voting power and the
possibility of a change of control. However, in order to satisfy its working
capital needs, the Company may be forced to issue convertible securities with no
limitations on conversion. IN ADDITION, THE DIVIDENDS ON THE PREFERRED STOCK
AFFECT THE NET LOSSES APPLICABLE TO SHAREHOLDERS. THERE ARE ALSO ADJUSTMENTS AS
A RESULT OF THE CALCULATION OF THE DEEMED PREFERRED STOCK DIVIDENDS APPLICABLE
BECAUSE THE COMPANY HAS ENTERED INTO CONTRACTS PROVIDING FOR DISCOUNTS ON THE
PREFERRED STOCK WHEN IT IS CONVERTED. AS A RESULT OF THE DIVIDENDS ON CUMULATIVE
PREFERRED STOCK, THE NET LOSS PER COMMON SHAREHOLDER HAS INCREASED FROM $.05 PER
SHARE FOR FISCAL YEAR ENDING JUNE 30, 1997 TO $.07 PER SHARE FOR FISCAL YEAR
ENDING JUNE 30, 1998. THE CUMULATIVE TO TOTAL IS $.19 PER SHARE.
See "Risk Factors-Authorization and Discretionary Issuance of Preferred Stock",
"Risk Factors-Capital Needs and Need For Additional Authorized Common Stock" and
Risk Factors- Sale of Unregistered Securities, Financing/equity Line of Credit".
In the event that the Company issues preferred stock without a limit on the
number of shares that can be issued upon conversion and the price of the
Company's common stock decreases, the percentage of shares outstanding that will
be held by preferred holders upon conversion will increase accordingly. The
lower the market price the greater the number of shares to be issued to the
preferred holders, upon conversion, thus increasing the potential profits to the
Holder when the price per share increases and the Holder sells the Common
Shares. The preferred stockholders potential for increased share issuance and
profit, including profits derived from shorting the Company's common stock, in
addition to a stock overhang of an undeterminable amount, may depress the price
of the Company's common stock. In addition, the sale of a substantial amount of
preferred stock to relatively few holders could effectuate a possible change of
control. Moreover, in the event of a voluntarily or involuntarily liquidation of
the Company while the preferred stock is outstanding, the holders will be
entitled to a preference in distribution of the Company's property available for
distribution $10,000 per share. The following table summarizes certain
information with regard to the Series B, C, D, E, F, G, H, and I Preferred
Shares as of April 7, 1999
<TABLE>
<CAPTION>
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
SERIES/# OF COMMON CONVERSION # OF COMMON SHARES APPROX. PRICE OR # OF COMMON SHARES
PREFERRED STOCK PRICE PRICE AT CONVERTIBLE INTO AT PRICE RANGE OF ISSUED UPON
SHARES AT TIME OF TIME OF TIME OF ISSUANCE (1) COMMON STOCK AT TIME CONVERSION
ISSUANCE ISSUANCE OF CONVERSION
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C>
B/450 $4.70 $3.85 1,168,831 N/A N/A
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
C/210 $1.63 $1.2225 1,714,268 $.4950-$1.0095 2,646,527
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
D/50 $1.22 $.915 546,448 $.2265-$.495 1,717,134
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
E/54 $1.093 $.81975 658,737 $.29775- $.77475 1,282,826
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
F/75 $1.31 $.917 817,884 $.46760-$.47320 1,971,375
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
G/38 $.34 $.255 1,490,196 N/A N/A
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
H/108 $.56 $.42 2,571,429 $5025 99,502 (3)
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
I/138 $.38 $.285 4,842,105 N/A N/A
- --------------- ------------- ------------- ---------------------- ---------------------- ---------------------
</TABLE>
(1) Approximate number estimated for the purpose of this table only.
(2) The conversion notice for the Series B Preferred Stock previously received
by the Company has been canceled by the new Series B Holders. In addition,
pursuant to the issuance of the Series I Preferred to the Series B Holders
the 1,542,877 shares that were required to be issued pursuant to the
dividend provision of the Series B Preferred Shares have been forgiven..
(3) Represents conversion of 5 shares of Series H Preferred Stock. The
remaining 103 shares remain unconverted. As of April 6, 1999, 3,614,035
shares would be required to convert the Series H shares at the conversion
price of $.285 per share.
54
<PAGE>
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleged
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. The Series B Holders
demanded damages in excess of $75,000, to be determined at trial, together with
interest costs and legal fees. On April 6, 1999, the Series B 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 $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.
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 share
underlying the Series B Preferred. The shares were never converted and the
registration statement is no longer current. On September 4, 1998, the Company
received a notice of conversion from Weyburn and Goodland requesting the
issuance of 4,559,846 and 10,639,642 shares of common stock, respectively. The
conversion rate was 82% of the average market price over a five-day period prior
to conversion or approximately $.35014 per share. At the time the B Preferred
Shares were issued, the conversion rate would have been $3.85 per share and the
Preferred shares would have been convertible into 1,168,831 shares. The increase
in the number of shares to be issued upon conversion was due to the decline in
the market price of the Company's Common Stock. The company has the option to
pay the accrued dividends in common stock.
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. The Series B Holders
demanded damages in excess of $75,000, to be determined at trial, together with
interest costs and legal fees. On April 6, 1999, the Series B 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 $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.
55
<PAGE>
SERIES C PREFERRED STOCK
On October 6, 1997, the Company finalized the private placement to Austost
Anstalt Schaan, UFH Endowment, Inc., Chris Baum, Avalon Capital Limited,
Dominion Capital, Ltd. and The Cuttyhunk Fund Limited and aggregate of 210
shares of its Series C Convertible Preferred Stock ("the "Preferred Shares") at
a purchase price of $10,000 per share and Warrants to purchase up to 105,000
shares of the Company's common stock at an exercise price of $1.63 per share.
The offering was conducted pursuant to Regulation S as promulgated under the
Securities Act of 1933, as amended (the ("Regulation S Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $1.63 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, without additional
consideration. Pursuant to the Subscription Agreement, the Series C Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company. Due to this contractual ownership
limitation, the Series C Preferred Shares were converted, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99% of the Company's outstanding common stock. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
issued upon conversion was determined by dividing (i) the sum of $10,000 by (ii)
the Conversion Price (determined as hereinafter provided) in effect at the time
of conversion. The "Conversion Price" was equal to seventy five percent (75%) of
the Average Closing Price of the Corporation's Common Stock for the five-day
trading period ending on the day prior to the date of conversion provided,
however, in no event was the Conversion Price to be greater than $1.222 per
share.
Pursuant to the Regulation S Sale documents, the Company was also required to
escrow an aggregate of 3,435,583 shares of its common stock (200% of the number
of shares the Purchasers would have received if the Preferred Shares were
exercised on the closing date of the Regulation S Sale). The shares underlying
the Preferred Shares and Warrants were entitled to demand registration rights in
the event that Regulation S was amended prior the conversion of the Preferred
Stock. This right expired upon conversion. In connection with this sale, the
Company paid Settondown Capital International, Ltd., an unaffiliated Investment
Banker an aggregate of $220,500 for placement and legal fees. Net proceeds to
the Company of $1,879,500 were used for working capital and the continuous
research, development and testing of the Company's Computed Tomography Laser
Mammography (CTLM (TM)) device.
The Series C Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 2,646,527
common shares.
SERIES D PREFERRED STOCK
On January 9, 1998, the Company finalized the private placement to Avalon
Capital Ltd. of 50 shares of its Series D Convertible Preferred Stock ("the
"Preferred Shares"), at a purchase price of $10,000 per share and Warrants to
purchase up to 25,000 shares of the Company's common stock at an exercise price
of $1.22 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.22 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, without additional
consideration. Pursuant to the Subscription Agreement, the Series D Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company. Due to this contractual ownership
limitation, the Series D Preferred Shares were converted in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99% of the Company's outstanding common stock. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
issued upon conversion was determined by dividing (i) the sum of $10,000 by (ii)
the Conversion Price (determined as hereinafter provided) in effect at the time
of conversion. The "Conversion Price" was equal to seventy five percent (75%) of
the Average Closing Price of the Corporation's Common Stock for the five-day
trading period ending on the day prior to the date of conversion. The shares
underlying the Preferred Shares and Warrants were entitled to demand
registration rights in the event that Regulation S was amended prior the
conversion of the Preferred Stock. This right expired upon conversion.
56
<PAGE>
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.
The Series D Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,717,134
common shares.
SERIES E PREFERRED STOCK
On February 5, 1998, the Company finalized the private placement to Austost
Anstalt Schaan and Balmore Funds S.A. of 50 shares of its Series E Convertible
Preferred Stock (the "Preferred Shares"), at a purchase price of $10,000 per
share and Warrants to purchase up to 25,000 shares of the Company's common stock
at an exercise price of $1.093 per share. The offering was conducted pursuant to
Regulation S as promulgated under the Securities Act of 1933, as amended (the
"Regulation S Sale"). At the time the placement was concluded, the average bid
and ask price of the Company's common stock was approximately $1.093 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter without additional
consideration. Pursuant to the Subscription Agreement, the Series E Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company. Due to this contractual ownership
limitation, the Series E Preferred Shares were converted, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99%. The number of fully paid and non-assessable shares of common
stock, no par value, of the Company issued upon conversion was determined by
dividing (i) the sum of $10,000 by (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy five percent (75%) of the Average Closing Price of
the Corporation's Common Stock for the five-day trading period ending on the day
prior to the date of conversion.
The shares underlying the Preferred Shares and Warrants were entitled to demand
registration rights in the event that Regulation S was amended prior the
conversion of the Preferred Stock. This right expired upon conversion.
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.
The Series E Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,282,826
common shares.
SERIES F PREFERRED STOCK
On February 20, 1998, the Company finalized a private placement to Dominion
Capital Fund, LTD and Canadian Advantage, LTD of 75 shares of its Series F
Convertible Preferred Stock (the "F Preferred Shares") at a purchase price of
$10,000 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.31 per share
The F Preferred Shares pay a dividend of 6% per annum, payable in Common Stock
at the time of each conversion and were convertible, at any time, commencing May
15, 1998 and for a period of two years thereafter without additional
consideration. Pursuant to the Subscription Agreement, the Series F Holder, or
any subsequent holder of the F Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company. Due to this contractual ownership
limitation, the Series F Preferred Shares were converted, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99% of the Company's outstanding Common Stock. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
issued upon conversion was determined by dividing (i) the sum of $10,000 plus
any earned dividends by (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The "Conversion Price" is equal
to seventy percent (70%) of the Average Closing Price of the Corporation's
Common Stock for the five-day trading period ending on the day prior to the date
of conversion. The shares underlying the Preferred Shares are entitled to demand
registration rights in the event that Regulation S was amended prior the
conversion of the Preferred Stock. Pursuant to these demand rights the 1,971,375
shares of Common Stock issued upon the conversion of the Series F Preferred are
being registered on behalf of the Holders (the "Series F Preferred Holders")
pursuant to the Registration Statement of which this Prospectus is a part (the
"Registration Statement").
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In connection with the Regulation S Sale, the Company paid, Rolcan Finance, Ltd.
an aggregate of $50,000 for placement and legal fees. Net proceeds to the
Company of $700,000 were used for working capital and the continuous research,
development and testing of the Company's Computed Tomography Laser Mammography
(CTLM (TM))
device.
SERIES G PREFERRED STOCK
On March 17, 1999, the Company finalized a private placement to Amro
International, S.A., Nesher Inc., Hewlett Fund, and Guaranty & Finance Ltd. of
35 shares of its Series G Convertible Preferred Stock (the "Preferred Shares")
at a purchase price of $10,000 per share and two year Warrants to purchase
65,625 shares of the Company's Common Stock at an exercise price of $.50 per
share. The offering was conducted pursuant to Regulation D as promulgated under
the Securities Act of 1933, as amended (the "Regulation D Sale"). At the time
the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.34 per share. In connection with the Regulation
D Sale, the Company paid Settondown Capital International, Ltd., and Libra
Finance S.A., unaffiliated Investment Bankers an aggregate of 3 shares of the
Series G Preferred Stock for placement and legal fees. Net proceeds to the
Company of $350,000 will be used for working capital and the continuous
research, development and testing of the Company's Computed Tomography Laser
Mammography (CTLM (TM)) device.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to lesser of (i) seventy-five percent (75%) discount to the two
lowest bids in a ten day period immediately preceding the conversion date; or
(ii) $.54. There is no floor on the conversion price and no time limits on
conversion. The shares can be converted at any time without additional
consideration. Pursuant to the Subscription Agreement, and Series G Designation,
the Series G Holder, or any subsequent holder of the Preferred Shares, is
prohibited from converting any portion of the Preferred Stock which would result
in the Holder being deemed the beneficial owner, in accordance with the
provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as amended, of
4.99% or more of the then issued and outstanding Common Stock of the Company.
Due to this ownership limitation, the Series G Preferred Shares can only be
converted in increments that, together with all shares of the Company's common
stock held by the Holder, would not exceed 4.99%. Pursuant to the terms of the
Registration Rights Agreement between the Company and the Series G Holders, the
Company is required to register 100% of the number of shares that would be
required to be issued if the Preferred Stock were converted on the day before
the filing of the Registration Statement. In the event that the Registration
Statement is not filed with 14 days from the closing or that it is not declared
effective with in 60 days, the Company will be required to pay the Series G
Holders, as liquidated damages for failure to have the Registration Statement
declared effective, and not as a penalty three (3%) percent of the principal
amount of the Securities for each thirty (30) day period thereafter until the
Company procures registration of the Securities. In the event that the
Registration Statement is not declared effective within 120 days, the Series G
Holders have the right to force the Company to redeem the Series G Preferred at
a redemption price of 120 % of the face value of the Preferred. Pursuant to the
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.
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In the event of a voluntarily or involuntarily liquidation of the Company while
the Series G Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
SERIES H PREFERRED STOCK
On June 2, 1998, the Company finalized a private placement to Austost Anstalt
Schaan and Balmore Funds S.A. of 100 shares of its Series H Convertible
Preferred Stock (the "Preferred Shares") at a purchase price of $10,000 per
share and 75,000A Warrant and 50,000 B Warrants. The A and B Warrants are
exercisable at $1.00 and $1.50 per share, respectively. The offering was
conducted pursuant to Regulation D as promulgated under the Securities Act of
1933, as amended (the "Regulation D Sale"). At the time the placement was
concluded, the average bid and ask price of the Company's common stock was
approximately $.56 per share. In connection with the Regulation D Sale, the
Company paid Settondown Capital International, Ltd., an unaffiliated Investment
Banker an aggregate of $10,000 and 8 shares of the Series H Preferred Stock for
placement and legal fees. Net proceeds to the Company of $990,000 were used for
working capital and the continuous research, development and testing of the
Company's Computed Tomography Laser Mammography (CTLM (TM)) device. As of the
date of this Prospectus 5 shares of Series H Preferred Stock have been converted
into 99,502 shares of common stock at a conversion price of $.5025 per share.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to lesser of seventy-five percent (75%) of the Average Price
(the lowest closing bid price of the Corporation's Common Stock for the ten-day
trading period ending on the day prior to the date of conversion). There is no
floor on the conversion price and no time limits on conversion. The shares can
be converted at any time without additional consideration. Pursuant to the
Subscription Agreement, the Series H Holder, or any subsequent holder of the
Preferred Shares, is prohibited from converting any portion of the Preferred
Stock which would result in the Holder being deemed the beneficial owner, in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, of 4.99% or more of the then issued and outstanding Common
Stock of the Company. Due to this contractual ownership limitation, the Series H
Preferred Shares can only be converted in increments that, together with all
shares of the Company's common stock held by the Holder, would not exceed 4.99%.
Pursuant to the terms of the Registration Rights Agreement, as amended, between
the Company and the Series H holder, the Company has registered herein 100% of
that number of shares that would be required to be issued if the Preferred Stock
were converted on the day before the filing of the Registration Statement
(2,661,698 shares). The Company is in technical default of the Registration
Rights Agreement, which required the Registration Statement to be declared
effective by October 2, 1998. Pursuant to the Registration Rights Agreement, the
Company is required to pay the Series H Holders in cash or in stock, as
liquidated damages for failure to have the Registration Statement declared
effective, and not as a penalty, two (2%) percent of the principal amount of the
Securities for the first thirty (30) days, and three (3%) percent of the
principal amount of the Securities for each thirty (30) day period thereafter
until the Company procures registration of the Securities. Pursuant to the
Registration Rights Agreement, liquidated damages of $169,000 have accrued as of
March 31, 1999. The Company is presently unable to comply with the liquidated
damage provision payment and no assurances can be given that it will be able to
do so in the future. On March 25, 1999 the Company issued 424,242 shares of
restricted common stock with registration rights to the Series H shareholders in
lieu of cash for liquidated damages through March 2, 1999. The value of these
shares was $140,000, leaving a balance of $29,000 due for liquidated damages
through March 31, 1999. The Company has the option of paying the accrued
dividends and liquidated damages in common stock.
Since the conversion price of the Series H Preferred is based on 75% of the
Average Price, WITHOUT A LIMIT ON THE NUMBER OF SHARES THAT CAN BE ISSUED UPON
CONVERSION, in the event that the price of the Company's common stock decreases,
the percentage of shares outstanding that will be held by the Series H Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders upon conversion, thus
increasing the potential profits to the Holder when the price per share
increases and the Holder sells the Common Shares. The preferred stocks potential
for increased share issuance and profit in addition to a stock overhang of an
undeterminable amount may depress the price of the Company's common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series H Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
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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%.
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 (4,794,164) 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 $1,100,000 of the Company's Debentures. 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 aggregate Debenture ($2,750,000) were
converted on the day before the filing of the Registration Statement (9,553,587
shares) are being registered herein on behalf of the Holders.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy five percent (75%) of the Average Closing Price of
the Company's Common Stock for the five-day trading period ending on the day
prior to the date of the conversion. The Debenture can be converted at any time
without additional consideration. Pursuant to the Subscription Agreement, the
Debenture Holder, or any subsequent holder of the Debenture, is prohibited from
converting any portion of the Debenture which would result in the Holder being
deemed the beneficial owner, in accordance with the provisions of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended, of 4.99% or more of the then
issued and outstanding Common Stock of the Company. Due to this contractual
ownership limitation, the Debentures can only be converted in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99%.
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Since the conversion price of the Debenture is based on 75% of the Average
Price, without a limit on the number of shares 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 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.
PRIVATE PLACEMENT OF COMMON STOCK
In August 1998, the Company sold 200,000 shares of restricted common stock to
Frank Giambroni, an unaffiliated third party, pursuant to Regulation D for an
aggregate purchase price of $60,000. No placement fee was paid in connection
with this offering. Net proceeds of $59,990 were used to pay the salaries of the
Company's non-executive employees. At the time the placement was concluded, the
average bid and ask price of the Company's common stock was approximately $.28
per share. These shares are subsequently being registered herein.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. These Shares are included in the
Registration Statement of which this Prospectus is a part. See "Selling Security
Holders". At the time the sale occurred the average bid and ask price of the
Company's common stock was $.595. The Note bears interest at the rate of 12% per
annum.. The Note is personally guaranteed by Linda B. Grable, the Company's
President. The repayment of the Note, which was originally due on October 2,
1998 was extended twice, became due on January 15, 1999, and remains unpaid to
date. The Company has not received a notice of default in connection with this
Note. In connection with the sale, the Company paid the sum of $23,000 to
Manchester Asset Management, Ltd., an unaffiliated third party, as a placement
fee. Net proceeds of $227,000 were used as follows: (i) salaries
($21,849-executive officers and $62,447-employees) (ii) machinery and equipment
$5,959; (iii) operating expenses ($55,240-inventory parts and assemblies,
employee health insurance, workers comp. and property insurance) and (iv)
working capital $82,000). The Company intends to repay the note either from the
Debenture or other equity and/or debt financing or by the issuance of additional
securities.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, toAvalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. These Shares are included in the Registration Statement of which this
Prospectus is a part. See "Selling Security Holders". No placement fee was paid
in connection with this offering, however the Company did issue 5,000 shares of
common stock to Goldstein, Goldstein and Reis LLC, an unaffiliated third party,
as payment for the attorneys fees incurred by the Purchaser pursuant to the
offering. At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $.50 per share. The Note bears
interest at the rate of 12% per annum. The note, which was originally due
November 2, 1998, was extended twice, became due on January 15, 1999, and
remains unpaid to date. The Company has not received a notice of default in
connection with the Note. The Note is personally guaranteed by Linda B. Grable,
the Company's President. Net proceeds of $100,000 were used as follows: (i)
salaries ($21,849-executive officers and $62,448-employees) and (ii) working
capital $15,703. The Company intends to repay the note either from the Debenture
or other equity and/or debt financing or by the issuance of additional
securities.
In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of common stock, to GCA Strategic Investment Fund Ltd.,
an unaffiliated third party, pursuant to Regulation D for an aggregate purchase
price of $210,000. These Shares are included in the Registration Statement of
which this Prospectus is a part. See "Selling Security Holders". At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.43 per share. The Note bore interest at the rate of
12% per annum and was personally guaranteed by Linda B. Grable, the Company's
President. In connection with the sale, the Company paid the sum of $23,000 to
LKB Financial LLC, an unaffiliated third party, as a placement fee. Net proceeds
of $100,000 were used as follows: (i) salaries ($21,849-executive officers and
$62,448-employees) and (ii) working capital $15,703. The Note, and all accrued
interest, was paid in January 1999. The officers of the Company provided the
payment for this loan through the sale of a portion of their shares of the
Company's common stock.
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In November the Company issued 286,000 shares of common stock as partial
consideration for a $115,000 aggregate loan to the Company by Deborah O'Brien,
an employee. At the time the loan was concluded, the average bid and ask price
of the Company's common stock was approximately $.625 per share. The Company is
also obligated to repay the lender the sum of $50,000.00. In January the Company
issued a Note evidencing this indebtedness. The Note bears interest at the rate
of 7% per annum and is due and payable upon demand.. Net proceeds of $115,000
were used as follows: (i) salaries ($21,849-executive officers and
$62,447-employees) (ii) operating expenses ($16,345-inventory parts and
assemblies, employee health insurance, workers comp. and property insurance) and
(iv) working capital ($14,359). The Company was also obligated to repay the
lender the sum of $50,000.00. On April 8, 1999 the company paid the balance due
on the loan of $47,396 to the lender. These Shares are included in the
Registration Statement of which this Prospectus is a part. See "Selling Security
Holders".
ISSUANCE OF STOCK FOR SERVICES
The Company from time to time, has and may continue to issue stock for services
performed and to be performed by consultants, all of which have been
unaffiliated. The consultants provided the following consulting services
pursuant to their Consulting Agreements.
Legal-General Counseling
Legal-Litigation Counseling
Investor Relations-Introducing the Company and its emerging technology
to stockbrokers and the investment community.
Shareholder Relations-Keeping shareholders informed of new
developments.
Public Relations-Creating public awareness of the Company and its
emerging technology to the public through print and electronic media.
Product Planning & Feasibility-Research into all aspects of product
planning and its acceptance into the medical imaging marketplace.
Clinical Site Consulting-Selection and introduction to potential
clinical sites.
Design Consulting-Design and feasibility of components for the
CTLM(TM).
SEC Filing and Compliance-Filing and compliance consultation.
Engineering-Mechanical engineering and prototype development.
Video Production Consultant-Script writing and production consultation.
Since the Company has generated no revenues to date, its ability to obtain and
retain consultants may be dependent on it ability to issue stock for services in
lieu of cash payment. Since 1996, the Company has issued an aggregate of
1,806,500 shares of common stock to independent consultants pursuant to
Registration Statements on Form S-8. The aggregate fair market value of the
shares was $2,327,151. The issuance of large amounts of common stock for
services rendered or to be rendered and the subsequent sale of such shares may
depress the price of the common stock. In addition, since each new issuance of
common stock dilutes existing shareholders, the issuance of substantial
additional shares may effectuate a change of control of the Company.
FINANCING/EQUITY LINE OF CREDIT
The Company will require substantial additional funds for its research and
development programs, pre-clinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs, results of pre-clinical and clinical
testing, the time and cost invoked in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. Moreover, the Company's fixed
commitments, including salaries and fees for current employees and consultants,
and other contractual agreements are likely to increase as additional agreements
are entered into and additional personnel are retained.
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On November 20, 1998, the Company finalized a $15 Million, three year, Equity
Line of Credit Agreement, whereby the Company, as it deems necessary, may raise
capital through the sale of its common stock to Austost Anstalt Schaan and
Balmore Funds S.A., which represent a consortium of prominent European banking
institutions (the "Investors"). Austost Anstalt Schaan and Balmore Funds S.A
will be deemed the beneficial owners of the shares.
Pursuant to the Equity Line of Credit Agreement, the Company may, but is not
obligated to, sell to the Investors shares of the Company's common stock at a
purchase price of 80% of the market price if the shares are traded in the OTC
Bulletin Board and 85% of the market price if traded on Nasdaq Small Cap Stock
Market or American Stock Exchange. As of April 7, 1999, based on the closing
price on that date of $.375, 52,631,578 shares of common stock, in order to
completely utilize the Equity Line of Credit. However, if the Company utilizes
the Equity Line of Credit, it intends to do so over a period of three years, at
times that are as advantageous as possible to the Company. It addition, the
limitations set forth below would prohibit the Company from utilizing the entire
Line of Credit at one time.
The Investors are irrevocably committed, subject to certain limitations
discussed below, to purchase that number of shares noticed for sale by the
Company (the "Put Notice"), however the maximum amounts that the Company can
require the Investor to purchase at any one time are indicated in the table
below opposite the heading Closing Price (the range in which the Closing Price
is on the date the Company elects to exercise its right to tender a notice of
sale to the Investors, referred to as the "Put Date") and below the heading 30
Day Average Daily Trading Volume (the range of the trading volume of the
Company's common stock for the thirty day trading period.
prior to the Put Date).
<TABLE>
<CAPTION>
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG.
DAILY DAILY TRADING DAILY TRADING DAILY TRADING DAILY DAILY
CLOSING PRICE TRADING VOLUME VOLUME VOLUME TRADING TRADING
VOLUME 50,001-75,000 75,001-100,000 100,001-125,000 VOLUME VOLUME
25,000-50,000 125,001-150,000150,001 AND
ABOVE
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.50-$1.00 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
$1.01 - $1.50 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
$1.51 - $2.00 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
$2.01 - $2.50 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
$2.51 - $3.00 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
$3.01 - $3.50 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
$3.51 - $4.00 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
$4.01 - ABOVE $450,000 $500,000 $550,000 $600,000 $650,000 $700,000
- ---------------- ------------- --------------- ----------------- --------------- -------------- --------------
</TABLE>
The number of shares noticed for sale by the Company must be the subject of an
effective Registration Statement prior to the time Company elects to exercise
its right to tender a notice requiring the Investors to purchase shares of the
Company's Common Stock.
The Investors obligations under the Equity Line of Credit are contingent upon
any effect on the business, Bid Price, trading volume of the Common Stock,
operations, properties, prospects, results of operations, or financial condition
of the Company that is material and adverse to the Company and its subsidiaries
and affiliates, individually, or taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement, the Registration Rights Agreement, the Escrow Agreement, or the
Warrants in any material respect.
63
<PAGE>
The right of the Company to deliver a Put Notice and the obligation of the
Investors hereunder to acquire and pay for the Put Shares is subject to the
normal and customary contract representations and warranties, breach of contract
provisions and the following conditions:
1. The Company shall have filed with the SEC a Registration
Statement with respect to the resale of at least that amount
of common stock contained in the Put Notice (the
"Securities").
2. The Registration Statement shall have previously become
effective and shall remain effective until the Securities are
sold or until two years from the date if issuance and (i) no
notice has been received that the SEC has issued or intends to
issue a stop order or that the SEC otherwise has suspended or
withdrawn the effectiveness of the Registration Statement,
either temporarily or permanently, or intends or has
threatened to do so (unless the SEC's concerns have been
addressed and the Investors are reasonably satisfied that the
SEC no longer is considering or intends to take such action),
and (ii) no other suspension of the use or withdrawal of the
effectiveness of the Registration Statement or related
prospectus shall exist. The Registration Statement must be
declared effective by the SEC prior to the first and each
subsequent Put Date.
3. The Company shall have obtained all permits and qualifications
required by any state for the offer and sale of the Put
Shares, or shall have the availability of exemptions
therefrom. The sale and issuance of the Put Shares shall be
legally permitted by all laws and regulations to which the
Company is subject.
4. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent
jurisdiction that prohibits or directly and adversely affects
any of the transactions contemplated by this Agreement, and no
proceeding shall have been commenced that may have the effect
of prohibiting or adversely affecting any of the transactions
contemplated by this Agreement.
5. Since the date of the Equity Line of Credit Agreement, no
event has had or is reasonably likely to have a material
adverse effect on the Company and its operations has occurred.
6. The trading of the Company's Common Stock has not been
suspended, and the common stock has not been de-listed or
threatened by de-listing, and the issuance of the Securities
to the Investors shall not violate the shareholder approval
requirements of the OTC Bulletin Board, the Nasdaq Small-Cap
Market, or the American Stock Exchange, as applicable.
7. The number of Put Shares to be purchased by each Investor will
not exceed the number of such shares which, when aggregated
with all other shares of Common Stock then owned by such
Investor beneficially or deemed beneficially owned by such
Investor, would result in any Investor owning more than 4.99%
of all of such Common Stock as would be outstanding on such
Closing Date, as determined in accordance with Rule 13d-3 of
the Exchange Act and the regulations promulgated thereunder.
8. The closing bid price of the Company's common stock must equal
or exceed $.50 per share for the six day period commencing
three (3) trading days immediately preceding the Put Notice,
the trading day the Put Notice is deemed delivered and the two
trading days immediately following the Trading Day on which a
Put Notice is deemed to be delivered.
9. The average trading volume for the Common Stock over the
previous thirty trading days must exceeds 25,000 shares per
Trading Day.
The Investors, as holders of common stock, shall have the same rights as all
other holders of common stock, Holders of the Common Stock are entitled to one
vote for each share in the election of directors and in all other matters to be
voted on by the shareholders. There is no cumulative voting in the election of
directors. Holders of Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors of the Company (the
"Board") out of funds legally available thereof and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the Common Stock. The rights of the holders of the Common Stock are subject to
any rights that may be fixed for holders of Preferred Stock. All of the
outstanding shares of Common Stock are fully paid and nonasseable.
Although no assurances can be made, the Company anticipates that it will need
approximately $8,000,000 over the next two year period to complete all necessary
stages in order to enable it to market the CTLM(TM) in the United States and
foreign countries. If the need should arise for capital in excess of the Equity
Line of Credit or is the Equity Lines is unavailable due to the price of the
Company's common stock, the Company may seek additional funding through public
or private financing, collaboration, licensing and other arrangements with
corporate partners. See "Management's Discussion and Analysis of Financial
Discussion" and Results of Operations and "Financial Statements" and "Risk
Factors".
If the Company utilizes the Equity Line of Credit or additional funds are raised
by issuing equity securities, especially Convertible Preferred Stock, dilution
to existing Shareholders will result and future investors may be granted rights
superior to those of existing Shareholders. Moreover substantial dilution may
result in a change in control of the Company. There can be no assurance,
however, that additional financing will be available when needed, or if
available, will be available on acceptable terms. Insufficient funds may prevent
the Company from implementing its business strategy or may require the Company
to delay, scale back, or eliminate certain of its research and product
development programs or to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself.
64
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock of the
Company as of April 8, 1999 as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock;
(b) each current director executive officer; and (c) all executive officers and
directors of the Company as a group, calculated as required by the Act.
The actual number of shares of Common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 7,162,797 and 3,000,800 shares
respectively. Both Richard Grable and Linda Grable specifically disclaim any
beneficial interest in each other's shares
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OWNED % OF OUTSTANDING
OF BENEFICIAL OWNER BENEFICIALLY (1)(2) SHARES OF COMMON STOCK
- ------------------- ------------------- ----------------------
<S> <C> <C>
RICHARD J. GRABLE 8,020,480(3) 20.1%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
LINDA B. GRABLE 8,020,480(4) 20.1%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
ALLAN L. SCHWARTZ 3,266,990 (5) 8.1%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
ALL OFFICERS AND DIRECTORS 11,287,470 (6) 27..1%
AS A GROUP (3 PERSONS)
</TABLE>
(1) Except as indicated in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole
voting power and investment power with respect to all shares of Common Stock
shown beneficially owned by them.
(2) Percentage of ownership is based on 39,805,643 shares of Common Stock
outstanding as of April 8,1999 plus each person's options that are
exercisable within 60 days. Shares of Common Stock subject to stock options
that are exercisable within 60 days as of April 8, 1 1999 are deemed
outstanding for computing the percentage of that person and the group.
(3) Includes 556,883 shares subject to options and 3,000,800 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per
share and 250,000 shares at $.17 which are not exercisable within the next
60 days.
(4) Includes 556,883 shares subject to options and 7,162,797 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims
beneficial ownership. Does not include options to purchase 208,333 shares at
$.48 per share and 250,000 shares at $.17, which are not exercisable within
the next 60 days.
(5) Includes 664,410 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
beneficial ownership. Does not include options to purchase 208,333 shares at
$.48 per share and 250,000 shares at $.17, which are not exercisable within
the next 60 days.
(6) Includes 556,883 shares subject to options held by Linda and Richard
Grable. Also includes 1,778,176 shares subject to options and 9,000 shares
owned by the wife of Allan L. Schwartz, Carolyn Schwartz, of which he
disclaims beneficial ownership.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends with respect to its
capital stock, and the current policy of the Board of Directors is to retain any
earnings to provide for the growth of the Company. Consequently, no cash
dividends are expected to be paid on the Company's Common Stock in the
foreseeable future. "See Risk Factors-Lack of Dividends".
65
<PAGE>
SELLING SECURITY HOLDERS
The Selling Security Holders consist of certain common Stock Holders and the
Series H Preferred Holders. The Registration Statement of which this Prospectus
is a part is being filed, and the Shares offered hereby are included herein,
pursuant to registration rights as provided for in the subscription agreement
and registration rights agreements entered into between the Company and the
Selling Security Holders (collectively, the "Registration Rights"). Due to (i)
the ability of the Selling Security Holders to determine when and whether they
will sell any Shares under this Prospectus and (ii) the uncertainty as to how
many of the Warrants will be exercised and how many shares of Common Stock will
be issued upon conversion of shares of Series H Preferred, the Company is unable
to determine the exact number of Shares that will actually be sold pursuant to
this Prospectus. The number of fully paid and nonassessable shares of common
stock, no par value, of the Company to be issued upon conversion of the Series H
Preferred will be determined by dividing (i) the sum of $10,000 (ii) the
Conversion Price (determined as hereinafter provided) in effect at the time of
conversion. The "Conversion Price" is equal to lesser of seventy-five percent
(75%) of the Average Price (the lowest closing bid price of the Corporation's
Common Stock for the ten-ten-day trading period ending on the day prior to the
date of conversion. Since the conversion price of the Series H Preferred shares
is based on the market price of the Company's Common Stock, the number of Shares
subject to registration rights will increase if the market price of the Common
Stock decreases and will decrease if the market price increases. See "Sale of
Unregistered Securities-Financing/Equity Line of Credit.
The following table identifies each Selling Security Holder based upon
information provided to the Company, set forth as of April 8, 1999 with respect
to the Shares beneficially held by or acquirable by, as the case may be, each
Selling Security Holder and the shares of Common Stock beneficially owned by the
Selling Security Holders which are not covered by this Prospectus. No Selling
Security Holder or its affiliates except for Deborah O'Brien have held any
position, office, or other material relationship with the Company. Ms. O'Brien
is an employee of the Company. Ms. O'Brien shares were issued as partial
compensation for a $115,000 loan to the Company.
<TABLE>
<CAPTION>
SELLING SECURITY HOLDERS
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
NAME OF INVESTOR COMMON SHARES PREFERRED COMMON SHARES COMMON SHARES TOTAL NUMBER OF
OWNED PRIOR TO SHARES OWNED UNDERLYING UNDERLYING SHARES TO BE
OFFERING PREFERRED WARRANTS REGISTERED (2)
/DEBENTURE(1)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Balmore Funds SA
<S> <C> <C> <C> <C> <C>
C/0 Trident Trust Company 261,872 H-47.5 1,650,165 50,000 1,,749,916
(BVI) Limited
Trident Chambers
Road Town
Tortola, British Virgin
Islands
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Austost Anstalt Schaan
Ladstrasse 163 261,872 H-47.5 1,650,165 50,000 1,749,916
9494 Furstentums
Vaduz, Liechtenstein
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Amro International, S.A.
c/o Ultra Finanz 0 G-15 521,105 28,125 549,230
Grossmunsterplatz 6
Zurich CH 8022, Switzerland
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
66
<PAGE>
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
NAME OF INVESTOR COMMON SHARES PREFERRED COMMON SHARES COMMON SHARES TOTAL NUMBER OF
OWNED PRIOR TO SHARES OWNED UNDERLYING UNDERLYING SHARES TO BE
OFFERING PREFERRED/ WARRANTS REGISTERED (2)
DEBENTURE(1)
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Nesher Inc.
Ragnalt Houise 0 G-8 277,923 15,000 292,923
18 Peel Road
Douglas, Isle of Man
1M14U2, United Kingdom
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Hewlett Fund
20 Adele Road 0 G-5 173,702 9,375 183,077
Brooklyn, New York
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Guaranty & Finance Ltd.
Vallarino PH 0 G-7 243,182 13,125 256,301
Calle 52, Panama
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Libra Finance SA
Trident Chambers 0 G-2 69,481 0 69,481
PO Box 146, Road Town
Tortola. British Virgin
Islands
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Dominion Capital Fund C/o
Thomas Kernaghan & Co. Ltd. 1,334,996 0 0 0 1,334,996
365 Bay Street
Toronto, Ontario
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Canadian Advantage Ltd.
Partnership 636,379 0 0 0 636,379
C/o Thomas Kernaghan & Co.
Ltd.
365 Bay Street
Toronto, Ontario
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Scott Hugh Goldstein
C/o 65 Broadway 10th floor 25,000 0 0 0 25,000
New York, NY 10006
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Sheldon E. Goldstein
C/o 65 Broadway 10th Floor 25,000 0 0 0 25,000
New York, NY 10006
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Deborah O'Brien
C/o 6531 NW 18th Court 287,800 0 0 0 286,000
Plantation FL 33313
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
GCA Strategic Investment
Fund Ltd 210,000 0 0 0 210,000
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Avalon Capital, Inc.
487 Sherwood Drive 80,000 0 0 0 80,000
Salusaliton CA 94965
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
CHARLTON AVENUE, LLC
c/o Citco Trustees (Cayman) 0 Series B-450 14,298,605 0 28,646,156
Limited Series I 138 4,794,164
P.O. Box 31106 SMB Debenture 9,553,387
Grand Cayman
Cayman Island, British West
Indies
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Settondown Capital
International, Ltd 200,000 H-8 277,923 25,000 537,663
Charlotte House, Charlotte G-1 34,740
Street
P.O. Box N 9204
Nassau, Bahamas
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
Frank Giambroni
118 Park Ave. 200,000 0 0 0 200,000
Bay Head, NJ 08742
- ----------------------------- ----------------- --------------- ------------------ ----------------- -----------------
</TABLE>
1 Based on the number of shares that would be required to be issued if the
Preferred Stock and Debentures were converted at $314716 and $.28785 per
share (75% and 82% of the price prior to registration.
67
<PAGE>
2. WHERE APPLICABLE, THE Amount being registered is 100% of the number of
shares that would be required to be issued if the Preferred Stock or
Debenture were converted on the day before the filing of the
Registration Statement plus common stock and the shares underling the
Warrants.
- ----------------------------------
The Persons who have voting control over the Preferred and Debenture Holders are
as follows:
1. Thomas Hackl and Peter Nakowitz are the Directors of and have voting
control over Austost Anstalt Schaan.
2. Francois Morax and Matityahu Kaniel are the Directors of and have voting
control over Balmore Funds S.A.
3. Seymour Braun is the Diretor of and has voting control over Libra Finance
SA.
4. Minglewood Capital LLC holds the voting shares of Charlton Avenue LLC. CTC
Corporation LTD is the Director Minglewood. Michael Francombe is a director
of CTC Corporation LTD.
5. H.U. Bachofen is the Director of and has voting control over AMRO
International, S.A.
6. VHM Management Ltd. holds the voting shares of Canadian Advantage Ltd. Ian
McKinnon and Mark Valentine have voting control over VMH Management.
7. Livingston Asset Management Ltd. has voting control over Dominion Capital
Fund. David Sims has voting control over Livingstone.
8. Anthony L.M. Inder Riden is the Director of and has voting control over
Settondown Capital International, Ltd.
9. David Grin and John Clark are the Directors of and have voting control over
Nesher, Inc.
10. Jenifer Spinner is the Director of and has voting control over Hewlett
Fund.
11. Dr. Durling is the Director of and has voting control over Guaranty &
Finance Ltd.
PLAN OF DISTRIBUTION
The Registration Statement of which this Prospectus forms a part has been filed
pursuant to the registration rights included in Subscription Agreement between
the Company and the Selling Security Holders. To the Company's knowledge, as of
the date hereof, the Selling Security Holders has not entered into any
agreement, arrangement or understanding with any particular broker or market
maker with respect to the Shares offered hereby, nor does the Company know the
identity of the brokers or market makers which will participate in the offering.
The Shares covered hereby may be offered and sold from time to time by the
Selling Security Holders. The Selling Security Holders will act independently of
the Company in making decisions with respect to the timing, manner, and size of
each sale. Such sale may be made on the OTC Bulletin Board or otherwise, at
prices and on terms then prevailing or at prices related to the then market
price, or in negotiated transactions. The Shares may be sold by one or more of
the following methods: (a) a block trade in which the broker-dealer engaged by
the Selling Security Holders will attempt to sell Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by the broker-dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
To the best of the Company's knowledge, the Selling Security Holders have not,
as of the date hereof, entered into any arrangement with a broker or dealer for
the sale of shares through a block trade, special offering, or secondary
distribution of a purchase by a broker-dealer. In effecting sales,
broker-dealers engaged by the Selling Security Holders may arrange for other
broker-dealers to participate. Broker-dealers may receive commissions or
discounts from the Selling Security Holders in amounts to be negotiated.
In offering the Shares, the Selling Security Holders and any broker-dealers who
execute sales for the Selling Security Holders may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any profits realized by the Selling Security Holders and the
compensation of such broker-dealer may be deemed to be underwriting discounts
and commissions.
68
<PAGE>
THE SELLING SHAREHOLDERS HAVE BEEN ADVISED BY THE COMPANY THAT DURING THE TIME
EACH IS ENGAGED IN DISTRIBUTION OF THE SECURITIES COVERED BY THIS PROSPECTUS,
EACH MUST COMPLY WITH RULE 10B-5 AND REGULATION M UNDER THE EXCHANGE ACT AND
PURSUANT THERETO: (I) EACH MUST NOT ENGAGE IN ANY STABILIZATION ACTIVITY IN
CONNECTION WITH THE COMPANY'S SECURITIES; (II) EACH MUST FURNISH EACH BROKER
THROUGH WHICH SECURITIES COVERED BY THIS PROSPECTUS MAY BE OFFERED THE NUMBER OF
COPIES OF THIS PROSPECTUS WHICH ARE REQUIRED BY EACH BROKER; AND (III) EACH MUST
NOT BID FOR OR PURCHASE ANY SECURITIES OF THE COMPANY OR ATTEMPT TO INDUCE ANY
PERSON TO PURCHASE ANY OF THE COMPANY'S SECURITIES OTHER THAN AS PERMITTED UNDER
THE EXCHANGE ACT RELEASE 34-38067 (DECEMBER 20, 1996) HAVE BEEN ADVISED THAT
THEY MUST COORDINATE THEIR SALES UNDER THIS PROSPECTUS WITH EACH OTHER AND THE
COMPANY FOR PURPOSES OF REGULATION M.
This offering will terminate on the earlier of (a) the date on which such
Selling Security Holders' shares may be resold pursuant to Rule 144 under the
Securities Act; or (b) the date on which all Shares offered hereby have been
sold by the Selling Security Holders. There can be no assurance that the Selling
Security Holders will sell any or all of the shares of Common Stock offered
hereby.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 102,000,00 shares of capital
stock of which 100,000,00 shares are common stock no par value and 2,000,000
shares are preferred, no par value. As of April 8, 1999, there were issued and
outstanding 39,805,643 shares of Common Stock and. 450 shares of Series B
Convertible Preferred Stock, 38 shares of Series G Convertible Preferred, 105
shares of Series H Convertible Preferred, 138 shares of Series I Convertible
Preferred, Options to purchase 4,128,371 shares and Warrants to purchase 508,125
shares of Common Stock of the Company. In addition, an investor has subscribed
for $2,750,000 in convertible debentures, $1,100,000 of which have been issued
to date.
COMMON STOCK
Holders of the Common Stock are entitled to one vote for each share in the
election of directors and in all other matters to be voted on by the
shareholders. There is no cumulative voting in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors of the Company (the
"Board") out of funds legally available thereof and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the Common Stock. The rights of the holders of the Common Stock are subject to
any rights that may be fixed for holders of Preferred Stock. All of the
outstanding shares of Common Stock are fully paid and nonasseable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights, and preferences as may be
determined from time to time by the board of directors. Accordingly, the board
of directors is empowered, without stockholder approval, to designate and issue
additional series of preferred stock with dividend, liquidation, conversion,
voting or other rights, including the right to issue convertible securities with
no limitations on conversion, which could adversely affect the voting power or
other rights of the holders of the Company's Common Stock, substantially dilute
the common shareholder's interest and depress the price of the Company's common
stock. See "Risk Factors-Authorization and Discretionary Issuance of Preferred
Stock/Barriers to Takeover"
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective August 1, 1997, the accounting firm of Margolies and Fink, Certified
Public Accountants for the Company, changed the accounting firm's name to
Margolies, Fink and Wichrowski, Certified Public Accountants.
69
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH IN THE COMPANY'S ARTICLES OF INCORPORATION,
THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE
ACT AND IS THEREFORE UNENFORCEABLE
INTERESTS OF NAMED EXPERTS AND COUNSEL
Certain legal matters in connection with the securities being offered hereby
will be passed upon for the Company by Rebecca J. Del Medico, Esq., General
Counsel of the Company. Ms. Del Medico currently owns approximately 47,100
shares of common stock of the Company.
EXPERTS
The audited financial statements of Imaging Diagnostic Systems, Inc.
incorporated by referenced herein have been examined by Margolies, Fink and
Wichrowski, independent certified public accountants, for the periods and to the
extent set forth in their respective report and are incorporated herein in
reliance upon such report of said firm given under their authority as experts in
accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Shares will be passed upon for the Company
by Rebecca J. Del Medico, General Counsel of the Company.
FINANCIAL INFORMATION
The following financial statements should be read in conjunction with the
financial statement information contained in and incorporated by reference from
the Company's most recent report on Form 10-QSB, which is being furnished with
this Prospectus.
<PAGE>
<TABLE>
<S> <C>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED 36,832,244 SHARES
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY IMAGING DIAGNOSTIC
SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS SYSTEMS, INC.
PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN
ANY JURISDICTION IN WHICH SUCH OFFER OR COMMON STOCK
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY
THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
----------------
PROSPECTUS
----------------
-----------------
TABLE OF CONTENTS
-----------------
PAGE
- ----
Available Information....................... 2
Incorporation of Certain
Documents By Reference...................... 3
Prospectus Summary.......................... 4
Risk Factors................................ 6
Management Discussion and Analysis of
Financial Condition and Results of
Operation................................... 14
Business.................................... 25
Management.................................. 48 IMAGING DIAGNOSTIC SYSTEMS, INC.
Certain Transactions........................ 51 6531 NW 18TH COURT
Market Price of Security and Other Related PLANTATION, FLORIDA 33313
Stockholder Matters....................... 52 (954) 581-9800
Sales of Unregistered Securities............ 55
Principal Stockholders...................... 67
Dividend Policy ............................ 68
Selling Security Holders.................... 68
Plan of Distribution........................ 70
Description of Securities................... 71
Changes in and Disagreements with
Accountants .............................. 71
Disclosure of Commission Position on
Indemnification for Securities Act APRIL ___, 1999
Liabilities............................... 72
Interests Of Named Experts and Counsel...... 72
Experts..................................... 72
Legal Opinions.............................. 72
Financial Information....................... 72
UNTIL ____________, 1999 (25 DAYS AFTER THE DATE
HEREOF) ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the securities
being registered are as follows:
SEC Registration Fee............................. $4,283.70
Edgar Formatting Fees..............................$4,630.00
---------
TOTAL $8,913.70
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Company's Articles of Incorporation authorizes the Company to
indemnify directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal or
termination of effectiveness.
2. So long as permitted by law, no officer of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such officer occurring prior to such amendment, repeal or
termination of effectiveness.
3. To the extent that a Director, Officer, or other corporate agent of
this corporation has been successful on the merits or otherwise in
defense of any civil or criminal action, suit, or proceeding referred
to in sections (a) and (b), above, or in defense of any claim, issue,
or matter therein, he shall be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Expenses incurred by a Director, Officer, or other corporate agent
in connection with a civil or criminal action, suit, or proceeding may
be paid by the corporation in advance of the final disposition of such
action suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the corporate agent to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH ABOVE, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE
II- 1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of the Company's Form 10-KSB for the fiscal year ending
June 30, 1995
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to
Exhibit 3.(i).6 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1996. File number 033-04008.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-1 dated July 1, 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated October 15, 1997.
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of the Company's Form 10-KSB for the fiscal year ending
June 30, 1995.
3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated
by reference to Exhibit 3 (i) of the Company's Form 10-SB, as amended,
file number 0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11 Certificate and Plan of Merger - is incorporated by reference to
Exhibit 3(i) of the Form 10-SB.
3.12 Certificate of Amendment - is incorporated by reference to Exhibit 3(i)
of the Form 10-SB.
3.13 Amended Certificate of Amendment-Series G Designation.
3.14 Certificate of Amendment-Series I Designation
3.15 Amended Certificate of Amendment-Series B Designation
4.1 Instruments Defining the Rights of Security Holders - Designation of
Series B Convertible Preferred Shares. (See Exhibit 3.3, above).
4.2 Instruments Defining the Rights of Security Holders - Designation of
Series C Convertible Preferred Shares. (See Exhibit 3.4, above).
4.3 Instruments Defining the Rights of Security Holders -Designation of
Series D Convertible Preferred Shares. (See Exhibit 3.5, above).
4.4 Instruments Defining the Rights of Security Holders - Designation of
Series E Convertible Preferred Shares. (See Exhibit 3.6, above).
4.5 Instruments Defining the Rights of Security Holders - Designation of
Series F Convertible Preferred Shares. (See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders - Designation of
Series H Convertible Preferred Shares. (See Exhibit 3.8, above).
4.7 Instruments Defining the Rights of Security Holders - Amended
Designation of Series G Convertible Preferred Shares.
(See Exhibit 3.13, above).
4.8 Instruments Defining the Rights of Security Holders - Designation of
Series I Convertible Preferred Shares. (See Exhibit 3.14, above).
4.9 Instruments Defining the Rights of Security Holders - Amended
Designation of Series B Convertible Preferred Shares.
(See Exhibit 3.15, above).
4.10 Convertible Debenture
5 Legal opinion of Rebecca J. Del Medico, Esq.,
dated April 9, 1999.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
Company's Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
II-2
<PAGE>
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
Form 10-SB.
10.5 Lock Up Agreement By and Between the Company and Richard J. Grable,
Linda B. Grable, and Allan L. Schwartz, is incorporated by reference to
Exhibit 10.5 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1996. File number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of the
Company's Form 10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1998.
10.10 Focus Distribution Agreement (United Kingdom and Ireland). Incorporated
by reference to the Company's Form 10 QSB/A filed on April 2, 1999.
10.11 Focus Distribution Agreement (Benelux countries).
10.12 Syncor Distribution Agreement.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
the Company's Form 10 KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference to
the Company's Form 10 KSB/A filed on April 9, 1999.
10.16 Form of Series I Preferred Stock Subscription Documents.
10.17 Form of Debenture Subscription Documents.
10.18 Form of Mortgage
10.19 Form of Series G Subscription Documents
24.1 Consent of Rebecca J. Del Medico, Esq., included in the opinion filed
as Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
(B) REPORTS ON FORM 8-K
None
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its legal counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
(b) The undersigned registrant hereby undertakes that:
(i) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424 (b) (1) or (4) or 497
(h) under the Securities Act shall be deem to be part of the registration
statement as of the time it was declared effective. II- 3
(ii) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13 (a) or
Sections 15 (d) of the Securities Exchange Act of 1934 (and where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15 (d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement be deemed to
be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets the
requirement for filing on Form S-2 and has duly caused this Amended Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plantation, State of Florida, on the 9th day of April
1999.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /S/LINDA B. GRABLE
Linda B. Grable, Chairman of the Board,
Director, and President.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: April 9, 1999 By: /S/ LINDA B. GRABLE
-------------------
Linda B. Grable, Chairman of the Board
Director and President
Dated: April 9, 1999 By: /S/ RICHARD J. GRABLE
---------------------
Richard J. Grable, Director
and Chief Executive Officer
Dated: April 9, 1999 By: /S/ ALLAN L. SCHWARTZ
---------------------
Allan L. Schwartz, Director
and Executive Vice-President
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
II- 4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1-2
FINANCIAL STATEMENTS:
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5-8
Statements of Cash Flows F-9-10
Notes to Financial Statements F-11-40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheet of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1998 and 1997 and for the period December 10, 1993 (date of
inception) to June 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 1998 and 1997 and the results
of its operations and its cash flows for the years ended June 30, 1998 and 1997
and for the period December 10, 1993 (date of inception) to June 30, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company has restated its
financial statements to reflect the changes in accounting for software
development costs, recording the deemed dividends on the issuance of the
preferred stock and recording the compensation on stock options in accordance
with Accounting Principles Board Opinion No. 25.
The Company is in the development stage as of June 30, 1998 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.
F - 1
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered losses and has yet to
generate an internal cash flow that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 5. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 6, 1998
F - 2
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1998 AND 1997
ASSETS
1998 1997
------------ ------------
(restated)
<S> <C> <C>
Current assets:
Cash $ 310,116 $ 383,223
Restricted certificate of deposit -- 103,500
Loans receivable-other -- 10,073
Inventory 3,214,045 --
Prepaid expenses 33,539 56,792
------------ ------------
Total current assets 3,557,700 553,588
------------ ------------
Property and equipment, net 2,920,980 3,293,297
Prototype equipment -- 1,216,585
Other assets 688,463 9,635
------------ ------------
$ 7,167,143 $ 5,073,105
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,363,766 $ 519,546
Loan payable 285,407 --
Current maturities of capital lease obligations 9,715 8,928
Other current liabilities 2,155,978 319,547
------------ ------------
Total current liabilities 3,814,866 848,021
------------ ------------
Long-term capital lease obligations 26,134 35,849
------------ ------------
Total liabilities 3,841,000 883,870
------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock (Series B), 7% cumulative annual dividend, no par value;
authorized 450 shares, issued 450 shares 4,500,000 4,500,000
Convertible preferred stock (Series D), no par value; authorized 54 shares,
issued 29 and 0 shares, respectively 290,000 --
Convertible preferred stock (Series E), no par value; authorized 54 shares,
issued 24 and 0 shares, respectively 240,000 --
Convertible preferred stock (Series H), no par value; authorized 108 shares,
issued 108 and 0 shares, respectively 1,080,000 --
Common stock, no par value; authorized 48,000,000 shares, issued 36,493,544
and 24,905,084 shares, respectively 23,983,073 15,739,729
Additional paid-in capital 1,884,846 3,663,120
Deficit accumulated during the development stage (27,336,655) (18,298,930)
------------ ------------
4,641,264 5,603,919
Less: subscriptions receivable (14,309) (35,559)
deferred compensation (1,300,812) (1,379,125)
------------ ------------
Total stockholders' equity 3,326,143 4,189,235
------------ ------------
$ 7,167,143 $ 5,073,105
============ ============
</TABLE>
See accompanying notes to the financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- --------------
(restated)
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 1,210,526 $ 2,847,238 $ 6,475,238
Research and development 776,578 616,886 1,745,089
Research and development expenses 254,722 1,065,178 2,918,894
Advertising and promotion expenses 329,446 166,520 873,841
Selling, general and
administrative expenses 396,752 528,753 1,302,137
Clinical expenses 9,859 33,506 360,675
Consulting expenses 1,220,676 764,364 2,936,584
Insurance costs 162,549 121,287 328,791
Professional fees 454,730 178,402 1,351,835
Stockholder expenses 75,608 20,902 96,510
Trade show expenses 216,182 154,782 505,458
Travel and subsistence costs 111,559 195,585 457,159
Rent expense 26,213 48,897 247,461
Interest expense 55,543 2,744 82,596
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Interest income (22,137) (116,972) (197,417)
------------ ------------ ------------
6,981,710 7,646,119 22,714,526
------------ ------------ ------------
Net loss (6,981,710) (7,646,119) (22,714,526)
Dividends on cumulative preferred stock:
From discount at issuance (1,741,015) (998,120) (4,074,609)
Earned (315,000) (184,675) (547,520)
------------ ------------ ------------
Net loss applicable to common shareholders $ (9,037,725) $ (8,828,914) $(27,336,655)
============ ============ ============
Net loss per common share:
Basic
Net loss per common share $ (.32) $ (.36) $ (1.27)
============ ============ ============
Weighted average number of common shares 27,882,886 24,222,966 21,574,057
============ ============ ============
Diluted
Net loss per common share $ (.32) $ (.36) $ (1.27)
============ ============ ============
Weighted average number of common shares 27,882,886 24,222,966 21,574,057
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
Deficit
Preferred Stock (**) Common Stock Accumulated
-------------------- ------------------ Additional During the
Number of Number of Paid-In Development
Shares Amount Shares Amount Capital Stage
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception) -0- $ -0- -0- $ -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split -- -- 510,000 50,000 -- --
Acquisition of public shell -- -- 178,752 -- -- --
Net issuance of additional shares of stock -- -- 15,342,520 16,451 -- --
Common stock sold -- -- 36,500 36,500 -- --
Net loss -- -- -- -- -- (66,951)
------- ------- ------------ --------- -------- ----------
Balance at June 30, 1994 -- -- 16,067,772 102,951 -- (66,951)
Common stock sold -- -- 1,980,791 1,566,595 -- --
Common stock issued in exchange for services -- -- 115,650 102,942 -- --
Common stock issued with employment agreement -- -- 75,000 78,750 -- --
Common stock issued for compensation -- -- 377,500 151,000 -- --
Stock options granted -- -- -- -- 622,500 --
Amortization of deferred compensation -- -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 50,333 --
Net loss -- -- -- -- -- (1,086,436)
------- ------- ------------ --------- -------- ----------
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833 (1,153,387)
======= ======= ============ ========= ======== ==========
(RESTUBBED TABLE)
Subscriptions Deferred
Receivable Compensation Total
---------- ------------ -----
Balance at December 10, 1993(date of inception $ -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split -- -- 50,000
Acquisition of public shell -- -- --
Net issuance of additional shares of stock -- -- 16,451
Common stock sold -- -- 36,500
Net loss -- -- (66,951)
-------- ---------- -----------
Balance at June 30, 1994 -0- -- 36,000
Common stock sold (523,118) -- 1,043,477
Common stock issued in exchange for services -- -- 102,942
Common stock issued with employment agreement -- -- 78,750
Common stock issued for compensation -- -- 151,000
Stock options granted -- (622,500) --
Amortization of deferred compensation -- 114,375 114,375
Forgiveness of officers' compensation -- -- 50,333
Net loss -- -- (1,086,436)
-------- ---------- -----------
Balance at June 30, 1995 (523,118) (508,125) 490,441
======== ========== ===========
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1998
Preferred Stock (**) Common Stock
--------------------- ------------------ Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
--------- ----------- ------------ ------------ ------------
Preferred stock sold, including dividends 4,000 3,600,000 -- -- 1,335,474
Common stock sold -- -- 700,471 1,561,110 --
Cancellation of stock subscription -- -- (410,500) (405,130) --
Common stock issued in exchange for services -- -- 2,503,789 4,257,320 --
Common stock issued with exercise of stock options -- -- 191,500 104,375 --
Common stock issued with exercise of options
for compensation -- -- 996,400 567,164 --
Conversion of preferred stock to common stock (1,600) (1,440,000) 420,662 1,974,190 (534,190)
Common stock issued as payment of preferred
stock dividends -- -- 4,754 14,629 --
Dividends accrued on preferred
stock not yet converted -- -- -- -- --
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 100,667
Net loss (restated) -- -- -- -- --
--------- ----------- ------------ ------------ ------------
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
========= =========== ============ ============ ============
(RESTUBBED TABLE)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
------------ ---------- -------- ----------
Preferred stock sold, including dividends (1,335,474) -- -- 3,600,000
Common stock sold -- -- -- 1,561,110
Cancellation of stock subscription -- 405,130 -- --
Common stock issued in exchange for services -- -- -- 4,257,320
Common stock issued with exercise of stock options -- (4,375) -- 100,000
Common stock issued with exercise of options
for compensation -- -- -- 567,164
Conversion of preferred stock to common stock -- -- -- --
Common stock issued as payment of preferred
stock dividends (14,629) -- -- --
Dividends accrued on preferred
stock not yet converted (33,216) -- -- (33,216)
Collection of stock subscriptions -- 103,679 -- 103,679
Amortization of deferred compensation -- -- 232,500 232,500
Forgiveness of officers' compensation -- -- -- 100,667
Net loss (restated) (6,933,310) -- -- (6,933,310)
------------ ---------- -------- ----------
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
============ ========== ======== ==========
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F- 6
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1998
Preferred Stock (**) Common Stock
---------------------- ------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
---------- ------------ ----------- ----------- -----------
Preferred stock sold, including dividends 450 4,500,000 -- -- 998,120
Conversion of preferred stock to common stock (2,400) (2,160,000) 1,061,202 2,961,284 (801,284)
Common stock issued in exchange for services -- -- 234,200 650,129 --
Common stock issued for compensation -- -- 353,200 918,364 --
Common stock issued with exercise of stock options -- -- 361,933 1,136,953 --
Cancellation of stock issued to employee -- -- (150,000) (52,500) --
Common stock issued as payment of preferred
stock dividends -- -- 20,760 49,603 --
Dividends accrued on preferred
stock not yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,891,500
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Net loss (restated) -- -- -- -- --
---------- ------------ ----------- ----------- -----------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
========== ============ =========== =========== ===========
(RESTUBBED TABLE)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
------------ ---------- ----------- ------------
Preferred stock sold, including dividends (998,120) -- -- 4,500,000
Conversion of preferred stock to common stock -- -- -- --
Common stock issued in exchange for services -- -- -- 650,129
Common stock issued for compensation -- -- -- 918,364
Common stock issued with exercise of stock options -- (33,750) -- 1,103,203
Cancellation of stock issued to employee -- -- -- (52,500)
Common stock issued as payment of preferred
stock dividends (16,387) -- -- 33,216
Dividends accrued on preferred
stock not yet converted (168,288) -- -- (168,288)
Stock options granted -- -- (1,891,500) --
Collection of stock subscriptions -- 16,875 -- 16,875
Amortization of deferred compensation -- -- 788,000 788,000
Net loss (restated) (7,646,119) -- -- (7,646,119)
------------ ---------- ----------- ------------
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
============ ========== =========== ============
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 7
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
Preferred Stock (**) Common Stock
------------------- ------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
------- ----------- ----------- ------------ ------------
Preferred stock sold, including dividends
and placement fees 501 5,010,000 -- -- 1,290,515
Conversion of preferred stock to common stock (340) (3,400,000) 6,502,448 4,644,307 (1,210,414)
Common stock sold -- -- 500,000 200,000 --
Common stock issued in exchange for services -- -- 956,000 1,419,130 --
Common stock issued for compensation -- -- 64,300 54,408 --
Common stock issued with exercise of stock options -- -- 65,712 22,999 --
Common stock issued in exchange for
licensing agrement -- -- 3,500,000 1,890,000 (3,199,000)
Dividends accrued on preferred
stock not yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,340,625
Collection of stock subscriptions -- -- -- 12,500 --
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------- ----------- ----------- ------------ ------------
Balance at June 30, 1998 611 $ 6,110,000 36,493,544 $ 23,983,073 $ 1,884,846
======= =========== =========== ============ ============
(RESTUBBED TABLE)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
------------ ------------ ------------ ------------
Preferred stock sold, including dividends
and placement fees (1,741,015) -- -- 4,559,500
Conversion of preferred stock to common stock -- -- -- 33,893
Common stock sold -- -- -- 200,000
Common stock issued in exchange for services -- -- -- 1,419,130
Common stock issued for compensation -- -- -- 54,408
Common stock issued with exercise of stock options -- -- -- 22,999
Common stock issued in exchange for
licensing agrement -- -- -- (1,309,000)
Dividends accrued on preferred
stock not yet converted (315,000) -- -- (315,000)
Stock options granted -- -- (1,340,625) --
Collection of stock subscriptions -- 21,250 -- 33,750
Amortization of deferred compensation -- -- 1,418,938 1,418,938
Net loss (6,981,710) -- -- (6,981,710)
------------ ------------ ------------ ------------
Balance at June 30, 1998 $(27,336,655) $ (14,309) $ (1,300,812) $ 3,326,143
============ ============ ============ ============
</TABLE>
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F - 8
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
-------------- -------------- ----------------
(restated)
<S> <C> <C> <C>
Net loss $ (6,981,710) $ (7,646,119) $(22,714,526)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Noncash compensation and consulting expenses 1,379,938 2,654,821 7,388,147
(Increase) decrease in restricted certificate of deposit 103,500 (103,500) --
(Increase) decrease in loans receivable - other 10,073 (10,073) --
Increase in inventory (155,782) -- (155,782)
(Increase) decrease in prepaid expenses 23,253 (40,892) (33,539)
(Increase) decrease in other assets (97,828) 43,375 (107,463)
Increase in accounts payable and accrued expenses 529,220 88,074 880,478
Increase (decrease) in other current liabilities (53,569) (536,599) 265,978
------------ ------------ ------------
Total adjustments 3,441,709 3,113,253 11,467,494
------------ ------------ ------------
Net cash used for operating activities (3,540,001) (4,532,866) (11,247,032)
------------ ------------ ------------
Cash flows from investing activities:
Prototype equipment (1,582,446) (641,247) (2,799,031)
Capital expenditures (115,738) (2,815,923) (3,660,994)
------------ ------------ ------------
Net cash used for investing activities (1,698,184) (3,457,170) (6,460,025)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (8,928) (5,512) (14,440)
Proceeds from stockholder loans, net -- (77,833) --
Proceeds from loan payable, net 285,407 -- 285,407
Proceeds from issuance of preferred stock 4,559,500 4,500,000 12,659,500
Net proceeds from issuance of common stock 329,099 (18,750) 5,086,706
------------ ------------ ------------
Net cash provided by financing activities 5,165,078 4,397,905 18,017,173
------------ ------------ ------------
Net increase (decrease) in cash (73,107) (3,592,131) 310,116
Cash and cash equivalents at beginning of period 383,223 3,975,354 -0-
------------ ------------ ------------
Cash and cash equivalents at end of period $ 310,116 $ 383,223 $ 310,116
============ ============ ============
(CONTINUED)
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS (CONTINUED)
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
(restated)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,105 $ 2,744 $ 30,158
================ ========== ==========
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ 1,325,530 $ 650,129 $4,615,959
================ ========== ==========
Issuance of common stock in
exchange for property and equipment $ -- $ -- $ 89,650
================ ========== ==========
Issuance of common stock and other current liability
in exchange for patent licensing agreement $ 581,000 $ -- $ 581,000
================ ========== ==========
Issuance of common stock for
compensation $ 54,408 $ 918,364 $1,690,936
================ ========== ==========
Issuance of common stock through
exercise of incentive stock options $ -- $1,103,203 $1,103,203
================ ========== ==========
Issuance of common stock as
payment for preferred stock dividends $ -- $ 49,603 $ 64,232
================ ========== ==========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ -- $ 50,289 $ 50,289
================ ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F - 10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc.("IDSI- Fl."). IDSI-Fl. was
formed on December 10, 1993.(see Note 4) Effective July 1, 1995 the Company
changed its corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial Computed Tomography Laser Mammography ("CTLM(TM)")
prototype has been developed with the use of "Ultrafast Laser Imaging
Technology"TM, and this technology was first introduced at the "RSNA" scientific
assembly and conference during late November 1994. The completed CTLM(TM) device
was exhibited at the "RSNA" conference November 26-30, 1995. The Company
exhibited the pilot production run CTLM(TM) device at the "RSNA" conference held
in Chicago on December 2-6, 1996. A further refined CTLM(TM) device and clinical
images were exhibited at the "RSNA" conference held in Chicago on December 1-5,
1997.
The initial CTLM(TM) prototype produced live images of an augmented breast on
February 23, 1995. From the experience gained with this initial prototype, the
Company continued its research and development resulting in new hardware and
software enhancements. The Company has completed a series of calibration scans
under an approved Investigational Device Exemption ("IDE") from the Food and
Drug Administration ("FDA"). This IDE authorized 50 patient scans at the Strax
Breast Diagnostic Center and 20 additional patients at its in-house facility.
Prior to the completion of the 1996 IDE, the Company was advised that greatly
improved laser technology would soon be available. The IDE at Strax was halted,
pending receipt of the new laser system. In November 1997 the CTLM(TM) was
removed from Strax and, on May 20, 1998, the Company's termination of the IDE
and its final report was accepted by the FDA.
The Company was granted, in June 1998, its second IDE authorizing the scanning
of 20 patients at the Company's in-house facilities. On September 1 and 10,
1998, the Company formally submitted the first and second series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.
On June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995 was granted with 7 independent
and 16 subordinate claims. Foreign patent applications have been filed and are
pending.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
CTLM(TM) device is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(CONTINUED)
F - 11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(b) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three
months or less and investment in money market funds are considered to
be cash equivalents by the Company.
(c) Inventory
Inventories, consisting principally of raw materials and
work-in-process, are carried at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) Prototype equipment
The direct costs associated with the final CTLM(TM) prototypes have
been capitalized. On June 17, 1996 the Company's Director of Research
and Development and the Director of Engineering decided to discontinue
with the development of the then current generation proprietary scanner
and data collection system (components of the prototype CTLM(TM)
device) and to begin development of a third generation scanner and data
collection system. As a result, certain items amounting to $677,395
were reclassified as follows: $512,453 as research and development
expense and $164,941 as computer and lab equipment. The original
amortization period of two years was increased to five years to provide
for the estimated period of time the clinical equipment would be in
service to gain FDA approval.
During the fiscal year ended June 30, 1998, the costs associated with
the various pre-production units available for sale have been
reclassified as inventory and the remaining costs which will no longer
benefit future periods were expensed to research and development costs.
(CONTINUED)
F - 12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using straight-line methods over the estimated useful lives of
the related assets.
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, capitalization of software development costs begins
upon the establishment of technological feasibility for the product.
The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable
judgement by management with respect to certain external factors,
including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. After considering the above factors, the Company has
determined that software development costs, incurred subsequent to the
initial acquisition of the basic software technology, should be
properly expensed. Such costs are included in research and development
expense in the accompanying statements of operations.
(f) Research and development
Research and development expenses consist principally of expenditures
for equipment and outside third-party consultants which are used in
testing and the development of the Company's CTLM(TM) device, product
software and compensation to specific company personnel. The
non-payroll related expenses include testing at outside laboratories,
parts associated with the design of initial components and tooling
costs, and other costs which do not remain with the developed CTLM(TM)
device. The software development costs are with outside third-party
consultants involved with the implementation of final changes to the
developed software. All research and development costs are expensed as
incurred.
(g) Net loss per share
In 1998, the Company adopted SFAS No. 128, ("Earnings Per Share"),
which requires the reporting of both basic and diluted earnings per
share. Basic net loss per share is determined by dividing loss
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted loss per share
reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised or converted into common
stock, as long as the effect of their inclusion is not anti-dilutive.
(CONTINUED)
F - 13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Patent license agreement
The patent license agreement will be amortized over the seventeen year
life of the patent, the term of the agreement.
(i) Stock-based compensation
The Company adopted Statement of Financial Accounting Standards No.
123. "Accounting for Stock-Based Compensation" ("SFAS 123"), in fiscal
1997. As permitted by SFAS 123, the Company continues to measure
compensation costs in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", but
provides pro forma disclosures of net loss and loss per share as if the
fair value method (as defined in SFAS 123) had been applied beginning
in fiscal 1997.
(j) Long-lived assets
Effective July 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121. "Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). This statement requires companies to write
down to estimated fair value long-lived assets that are impaired. The
Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset
may not be recoverable. In performing the review of recoverability the
Company estimates the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected
future cash flows is less than the carrying amount of the assets, an
impairment loss is recognized. The Company has determined that no
impairment losses need to be recognized through the fiscal year ended
June 30, 1998.
(k) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. Under SFAS 109, the effect
on deferred taxes of a change in tax rates is recognized in income in
the year that includes the enactment date.
(CONTINUED)
F - 14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with the current period presentation.
(3) RESTATEMENT
The June 30, 1997 and 1996 financial statements have been restated to properly
reflect the accrual of compensation and recording of deferred compensation on
the qualified and non-qualified stock options for the officers, and the
correction of an accumulated depreciation understatement of $27,682 for the year
ended June 30, 1997. The effect on net loss from the compensation restatement
was an increase of $946,796 for the year ended June 30, 1996 and a decrease of
$299,055 for the year ended June 30, 1997. These statements were also restated
to correct the calculation of the deemed dividends on the cumulative preferred
stock as a result of the discount at issuance. The effect of this change was an
increase to the net loss applicable to common shareholders of $283,965 ($.01 per
share) and $337,074 ($.02 per share) for the fiscal years ended June 30, 1997
and 1996, respectively.
The Company had been capitalizing the costs associated with the final
development of the CTLM(TM) software from its initial acquisition phase to the
software being used in the CTLM(TM) device currently undergoing clinical
testing. Effective December 31, 1996, the Company restated its financial
statements to expense all additional costs incurred since the acquisition of the
original software. Accordingly, the Company expensed a total of $869,692 as
additional research and development costs through December 31, 1996, of which
$436,736 was applicable to the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Increase in net loss $ 161,583 $ 1,383,532
================ ===============
Per share data:
Basic $ .01 $ .06
================ ===============
Diluted $ .01 $ .06
================ ===============
</TABLE>
(CONTINUED)
F - 15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) MERGER
On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and
outstanding shares of Alkan Corp. The transaction was accounted for as a reverse
merger in accordance with Accounting Principles Board Opinion #16, wherein the
shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan
Corp. after the merger.(see Note 16)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(5) GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. To date, management has been able to
raise the necessary capital to reach this stage of product development and has
been able to fund any capital requirements. However, there is no assurance that
once the development of the CTLM(TM) device is completed and finally gains
Federal Drug Administration marketing clearance, that the Company will achieve a
profitable level of operations.
(6) RESTRICTED CERTIFICATE OF DEPOSIT
The Company had issued an irrevocable letter of credit, which matured on October
4, 1997, towards the purchase of laboratory equipment. The letter of credit was
secured with the certificate of deposit.
(CONTINUED)
F - 16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 1,296,864 $ -
Work-in process 1,917,181 -
------------- ------------
$ 3,214,045 $ -
============= ============
</TABLE>
(8) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Furniture and fixtures $ 245,219 $ 240,029
Building and land (See Note 20) 2,084,085 2,081,399
Clinical equipment - 250,000
Computers and equipment 487,143 389,373
CTLM(TM) software costs 352,932 352,932
Trade show equipment 153,193 153,193
Laboratory equipment 190,031 179,862
--------------- --------------
3,512,603 3,646,788
Less: accumulated depreciation (591,623) (353,491)
--------------- --------------
Totals $ 2,920,980 $ 3,293,297
=============== ==============
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM(TM) software costs 5 years
</TABLE>
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM(TM) software at June 30, 1998 and 1997 are $138,180 and $225,007,
respectively, which represents the net realizable value of the CTLM(TM) software
at the end of each period presented.
(CONTINUED)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) PROPERTY AND EQUIPMENT (CONTINUED)
Amortization expense related to the CTLM(TM) software for each period presented
in the statement of operations is as follows:
PERIOD ENDED AMOUNT
------------ -----------
6/30/98 $ 70,587
6/30/97 70,587
6/30/96 54,345
6/30/95 19,160
6/30/94 73
-----------
Total $ 214,752
===========
(9) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Patent license agreement $ 581,000 $ -
Court bond 100,000 -
Security deposits 6,080 9,635
Other 1,383 -
-------------- -----------
Totals $ 688,463 $ 9,635
============== ===========
</TABLE>
During June 1998, the Company finalized an exclusive Patent License Agreement
with its chief executive officer. The officer is the owner of patents issued on
December 2, 1997 which encompasses the technology of the CTLM(TM) . Pursuant to
the terms of the agreement, the Company was granted the exclusive right to
modify, customize, maintain, incorporate, manufacture, sell, and otherwise
utilize and practice the Patent, all improvements thereto and all technology
related to the process, throughout the world. The license shall apply to any
extension or re-issue of the Patent. The term of license is for the life of the
Patent and any renewal thereof, subject to termination, under certain
conditions. As consideration for the License, the Company issued to the officer
3,500,000 shares of common stock and is required to issue an additional
3,500,000 shares in June 1999. The License agreement has been recorded at the
historical cost basis of the chief executive officer, who owns the patent. A
liability has been recorded for the fair market value of the remaining shares to
be issued in June 1999. (see Note 11)
(CONTINUED)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
---- ----
(restated)
<S> <C> <C>
Accounts payable - trade $ 774,952 $ 276,096
Preferred stock dividends payable 483,288 168,288
Accrued property taxes payable 15,585 14,000
Insurance financing payable 10,233 -
Accrued compensated absences 38,530 56,632
Accrued interest 18,546
Payroll taxes payable 4,250 4,530
Other 18,382 -
-------------- -----------
Totals $ 1,363,766 $ 519,546
============== ===========
</TABLE>
(11) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Patent licensing agreement payable (see Note 9) $ 1,890,000 $ -
Accrued compensation-stock options 265,978 319,547
------------ ------------
$ 2,155,978 $ 319,547
============ ===========
</TABLE>
The Company anticipates that the items included in other current liabilities
will be liquidated through the issuance of common stock within the next fiscal
year.
(12) LOAN PAYABLE
During the year ended June 30, 1998, the Company borrowed $460,407, from an
unrelated third-party on an unsecured basis. The loan accrues interest at a rate
of 6% per annum and is payable on demand. The Company has repaid $175,000 as of
June 30, 1998. Accrued interest of $18,546 is reflected in accrued expenses on
the balance sheet.
(CONTINUED)
F - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) LEASES
The Company has entered into a lease arrangement which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 8) and the obligation has been
recorded as debt. At June 30, 1998, approximate future minimum lease payments
under capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C> <C>
1999 $ 12,384
2000 12,384
2001 12,384
2002 4,128
----------
Total minimum lease payments 41,280
Less amount representing interest (5,431)
----------
Present value of net minimum lease payments 35,849
Less current portion (9,715)
----------
Long-term portion $ 26,134
==========
</TABLE>
The Company also leases certain office equipment under an operating lease
expiring in June 2002. The Company's lease for its office space expired during
the fiscal year ended June 30, 1997.
Minimum future lease payments under the non-cancelable operating lease having a
remaining term in excess of one year as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, AMOUNT
-------- ------
<S> <C> <C>
1999 $ 3,370
2000 3,676
2001 3,676
2002 3,676
----------
Total minimum future lease payments $ 14,398
==========
</TABLE>
(CONTINUED)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(14) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $16,691,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $5,675,000 and $3,755,000 at June 30, 1998 and 1997, respectively.
The Company has reduced the deferred tax asset resulting from its tax loss
carryforwards by a valuation allowance of an equal amount as the realization of
the deferred tax asset is uncertain. The net change in the deferred tax asset
and valuation allowance from July 1, 1997 to June 30, 1998 was an increase of
approximately $1,920,000.
(15) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock. All Series of the convertible preferred stock are not redeemable and
automatically convert into shares of common stock at the conversion rates three
years after issuance.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000 per
share, with net proceeds to the Company, after commissions and issuance costs,
amounting to $3,600,000.
The holders of the Series A Preferred Stock could have converted up to 50% prior
to May 28, 1996, and may convert their remaining shares subsequent to May 28,
1996 without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Preferred Stock will receive shares determined by dividing (i) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.
(CONTINUED)
F - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Series A Convertible Preferred
Stock. The holders of the Series A Preferred Stock are also entitled to receive
a five percent (5%) per share, per annum dividend out of legally available funds
and to the extent permitted by law. These dividends are payable quarterly on the
last business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series A Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series A Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
A Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.
The holders of the Series B Preferred Stock could have converted up to 34% of
the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may
convert their remaining shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration, into fully paid and nonassessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (i) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty-two percent (82%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than $3.85. The warrants are exercisable at
any time for an exercise price of $5.00 and will expire five years from the date
of issue.
(CONTINUED)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1998, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $483,288 of accrued
dividends payable. (See Note 20)
During the year ended June 30, 1998 the Company issued five Private Placements
of convertible preferred stock (see schedule incorporated into Note 15). The
Private Placements are summarized as follows:
SERIES C PREFERRED STOCK
On October 6, 1997, the Company finalized the private placement to foreign
investors of 210 shares of its Series C Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 105,000
shares of the Company's common stock at an exercise price of $1.63 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series C Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series C Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion.
(CONTINUED)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock; however, in no event
will the "Conversion Price" be greater than $1.222. Pursuant to the
Regulation S documents, the Company was also required to escrow an aggregate
of 3,435,583 shares of its common stock (200% of the number of shares the
investor would have received had the shares been converted on the closing
date of the Regulation S sale).
In connection with the sale, the Company paid an unaffiliated investment
banker $220,500 for placement and legal fees, providing net proceeds to the
Company of $1,879,500.
SERIES D PREFERRED STOCK
On January 9, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series D Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.22 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series D Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series D Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy-five percent (75%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
SERIES E PREFERRED STOCK
On February 5, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series E Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.093 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series E Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment
(CONTINUED)
F - 24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
of any additional consideration, into fully paid and nonassessable shares of
the Company's no par value common stock based upon the "conversion formula".
The conversion formula states that the holder of the Series E Preferred
Stock will receive shares determined by dividing (i) the sum of $10,000 by
the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
SERIES F PREFERRED STOCK
On February 20, 1998, the Company finalized the private placement to foreign
investors of 75 shares of its Series F Convertible Preferred Stock at a
purchase price of $10,000 per share. The agreement was executed pursuant to
Regulation S as promulgated by the Securities Act of 1933, as amended.
The Series F Preferred Shares pay a dividend of 6% per annum, payable in
Common Stock at the time of each conversion and are convertible, at any
time, commencing May 15, 1998 and for a period of two years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series F Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy percent (70%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company paid an unaffiliated investment
banker $50,000 for placement and legal fees, providing net proceeds to the
Company of $700,000. The shares underlying the preferred shares and warrant
are entitled to demand registration rights under certain conditions.
SERIES H PREFERRED STOCK
On June 2, 1998, the Company finalized the private placement to foreign
investors of 100 shares of its Series H Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 126,500
shares of the Company's common stock at an exercise price of $1.00 per
share. The agreement was executed pursuant to Regulation D as promulgated by
the Securities Act of 1933, as amended.
(CONTINUED)
F - 25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Series H Preferred Stock is convertible, at any time, for a period of
two years thereafter, in whole or in part, without the payment of any
additional consideration, into fully paid and nonassessable shares of the
Company's no par value common stock based upon the "conversion formula". The
conversion formula states that the holder of the Series H Preferred Stock
will receive shares determined by dividing (i) the sum of $10,000 by the
(ii) "Conversion Price" in effect at the time of conversion. The "Conversion
Price" shall be equal to the lesser of $.53 or seventy-five percent (75%) of
the Average Closing Price of the Company's common stock for the ten-day
trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued eight preferred shares and
paid $10,000 to an unaffiliated investment banker for placement and legal
fees, providing net proceeds to the Company of $990,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
The Company is currently in technical default of the Registration Rights
Agreement ("RRA"), which required the Registration Statement to be declared
effective by October 2, 1998. Pursuant to the RRA, the Company is required
to pay the Series H holders, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, 2% of the
principal amount of the Securities for the first thirty days, and 3% of the
principal amount of the Securities for each thirty day period thereafter
until the Company procures registration of the Securities. (See Note 20)
The agreements provide that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.
The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 1998, including
certain additional information with respect to the deemed preferred stock
dividends that were calculated as a result of the discount from market for the
conversion price per share:
(CONTINUED)
F - 26
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) Convertible Preferred Stock (Continued)
Series A Series B Series C Series D
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------- ----------- ------ ----------- ------ ----------- ------- -----------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
------- ----------- ------ ----------- ------ ----------- ------- -----------
Balance at June 30, 1997 - - 450 4,500,000
Sale of preferred stock
(Series C - H) 210 2,100,000 54 540,000
Conversion of preferred
stock (210) (2,100,000) (25) (250,000)
------- ----------- ------ ----------- ------ ----------- ------- -----------
Balance at June 30, 1998 - $ - 450 $4,500,000 - $ - 29 $290,000
======= =========== ====== =========== ====== =========== ======= ===========
Additional information:
Discount off market price 25% 18% 25% 25%
== == == ==
Fair market value-issue date $ 8.31 $ 3.25 $ 1.63 $ 0.99
====== ====== ====== ======
Deemed preferred stock
dividend $ 1,335,474 $ 998,120 $ 705,738 $ 182,433
=========== ========= ========= =========
(RESTUBBED TABLE)
Series E Series F Series H Totals
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------ ---------- ------ ---------- ------ ------------ --------- -----------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
------ ---------- ------ ---------- ------ ------------ --------- -----------
Balance at June 30, 1997 450 4,500,000
Sale of preferred stock
(Series C - H) 54 540,000 75 750,000 108 1,080,000 501 5,010,000
Conversion of preferred
stock (30) (300,000) (75) (750,000) (340) (3,400,000)
------ ---------- ------ ---------- ------ ------------ --------- -----------
Balance at June 30, 1998 24 $240,000 - $ - 108 $ 1,080,000 611 $6,110,000
====== ========== ====== ========== ====== ============ ========= ===========
Additional information:
Discount off market price 25% 30% 25%
== == ==
Fair market value-issue date $ 1.07 $ 1.24 $ 0.57
====== ====== ======
Deemed preferred stock
dividend $ 182,250 $ 318,966 $ 351,628
========= ========= =========
(CONTINUED)
</TABLE>
F - 27
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company. (See
Statement of Stockholders' Equity)
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. During the year
ended June 30, 1996, 410,500 shares of the common stock related to these
receivables were canceled and $103,679 was collected on the receivable. The
unpaid balance on these original sales and other subsequent sales of common
stock, in the amount of $35,559, as of June 30, 1997, is reflected as a
reduction to stockholder's equity on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $102,942, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.
In addition, during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000, were satisfied with the issuance of
377,500 shares of restricted common stock. Compensation expenses has been
recorded during the fiscal year pursuant to the employment agreements with the
officers. In addition, during the year ended June 30, 1995, 75,000 shares of
restricted common stock was issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(CONTINUED)
F - 28
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK (CONTINUED)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $2,397,258
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the fair market
value at the various grant dates for the transactions. Compensation, aggregating
$2,298,907, has been recorded at the excess of the fair market value of the
transaction over the exercise price for each of the transactions.
As of June 30, 1996, there were a total of 425,416 shares of common stock issued
as a result of the conversion of the Series A Convertible Preferred Stock and
the related accumulated dividends. (See Note 15)
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock option plan and were
exercised in a "cash-less" transaction, resulting in compensation to the
officers of $567,164. Compensation cost was measured as the excess of fair
market value of the shares received over the value of the stock options tendered
in the transaction. The excess of fair market value at July 15, 1995
approximated $.57 per share on the 996,400 shares issued.
During the year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($5,461,589) of its common stock. The conversion of Series A Convertible
Preferred Stock, including accrued dividends, accounted for the issuance of
1,081,962 shares ($2,808,643). The remaining 799,333 shares were issued as
follows:
1. Services rendered by independent consultants in exchange for 31,200
shares. Research and development expenses of $90,480 was charged as the
fair market value at November 20, 1996 was $2.90 per share.
2. On December 20, 1996, bonus stock was issued to Company employees,
3,200 shares. Compensation expense of $10,463 was charged as the fair
market value at that date was $3.27 per share.
3. On January 3, 1997 bonus stock was issued to the officers of the
Company, 350,000 shares. Compensation expense of $907,900 was charged, as
the fair market value at that date was $2.59 per share.
(CONTINUED)
F - 29
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK (CONTINUED)
4. On February 13, 1997, 4,000 shares were issued to an outside
consultant in exchange for services performed. Consulting services of
$11,500 were recorded, representing the fair market value ($2.88 per
share) on that date.
5. Services rendered by an independent consultant during June 1997 in
exchange for 199,000 shares. Consulting expenses of $548,149 was
charged, as the fair market value on the date of the transaction was
approximately $2.75 per share.
6. Exercise of incentive stock options comprised of 27,000 shares
($33,750) exercised and paid for at $1.25 per share, and 334,933 shares
($1,103,203) acquired in the exchange for options tendered in a cash
less transaction.
7. The Company repurchased 150,000 shares ($52,500), which had been
previously acquired by one of its employees.
During the year ended June 30, 1998, the Company issued a total of 11,588,460
shares ($8,583,721) of its common stock. The conversion of Convertible Preferred
Stock (see Note 15) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for 100,000
shares. Consulting expenses of $221,900 was charged as the fair market
value at July 10, 1997 was $2.22 per share.
2. Services rendered by an independent consultant in exchange for 200,000
shares. Consulting expenses of $400,000 was charged as the fair market
value at August 20, 1997 was $2.00 per share.
3. Services rendered by an independent consultant in exchange for 40,000
shares. Consulting expenses of $67,480 was charged as the fair market
value at September 4, 1997 was $1.69 per share.
4. Services rendered by a public relations company in exchange for 166,000
shares. Public relations expenses of $269,750 was charged as the fair
market value at October 24, 1997 was $1.63 per share.
5. On December 15, 1997, bonus stock was issued to Company employees, for
39,300 shares. Compensation expense of $41,658 was charged as the fair
market value at that date was $1.06 per share.
(CONTINUED)
F - 30
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) COMMON STOCK (CONTINUED)
6. Services rendered by an independent consultant in exchange for
250,000 shares. Consulting expenses of $320,000 was charged as the fair
market value at January 7, 1998 was $1.28 per share.
7. Services rendered by an independent consultant during May 1998 in
exchange for 200,000 shares. Consulting expenses of $140,000 was
charged, as the fair market value on that date was $.70 per share.
8. The Company sold 500,000 shares on May 15, 1998 in a Regulation D
offering at $.40 per share, and received cash proceeds of $200,000.
9. On June 5, 1998, the Company issued to its chief executive officer
3,500,000 shares ($1,890,000) as consideration for an exclusive Patent
License Agreement (see Note 8). The market value of the stock on this
date was $.54 per share. The excess of the fair market value of the
common stock over the historical cost basis of the patent license was
recorded as a distribution to the shareholder; recorded as a reduction
to additional paid-in capital of $3,199,000.
10. On June 11, 1998, the Company issued 25,000 shares to its corporate
counsel as additional bonus compensation. Legal expenses of $12,750
were recorded as the market value of the stock on that date was $.51
per share.
11. A total of 65,712 non-qualified stock options were exercised and
proceeds of $22,999 ($.35 per share) was received by the Company.
(17) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan and pursuant to
their employment contracts, an officer may be granted non-qualified options to
purchase shares of common stock over the next five calendar years, at a minimum
of 250,000 shares per calendar year. The exercise price shall be thirty-five
percent of the fair market value at the date of grant. On July 5, 1995 the Board
of Directors authorized an amendment to the Plan to provide that upon exercise
of the option, the payment for the shares exercised under the option may be made
in whole or in part with shares of the same class of stock. The shares to be
delivered for payment would be valued at the fair market value of the stock on
the day preceding the date of exercise. The plan was terminated effective July
1, 1996, however the officers will be issued the options originally provided
under the terms of their employment contracts.
(CONTINUED)
F - 31
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This plan
provides for the granting, exercising and issuing of incentive stock options
pursuant to Internal Revenue Code Section 422. The Company may grant incentive
stock options to purchase up to 5% of the issued and outstanding common stock of
the Company at any time. The Board of Directors has direct responsibility for
the administration of these plans.
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock as of the date of grant.
The exercise price of incentive options to officers, or affiliated persons, must
be at least 110% of the fair market value as of the date of grant.
In accordance with the provisions of APB No. 25, the Company records the
discount from fair market value on the non-qualified stock options as a charge
to deferred compensation at the date of grant and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as
follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
----------------------- --------------------
SHARES WTD. AVG. PRICE SHARES WTD. AVG. PRICE
------ --------- ----- ------ --------- -----
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 75,000 $ 1.40 1,500,000 $ 1.12
Exercised - -
------------- -------------
Outstanding at June 30, 1995 75,000 1.40 1,500,000 1.12
Granted 770,309 1.66 750,000 1.44
Exercised (164,956) .92 (1,800,000) 1.50
------------- -------------
Outstanding at June 30, 1996 680,353 1.81 450,000 .13
Granted 371,377 3.27 750,000 3.88
Exercised (395,384) 1.10 -
------------- -------------
Outstanding at June 30, 1997 656,346 3.07 1,200,000 2.47
Granted 220,755 1.95 750,000 2.75
Exercised - (65,712) .35
Canceled (175,205) 4.25 -
------------- -------------
Outstanding at June 30, 1998 701,896 2.42 1,884,288 2.66
============= =============
(CONTINUED)
</TABLE>
F - 32
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
At June 30, 1998 and 1997, 451,513 and 270,526, respectively, of the incentive
stock options were vested and exercisable and 1,884,288 and 1,200,000,
respectively, of the non-qualified stock options were fully vested and
exercisable. The stock options vest at various rates over periods up to ten
years. Shares of authorized common stock have been reserved for the exercise of
all options outstanding. The following summarizes the option transactions that
have occurred:
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense of
$567,164 was recorded during the year ended June 30, 1996 as a result of the
discount from the market value.
On November 7, 1994, the Company granted 300,000 non-qualified options to
its general counsel, currently a vice-president of the Company, at an
exercise price of $0.50 per share. Deferred compensation of $150,000 was
recorded on the transaction and is being amortized over the vesting period.
The options were all exercised as of June 30, 1997.
On March 30, 1995, the Company granted to the director of engineering, a
non-qualified option to purchase up to 150,000 shares of common stock per
year, or a total of 450,000 shares, during the period March 30, 1995 and
ending March 31, 1998. The exercise price shall be $0.35 per share. The
options do not "vest" until one year from the anniversary date. Deferred
compensation of $472,500 was recorded on the transaction and is being
amortized over the vesting period. The Company also granted the individual,
incentive options to purchase 75,000 shares of common stock at an exercise
price of $1.40 per share. The options originally expired on March 30, 1998,
but were reissued on March 30, 1998 for two years.
On July 5, 1995 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense was
recorded during the year ended June 30, 1996 as a result of the discount
from the market value.
On September 1, 1995, the Company issued to its three officers and directors
incentive options to purchase 107,527 shares, individually, at an exercise
price of $0.93 per share (110% of the fair market value). The options expire
on September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to
purchase 119,047 shares of common stock at an exercise price of $0.84 per
share. The options expire on September 1, 2000.
(CONTINUED)
F - 33
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
At various dates during the fiscal year ended June 30, 1996, the Company
issued to various employees incentive options to purchase 328,681 shares of
common stock at prices ranging from $0.81 to $8.18. In all instances, the
exercise price was established as the fair market value of the common stock
at the date of grant, therefore no compensation was recorded on the issuance
of the options. In most cases, one-third of the options vest one year from
the grant date, with one-third vesting each of the next two years. The
options expire in ten years from the grant date.
On July 4, 1996, the Company issued to its three officers and directors
incentive options to purchase 22,883 shares, individually, at an exercise
price of $4.37 per share (110% of the fair market value). The options expire
on July 4, 2001.
On July 5, 1996 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Deferred compensation of
$1,891,500 was recorded on the transaction and is being amortized over the
remaining term of the employment contracts (three years).
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 264,778 shares of common
stock at prices ranging from $2.56 to $3.81. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
On July 4, 1997, the Company granted to its three officers and directors
incentive options to purchase 34,000 shares, individually, at an exercise
price of $2.94 per share (110% of the fair market value). The options expire
on July 4, 2002.
On July 5, 1997, the Company issued non-qualified options to its officers
and directors to purchase 750,000 shares of common stock at 35% of the fair
market value at the date of grant. Deferred compensation of $1,340,625 was
recorded on the transaction and is being amortized over the remaining term
of the employment contract (two years).
(CONTINUED)
F - 34
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
At various dates during the year ended June 30, 1998, the Company issued to
various employees incentive options to purchase 204,905 shares of common
stock at prices ranging from $.55 to $2.60. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
The following table summarizes information about all of the stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
----------------------------------------------- ----------------------------
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE PRICES SHARES LIFE (YEARS) AVG. PRICE SHARES AVG. PRICE
--------------- ------ ------------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ .35 - 1.25 1,374,720 8.61 $ .83 1,252,490 $ .78
1.36 - 2.94 975,115 7.85 1.59 936,552 1.55
3.10 - 5.08 236,349 7.67 3.93 146,759 4.34
------------------------------------------------------------------------------------------------------
$ .35 - 5.08 2,586,184 8.24 $ 1.40 2,335,801 $ 1.31
======================================================================================================
</TABLE>
At June 30, 1998, the Company has two stock-based compensation plans, which have
been previously described. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans with respect to its
employees, however compensation has been recorded with respect to its officers
due to their provisions of utilizing "additional incentive stock options" to
exercise their incentive stock options, and acquire shares of common stock. The
compensation cost that has been charged against income for the officers was
$(53,570) and $475,955 for 1998 and 1997, respectively.
The weighted average Black-Scholes value of options granted during 1998 and 1997
was $1.44 and $2.03 per option, respectively. Had compensation cost for the
Company's fixed stock-based compensation plan been determined based on the fair
value at the grant dates for awards under this plan consistent with the method
of SFAS 123, the Company's pro forma net loss and pro forma net loss per share
would have been as indicated below:
(CONTINUED)
F - 35
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FROM
INCEPTION
(DECEMBER 10,
YEAR ENDED YEAR ENDED 1993) TO
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- --------------
<S> <C> <C> <C>
Net loss to common shareholders -
As reported $ (9,378,102) $ (8,544,949) $ (27,055,993)
============= ============ =============
Pro forma $ (9,638,158) $ (8,758,447) $ (27,615,569)
============= ============ =============
Basic loss per share -
As reported $ (.34) $ (.35) $ (1.25)
============= ============ =============
Pro forma $ (.35) $ (.36) $ (1.28)
============= ============ =============
Diluted loss per share -
As reported $ (.34) $ (.35) $ (1.25)
============= ============ =============
Pro forma $ (.35) $ (.36) $ (1.28)
============= ============ =============
</TABLE>
For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively: no dividend yield;
volatility of 7.1% and .2%; risk-free interest rate of 6% and 6.5%; and an
expected term of five years.
(18) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at June 30,
1998 was $350,698.
(CONTINUED)
F - 36
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(19) COMMITMENTS AND CONTINGENCIES
On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements provide for compensation to these individuals, during the Company's
development stage, at the annual rate of $250,000 (amended by Board of Directors
effective January 1, 1996), $104,000 (amended by Board of Directors effective
January 15, 1997), and $104,000, respectively.
Additional provisions have been made in these agreements for salary adjustments
to all of the individuals including bonus arrangements, once the Company is
operational. During the fourth quarter (May 1, 1995) of the fiscal year ended
June 30, 1995, the officers of the Company agreed to permanently forgive any
compensation provided in their employment contracts until the Company
establishes an adequate cash flow. The Company reinstated the compensation to
these officers beginning November 1, 1995. The total amount of compensation
forgiven by these officers amounted to $151,000; or $100,667 during the fiscal
year ended June 30, 1996 and $50,333 during the fiscal year ended June 30, 1995.
The financial statements reflect this compensation as a contribution to the
paid-in capital of the Company in the appropriate accounting periods. As a
result, the officers were paid at fifty-percent of their employment contract for
a period of twelve months.
On April 1, 1995, the Company entered into a two year agreement with its
vice-president and general counsel, and provides for annual compensation of
$85,000. This contract was extended on June 16, 1997, providing for annual
compensation of $95,000, with no limit as to the term. The officer resigned
during the fiscal year ended June 30, 1998.
As additional consideration for his development efforts in the CTLM(TM) device,
the chief executive officer has been granted a "development royalty" which will
be paid based upon the net foreign and domestic sales, after direct costs and
commissions, of the CTLM(TM) device. The royalty percent ranges from 2.5% to a
maximum of 5%, based upon varying levels of gross sales. Upon ratification of
the patent licensing agreement, entered into on June 2, 1998, at the Company's
next annual shareholder meeting, the royalties as outlined in that agreement
will take the place of those set forth in the original employment contract. The
royalty percentages in the new agreement start at 10% and decrease to 6% as
gross sales volumes increase.
On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The agreement
was extended for an additional two years during 1998 at an annual salary of
$110,000. The contract also provided for the issuance of 75,000 restricted
shares of the Company's common stock. Compensation expense ($1.05 per share), in
the amount of $78,750 was recorded on the transaction.
During the years ended June 30, 1998, 1997 and 1996, employment agreements were
initiated with individuals in various positions currently within the Company.
Annual payments for compensation under these agreements amount to $170,000,
$536,500 and $206,500, respectively, in the aggregate.
(CONTINUED)
F - 37
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(19) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into agreements with various distributors located
throughout Europe, Asia and South America to market the CTLM(TM) device. The
terms of these agreements range from eighteen months to three years. The Company
has the right to renew the agreements, with renewal periods ranging from one to
three years.
During the year ended June 30, 1998, the Company entered into an agreement for a
fifteen million dollar, three year equity line of credit, whereby the Company,
as it deems necessary, may raise capital through the sale of its common stock to
a consortium of prominent European banking institutions. The shares will be
purchased by the consortium at a discount from the fair market value of the
Company's common stock.
(20) SUBSEQUENT EVENTS
The Company has selected Nassau County Medical Center of East Meadow, Long
Island, New York, to be its first external clinical site. The Company has
submitted its Investigational Device Exemption ("IDE") protocol to the
hospital's Institutional Review Board, which is scheduled to meet on October 14,
1998 to review the IDE protocol. Upon approval, documents will be forwarded to
the Food and Drug Administration ("FDA") for their approval. The Company will be
contacted by the FDA granting permission to proceed with the clinical trials
described in the IDE protocol.
The Company has applied for a conventional first mortgage, of up to $2,000,000,
on its office and manufacturing facility located in Plantation, Florida. At
present, a commitment letter with respect to this mortgage is still pending.
During the period subsequent to the end of the fiscal year, the Company has
borrowed approximately $410,000 in three separate transactions. The Company
issued 480,000 shares of common stock in conjunction with the borrowings.
On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Company is in the process of completing the revisions to the Information
Statement. The Majority Shareholders consent with respect to the Amendment will
take effect twenty days from the notification that the SEC has no further
comments with respect to the Information Statement.
(CONTINUED)
F - 38
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(20) SUBSEQUENT EVENTS (CONTINUED)
On September 4, 1998, the Company received a notice of conversion from the
Series B Holders. The Series B Holders filed a lawsuit against the Company on
October 7, 1998. The Company was served on October 19, 1998. The lawsuit alleges
that the Company has breached its contract of sale to the Series B Holders by
failing to convert the Series B Holders and failure to register the common stock
underlying the Preferred Stock. The Series B Holders demanded damages in excess
of $75,000, to be determined at trial, together with interest costs and legal
fees. On April 6, 1999, the Series B Holders sold their preferred stock to an
unaffiliated third party ("the Purchaser") with no prior relationship to the
Company, or the Series B Holders. As part of the purchase agreement, the Series
B Holders were required to dismiss the lawsuit with prejudice and the Company
and the Series B Holders exchanged mutual general releases.
The Company also entered into a Subscription Agreement with the Purchaser
whereby the Company agreed to issue 138 shares of its Series I, 7% Convertible
Preferred Stock. The consideration for the subscription agreement was paid as
follows:
1. Forgiveness of approximately $725,795 of accrued interest in
connection with the Series B Convertible Preferred stock.
2. Settlement of all litigation concerning the Series B Convertible
Preferred stock.
3. Cancellation of 112,500 warrants that were issued with the Series B
Convertible Preferred stock.
4. A limitation on the owner(s) of the Series B Convertible Preferred
stock to ownership of not more than 4.99% of the Company's outstanding
common stock at any one time.
In addition, the Company entered into a Subscription Agreement with the
Purchaser whereby the Purchaser agrees to purchase $2,750,000 of the Company's
Debentures. The Debentures pay a 7% premium, to be paid in cash, or freely
trading common stock in the Company's sole discretion, at the time of each
conversion ("the Dividend Payment Date"). The Debentures are subject to
automatic conversion at the end of the two years from the date of issuance, at
which time all Debentures outstanding will be converted based upon a formula
detailed within the Debenture document. The Debentures are secured by a mortgage
on the Company's land and building. The mortgage shall only be released upon the
Company meeting certain conditions described in the mortgage document. The funds
are available to the Company as follows:
1. The Purchaser has irrevocably agreed to purchase $1,100,000 of the
Debentures, which will net the Company proceeds of $1,000,000 after
fees.
(CONTINUED)
F - 39
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(20) SUBSEQUENT EVENTS (CONTINUED)
2. The Company may draw a second $825,000 ($750,000 net of fees)
anytime thirty days after the effective date of the Registration
Statement, as long as the Company maintains an average bid price of
$.45 for the ten trading days immediately prior to the Company's
request for the funding. 3. The Company may draw a final $825,000
($750,000 net of fees) anytime sixty days after the effective date of
the Registration Statement, as long as the Company maintains an average
bid price of $.45 for the ten trading days immediately prior to the
Company's request for the funding.
The Series I Preferred and the Debenture also limits the Holders to ownership of
not more than 4.99% of the Company's outstanding common stock at any one time.
The shares underlying the Series B Preferred, the Series I Preferred and the
Debentures have registration rights and will be registered in the Company's S-2
Registration Statement presently pending with the Commission.
Pursuant to the terms of the Registration Rights Agreement ("RR Agreement")
between the Company and the Series H Holder, the Company has registered that
number of shares that would be required to be issued if the Series H Preferred
Stock were converted. The Company is in technical default of the "RR Agreement",
which required the Registration Statement to be declared effective by October 2,
1998. The Company filed Amendment No. 1 to the Registration Statement on
November 16, 1998. The "RR Agreement" requires the Company to pay the Series H
Holder in cash or in stock, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, two (2%)
percent of the principal amount of the Securities for the first thirty days, and
three (3%) percent of the principal amount of the Securities for each thirty day
period thereafter until the Company procures registration of the Securities. The
Company is presently unable to comply with the liquidated damage provision
payments and no assurances can be given that it will be able to do so in the
future.
Management of the Company has determined that a reasonable estimate of potential
damages to the Company to defend these defaults would be approximately $100,000,
and this amount has been accrued by the Company during October 1998. In
addition, the Company has accrued $125,000 as potential liquidated damages
resulting from the delay in effecting the Registration Statement, through
February 28, 1999. The Company has issued 424,242 shares of its common stock as
partial payment of the liquidated damages to the Series H holders.
F - 40
<PAGE>
INDEX TO EXHIBITS
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of the Company's Form 10-KSB for the fiscal year ending
June 30, 1995.
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to Exhibit
3.(i).6 of the Company's Form 10-KSB for the fiscal year ending June
30, 1996. File number 033-04008.3.3 Amendment to Articles of
Incorporation (Designation of Series B Convertible Preferred Shares).
Incorporated by reference from Registration statement on Form S-1
Dated July 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated October 15, 1997,
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of the Company's Form 10-KSB for the fiscal year ending June
30, 1995.
3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated
by reference to Exhibit 3 (i) of the Company's Form 10-SB, as amended,
file number 0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11 Certificate and Plan of Merger - is incorporated by reference to
Exhibit 3(i) of the Form 10-SB.
3.12 Certificate of Amendment is incorporated by reference to Exhibit 3(i)
of the Form 10-SB.
3.13 Amended Certificate of Amendment-Series G Designation.
3.14 Certificate of Amendment-Series I Designation
3.15 Amended Certificate of Amendment-Series B Designation
4.1 Instruments Defining the Rights of Security Holders Designation of
Series B Convertible Preferred Shares. See Exhibit 3.3, above.
4.2 Instruments Defining the Rights of Security Holders Designation of
Series C Convertible Preferred Shares. See Exhibit 3.4, above).
4.3 Instruments Defining the Rights of Security Holders Designation of
Series D Convertible Preferred Shares. See Exhibit 3.5, above).
4.4 Instruments Defining the Rights of Security Holders Designation of
Series E Convertible Preferred Shares. See Exhibit 3.6, above).
4.5 Instruments Defining the Rights of Security Holders - Designation of
Series F Convertible Preferred Shares. (See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders - Designation of
Series H Convertible Preferred Shares. (See Exhibit 3.8, above).
4.7 Instruments Defining the Rights of Security Holders - Amended
Designation of Series G Convertible Preferred Shares. (See Exhibit
3.13, above).
4.8 Instruments Defining the Rights of Security Holders - Designation of
Series I Convertible Preferred Shares. (See Exhibit 3.14, above).
4.9 Instruments Defining the Rights of Security Holders - Amended
Designation of Series B Convertible Preferred Shares. (See Exhibit
3.15, above).
4.10 Convertible Debenture Legal opinion of Rebecca J. Del Medico, Esq.,
dated April 9, 1999.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
Company's Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
Form 10-SB.
10.5 Lock Up Agreement By and Between the Company and Richard J. Grable,
Linda B. Grable, and Allan L. Schwartz, is incorporated by reference
to Exhibit 10.5 of the Company's Form 10-KSB for the fiscal year
ending June 30, 1996. File number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of the
Company's Form 10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1998.
10.10 Focus Distribution Agreement (United Kingdom and Ireland).
Incorporated by reference to the Company's Form 10 QSB/A filed on
April 2, 1999.
10.11 Focus Distribution Agreement (Benelux countries).
10.12 Syncor Distribution Agreement.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
the Company's Form 10 KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference to
the Company's Form 10 KSB/A filed on April 9, 1999.
10.16 Form of Series I Preferred Stock Subscription Documents.
10.17 Form of Debenture Subscription Documents.
10.18 Form of Mortgage
10.19 Form of Series G Subscription Documents
10.20 Form of Registration Rights Agreement
24.1 Consent of Rebecca J. Del Medico, Esq., included in the opinion filed
as Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
AMENDED ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
IMAGING DIAGNOSTIC SYSTEMS, INC.
The undersigned do hereby certify that, pursuant to the authority
conferred upon the Board of Directors of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"Corporation") a corporation organized and existing under the Florida Business
Corporation Act, by Florida Statute 607.0821 and Florida Statute 607.0602 and
pursuant to the written consent dated March 11, 1999, duly executed by all of
the members of the Corporation's Board of Directors, adopting the resolutions
providing for the issuance of up to 43 shares of the Corporation's authorized
but unissued preferred stock, no par value, to be designated the Series G
Convertible Preferred Stock (the "Preferred Stock"), and the Amendment of the
Corporation's Articles of Incorporation to provide for the Preferred Stock, and
there being no shareholder action required, the Corporation Articles of
Incorporation are hereby Amended as follows:
ARTICLE III CAPITAL STOCK
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS OF SERIES G
CONVERTIBLE PREFERRED STOCK
1. DESIGNATION AND RANK. The number and designation of the series of Preferred
Stock fixed by this amendment shall be 43 Shares of "Series G Convertible
Preferred Stock" (hereinafter referred to as the "Convertible Preferred Stock"),
all of which shall rank equally and be identical in all respects.
2. CONVERSION RIGHTS.
(A) RIGHT TO CONVERT. The holder of any shares of Series G Convertible Preferred
Stock (the "Preferred Stock") may, at any time, commencing upon the earlier of
(i) the effective date of a Registration Statement registering the share
underlying the Preferred stock; or 60 days from the date of issuance and a
period of three years thereafter, convert all or a portion of the Preferred
Stock and any accrued interest thereon, without the payment of any additional
consideration therefor, into that number of fully paid and nonassessable shares
of common stock, no par value, of the Corporation as is determined by dividing
(i) the sum of $10,000 by (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The "Conversion Price" shall be
equal to the lessor of (i) seventy five percent (75%) discount to the two lowest
bids in a ten day period immediately preceding the conversion date (as (a)
quoted by Bloomberg, L.P. or if not quoted by Bloomberg, L.P., then (b) as
reported by the National Association of Securities Automated Quotation System
("NASDAQ"), or if not quoted by NASDAQ then; (c) the two lowest closing bid
prices of the Common Stock in the over-the-counter market over the 10
consecutive trading days ending on the trading day immediately preceding the
date of the Conversion Notice); or (ii) $0.54 whichever is lower.
Provided however, that the Holder shall be 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.
(B) MECHANICS OF CONVERSION. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock. If upon conversion of shares of
Preferred Stock held by a registered holder which are being converted, such
register holder would, but for the provisions of this Section 3(b), receive a
fraction of a share of Common Stock thereon, then in lieu of any such fractional
share to which such holder would otherwise be entitled, the Corporation shall
round up or down, as the case may be, to the nearest share. Before any holder of
the Preferred Stock shall be entitled to convert the same into full shares of
Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or any transfer agent
for the Preferred Stock, and shall give written notice by facsimile or otherwise
(the "Conversion Notice") to the Corporation at such office that such holder
1
<PAGE>
elects to convert the same and shall state therein such holder's name or the
name of its nominees in which such holder wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, but in any event within five business days of the date
of its receipt of the Conversion Notice and original Preferred Stock
Certificate, issue and deliver or cause to be issued and delivered to such
holder of Preferred Stock, or to its nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled. Such conversion shall be deemed to have been made on the date that
the Corporation receives the Conversion Notice by facsimile or otherwise, and
the person or persons entitled to receive the share of Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. Upon the conversion of any
shares of Preferred Stock, such shares shall be restored to the status of
authorized but unissued shares and may be reissued as a new series by the
Corporation at any time.
(C) NOTICES OF RECORD DATE. In the event of (i) any declaration by the
Corporation of a record date of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution or (ii) any capital reorganization of the
Corporation, any classification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, and any transfer of
all or substantially all of the assets of the Corporation to any other
Corporation, or any other entity or person, or any voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, the Corporation shall
mail to each holder of Preferred Stock at least twenty (20) days prior to the
record date specified therein, a notice specifying (i) the date on which any
such record is to be declared for the purpose of such dividend or distribution
and a description of such dividend or distribution; (ii) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective; and
(iii) the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, transfer, consolidation, merger, dissolution or
winding up.
(D) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the Corporation shall
(i) take a record of holders of shares of the Common Stock for the purpose of
determining the holders entitled to receive dividends payable in shares of
Common Stock; (ii) subdivide the outstanding shares of Common Stock; (iii)
combine the outstanding shares of Common Stock into smaller number of shares; or
(iv) issue, by reclassification of the Common Stock, any other securities of the
Corporation, then, in each such case, the Conversion Price then in effect shall
be adjusted so that upon conversion of each share of Convertible Preferred Stock
then outstanding the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible after the happening of any of the
events described in clauses (i)through(iv) above shall be the number of such
shares of Common Stock into which such shares of Preferred Stock would have been
converted if so converted immediately prior to the happening of such event or
any record date with respect thereto.
(E) COMMON STOCK RESERVED. The Corporation shall reserve and keep available out
of its authorized but unissued Common Stock such numbers of shares of Common
Stock as shall from time to time be sufficient to effect conversion of all of
the then outstanding shares of Preferred Stock. In the event there are
insufficient shares to effect a conversion, the Corporation shall increase the
number of authorized shares to effect conversion, the holder shall be entitled
to vote with the holders of the Common Stock, as a single class, where each
share of Preferred Stock shall be entitled to that number of votes to which it
would be entitled had all of its shares of Preferred Stock been converted into
shares of Common Stock were notice of conversion given on the date of such vote.
No sale or disposition of all or substantially all of the Corporation's assets
shall take place without approval of the holders of the Convertible Preferred
Stock, voting as a single class.
(F) VOTING RIGHTS OF CONVERTIBLE PREFERRED STOCK. Except as otherwise required
by law and as provided for in Section 3(e), the holders of outstanding shares of
Preferred Stock shall not be entitled to vote on any matters submitted to the
stockholders of the Corporation.
4. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or involuntarily
liquidated, dissolved or wound up, at any time when any shares of Preferred
Stock shall be outstanding, the holders of the then outstanding shares of
Preferred Stock shall have a preference in distribution of the Corporation's
property available for the distribution to the holders of any other class of
capital stock of the Corporation, including but not limited to, the Common
Stock, equal to $10,000.00 consideration per share.
2
<PAGE>
5. ADJUSTMENTS DUE TO MERGER OR CONSOLIDATION, ETC. In the case of any
consolidation with or merger of the Corporation with or into another
corporation, or in the case of any sale, lease or conveyance to another
corporation of the assets of the Corporation as an entirety or substantially as
an entirety, each share of Preferred Stock shall after the date of such
consolidation, merger, sale, lease or conveyance be convertible into the number
of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease,
or conveyance) upon conversion of such share of Preferred Stock would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any
such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holders of the shares of Preferred Stock
shall be appropriately adjusted so as to be applicable, as nearly as may
reasonable be, to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares of Convertible Preferred Stock.
IN WITNESS WHEREOF, this Amendment to the Articles of Incorporation has
been executed and attested by the undersigned duly authorized officers of the
Corporation as of March 11, 1999.
/s/Linda B. Grable, President and Director
/s/Allan L. Schwartz, Executive Vice President and Director
/s/Richard J. Grable, Chief Executive Officer and Director
3
AMENDED ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
IMAGING DIAGNOSTIC SYSTEMS, INC.
DESIGNATING SERIES I PREFERRED STOCK
The undersigned do hereby certify that, pursuant to the authority
conferred upon the Board of Directors of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"Corporation") a corporation organized and existing under the Florida Business
Corporation Act, by Florida Statute 607.0821 and Florida Statute 607.0602 and
pursuant to a Board of Directors meeting held on December 21, 1998, whereby all
of the members of the Corporation's Board of Directors, unanimously voted for
the issuance of up to 455 shares of the Corporation's authorized but unissued
preferred stock, no par value, to be designated the Series I Convertible
Preferred Stock (the "Preferred Stock"), and the Amendment of the Corporation's
Articles of Incorporation to provide for the Preferred Stock, and there being no
shareholder action required, the Corporation Articles of Incorporation are
hereby Amended as follows:
ARTICLE III CAPITAL STOCK
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS OF SERIES I
CONVERTIBLE PREFERRED STOCK
1. DESIGNATION AND RANK. The number and designation of the series of Preferred
Stock fixed by this amendment shall be 455 Shares of "Series I Convertible
Preferred Stock" (hereinafter referred to as the "Convertible Preferred Stock"),
all of which shall rank equally and be identical in all respects.
2. CONVERSION RIGHTS.
(A) RIGHT TO CONVERT. The holder of any shares of Series I Convertible Preferred
Stock (the "Preferred Stock") may, at any time, for a period of two years
thereafter, convert all or a portion of the Preferred Stock and any accrued
interest thereon, without the payment of any additional consideration
therefor, into that number of fully paid and non-assessable shares of common
stock, no par value, of the Corporation as is determined by dividing (i) the
sum of $10,000 by (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The "Conversion Price" shall
be equal to seventy five percent (75%) of the Average Closing Price of the
Corporation's Common Stock for the five-day trading period ending on the day
prior to the date of the conversion. as quoted by Bloomberg, L.P. or if not
quoted by Bloomberg, L.P., then (ii) as reported by the National Association
of Securities Automated Quotation System ("NASDAQ"), or if not quoted by
NASDAQ then; (iii) the average of the closing bid prices of the Common Stock
in the over-the-counter market over the five consecutive trading days ending
on the trading day immediately preceding the date of the Conversion Notice;
or (iv) in the event the Common Stock is listed on a national stock
exchange, the Market Price shall be the average of the closing prices of the
Common Stock on such exchange, as reported in THE WALL STREET JOURNAL over
the five consecutive trading days immediately preceding the date of the
Conversion Notice.
Provided however, that the Holder shall be 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.
(B) MECHANICS OF CONVERSION. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock. If upon conversion of shares of
Preferred Stock held by a registered holder which are being converted, such
register holder would, but for the provisions of this Section 3(b), receive a
fraction of a share of Common Stock thereon, then in lieu of any such fractional
share to which such holder would otherwise be entitled, the Corporation shall
round up or down, as the case may be, to the nearest share. Before any holder of
the Preferred Stock shall be entitled to convert the same into full shares of
Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or any transfer agent
for the Preferred Stock, and shall give written notice by facsimile or otherwise
(the "Conversion Notice") to the Corporation at such office that such holder
1
<PAGE>
elects to convert the same and shall state therein such holder's name or the
name of its nominees in which such holder wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, but in any event within five business days of the date
of its receipt of the Conversion Notice and original Preferred Stock
Certificate, issue and deliver or cause to be issued and delivered to such
holder of Preferred Stock, or to its nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled. Such conversion shall be deemed to have been made on the date that
the Corporation receives the Conversion Notice by facsimile or otherwise, and
the person or persons entitled to receive the share of Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. Upon the conversion of any
shares of Preferred Stock, such shares shall be restored to the status of
authorized but unissued shares and may be reissued as a new series by the
Corporation at any time.
(C) NOTICES OF RECORD DATE. In the event of (i) any declaration by the
Corporation of a record date of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution or (ii) any capital reorganization of the
Corporation, any classification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, and any transfer of
all or substantially all of the assets of the Corporation to any other
Corporation, or any other entity or person, or any voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, the Corporation shall
mail to each holder of Preferred Stock at least twenty (20) days prior to the
record date specified therein, a notice specifying (i) the date on which any
such record is to be declared for the purpose of such dividend or distribution
and a description of such dividend or distribution; (ii) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective; and
(iii) the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, transfer, consolidation, merger, dissolution or
winding up.
(D) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the Corporation shall
(i) take a record of holders of shares of the Common Stock for the purpose of
determining the holders entitled to receive dividends payable in shares of
Common Stock; (ii) subdivide the outstanding shares of Common Stock; (iii)
combine the outstanding shares of Common Stock into smaller number of shares; or
(iv) issue, by reclassification of the Common Stock, any other securities of the
Corporation, then, in each such case, the Conversion Price then in effect shall
be adjusted so that upon conversion of each share of Convertible Preferred Stock
then outstanding the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible after the happening of any of the
events described in clauses (i)through(iv) above shall be the number of such
shares of Common Stock into which such shares of Preferred Stock would have been
converted if so converted immediately prior to the happening of such event or
any record date with respect thereto.
(E) COMMON STOCK RESERVED. The Corporation shall reserve and keep available out
of its authorized but unissued Common Stock such numbers of shares of Common
Stock as shall from time to time be sufficient to effect conversion of all of
the then outstanding shares of Preferred Stock. In the event there are
insufficient shares to effect a conversion, the Corporation shall increase the
number of authorized shares to effect conversion , the holder shall be entitled
to vote with the holders of the Common Stock, as a single class, where each
share of Preferred Stock shall be entitled to that number of votes to which it
would be entitled had all of its shares of Preferred Stock been converted into
shares of Common Stock were notice of conversion given on the date of such vote.
No sale or disposition of all or substantially all of the Corporation's assets
shall take place without approval of the holders of the Convertible Preferred
Stock, voting as a single class.
(F) VOTING RIGHTS OF CONVERTIBLE PREFERRED STOCK. Except as otherwise required
by law and as provided for in Section 3(e), the holders of outstanding shares of
Preferred Stock shall not be entitled to vote on any matters submitted to the
stockholders of the Corporation.
4. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or involuntarily
liquidated, dissolved or wound up, at any time when any shares of Preferred
Stock shall be outstanding, the holders of the then outstanding shares of
Preferred Stock shall have a preference in distribution of the Corporation's
property available for the distribution to the holders of any other class of
capital stock of the Corporation, including but not limited to, the Common
Stock, equal to $10,000.00 consideration per share.
2
<PAGE>
5. ADJUSTMENTS DUE TO MERGER OR CONSOLIDATION, ETC. In the case of any
consolidation with or merger of the Corporation with or into another
corporation, or in the case of any sale, lease or conveyance to another
corporation of the assets of the Corporation as an entirety or substantially as
an entirety, each share of Preferred Stock shall after the date of such
consolidation, merger, sale, lease or conveyance be convertible into the number
of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease,
or conveyance) upon conversion of such share of Preferred Stock would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any
such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holders of the shares of Preferred Stock
shall be appropriately adjusted so as to be applicable, as nearly as may
reasonable be, to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares of Convertible Preferred Stock.
IN WITNESS WHEREOF, this Amendment to the Articles of Incorporation has
been executed and attested by the undersigned duly authorized officers of the
Corporation as of the 21st day of December 1998.
ATTEST:
<TABLE>
<CAPTION>
<S> <C>
/s/Allan Schwartz, Executive Vice President /s/Linda B. Grable, President and Director
</TABLE>
3
AMENDED AND RESTATED ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
IMAGING DIAGNOSTIC SYSTEMS, INC.
DESIGNATION OF SERIES B PREFERRED STOCK
The undersigned do hereby certify that, pursuant to the authority
conferred upon the Board of Directors of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"Corporation") a corporation organized and existing under the Florida Business
Corporation Act, by Florida Statute 607.0821 and Florida Statute 607.0602 and
pursuant to a Board of Directors and Series B Preferred Shareholders meeting
held on April 8, 1999, whereby all of the members of the Corporation's Board of
Directors and all of the Series B shareholders, unanimously voted to Amend and
Restate the Articles of Amendment to the Articles of Incorporation of Imaging
Diagnostic Systems, Inc. for the Designation of the Series B Preferred Shares
(the "Preferred Stock"). as follows:
1. Designation. The designation of the series of Preferred Stock fixed
by this resolution shall be "Series B Convertible Preferred Stock" (hereinafter
referred to as the "Convertible Preferred Stock")
2. Conversion Rights.
(A) RIGHT TO CONVERT. The holder of any shares of Convertible
Preferred Stock may, (i) at any time convert, without the payment of additional
consideration therefor, into that number of fully paid and non-assessable shares
of common stock, no par value of the Corporation as is determined by dividing
(i) the sum of $10,000 by (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The Conversion Price shall be
equal to eighty two percent (82%) of the Market Price of the Corporation's,
Common Stock; provided, however, that in no event will the Conversion Price be
greater than $3.85. For purposes of this Section 2, the Market Price shall be
the average of the closing bid prices of the Common Stock over the five
consecutive trading days ending on the trading day immediately preceding the
date of the Conversion Notice (as defined in Section 2 (b) hereof), as reported
by the National Association of Securities Automated Quotation. System
("NASDAQ""), or the average of the closing bid prices of the Common Stock in the
over-the-counter market over the five consecutive trading days ending on the
trading day immediately preceding the date of the Conversion Notice, or, in the
event the Common Stock is listed on a national stock exchange, the Market Price
shall be the average of the closing prices of the Common Stock on such exchange,
as reported in THE WALL STREET JOURNAL over the five consecutive trading days
immediately preceding the date of the conversion Notice.
Provided however that, except for any contractual mandatory conversion
provisions, in no other event shall the holder be entitled to convert that
amount of Shares in excess of that amount upon conversion of which the sum of
(1) the number of shares of Common Stock beneficially owned by the holder and
its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Shares), and (2) the number of shares of Common Stock issuable upon the
conversion of the Shares with respect to which the determination of this proviso
is being made, would result in beneficial ownership by the Purchaser and its
affiliates of more than 4.9% of the outstanding shares of Common Stock of the
Company. For purposes of this provision to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13 (d) of
the Securities Exchange Act of 1934, as amended, and Regulations 13 D and G
thereunder, except as otherwise provided in clause (1) of such provision.
(b) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of convertible preferred stock. If upon
conversion of shares of Convertible Preferred Stock held by a registered holder
which- are being converted, such registered holder would, but for the provisions
of this Section 2 (b), receive a fraction of a share of Common Stock thereon,
then in lieu of any such fractional share to which such holder would otherwise
be entitled, the Corporation shall pay cash equal to such fraction multiplied by
the then effective Conversion Price. Before any holder of Convertible Preferred
Stock shall be entitled to convert the same into full shares of Common Stock,
such holder shall surrender the certificate or certificates therefor, duly
endorsed at the office of the Corporation or any transfer agent for the
Convertible Preferred Stock and shall give written notice (the "Conversion
Notice") to the Corporation at such office that such holder elects to convert
1
<PAGE>
the same shall state therein such holder's name or the name of its nominees in
which such holder wishes the certificate or certificates for shares of Common
Stock to be issued. The Corporation shall, as soon as practicable thereafter,
but in any event within three business days of the date of its receipt of the
Conversion Notice issue and deliver or cause to be issued and delivered 'to such
holder of Convertible Preferred Stock, or to its nominee or nominees' a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled, together with cash in lieu of any fraction
o(pound) a share. Such conversion shall be deemed to have, been made on the date
that the Corporation receives the Conversion Notice, and the person or persons
entitled to receive the share of Common Stock issuable upon conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. Upon the conversion of any shares of Convertible
Preferred Stock, such shares shall be restored to the status of authorized but
unissued shares and may be reissued by the Corporation at any time.
(c) NOTICES OF RECORD DATE. In the event of (i) any declaration by
the Corporation of a record date of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution or (ii) any capital reorganization of the
corporation, any classification or re-capitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, and any transfer of
all or substantially all or ins assets of the Corporation to any other
Corporation, or any other entity or person, or any voluntary or involuntary
dissolution, liquidation or winding up o~ the Corporation, the Corporation shall
mail to each holder or Convertible Preferred Stock at least twenty (20) days
prior to the record date specified therein, S. notice specifying (A) the -date
on which any such record is to be declared for the purpose of such dividend or
distribution and a description of such dividend or distribution, (3) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective
and (C) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled-to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, transfer, consolidation, merger,
dissolution or winding up.
(d) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the
Corporation shall (i) take a record of holders of shares of the Common Stock for
the purpose of determining the holders entitled to receive dividends payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock,
(iii) combine the outstanding shares of Common Stock into smaller number of
shares or (iv) issue by reclassification of the Common Stock, any other
securities of the Corporation then, in each such case, the Conversion Price then
in effect shall be adjusted so that upon conversion of each share of Convertible
Preferred Stock then outstanding the number of shares of Common Stock into which
such shares of Convertible Preferred Stock are convertible after the happening
of any of the events described in clauses (i) through (.iv) above shall be the
number of such shares of Common Stock into which such shares of Convertible
Preferred Stock would have been converted if so converted immediately prior to
the happening of such event or any record date with respect thereto.
(e) COMMON STOCK RESERVED. The Corporation shall reserve and keep
available out of its 'authorized but Unicode Common Stock such numbers of shares
of Common Stock as shall from tine to time be sufficient to effect conversion of
all of the then outstanding shares of Convertible Preferred Stock. In the event
there are insufficient shares to effect a conversion, the Corporation shall
increase the number of authorized shares to effect conversion. In the event
shareholder approval is required to increase the authorized shares, the holder
shall be entitled to vote with the holders of the Common Stock/ as a single
class, where each share of Convertible Preferred Stock shall be entitled to that
number of votes to which it would be entitled had all of its shares of
Convertible Preferred Stock been converted into shares of Common Stock were
notice of conversion given on the date of such vote. No sale or disposition of
all or substantially all of the Corporation's assets shall take place without
the approval of the holders of the Convertible Preferred Stock, voting as a
single class.
3. DIVIDEND RIGHTS. The holders of record of Convertible Preferred
Stock shall be entitled to receive cumulative dividends thereon, out of funds
legally available therefor and to the extent permitted by law, at the rate of
seven percent (7%) per share per annum computed on the basis of the actual
number of days elapsed in a 365-day year, commencing on the date of issuance of
such' shares of Convertible Preferred Stock and payable quarterly on the last
business day of each calendar quarter commencing with the calendar quarter next
succeeding the date of issuance of the .Convertible Preferred Stock. Such
dividends shall be fully cumulative and shall accrue/ whether or not declared by
the Board of Directors of the Corporation, from the date of issuance of the
shares of Convertible Preferred Stock until the date of payment thereof as set
forth in the immediately preceding sentence. No dividends or other distributions
shall be paid on or declared and set aside for payment on the Common Stock until
2
<PAGE>
full cumulative dividends on. all outstanding shares of Convertible Preferred
Stock shall have been paid or declared and set aside for payment. Such dividends
shall be payable in cash or in freely tradable shares of Common Stock/ with such
shares of Common Stock valued at the average closing bid price of such shares
over the five consecutive trading days immediately preceding the date of payment
thereof, as such average closing bid price is determined pursuant to Section 2
above.
4. VOTING RIGHTS OF CONVERTIBLE PREFERRED STOCK. Except as otherwise
required by law and' as provided for in Section 2(e), "the holders of
outstanding shares of Convertible Preferred Stock shall not be. entitled to vote
on any matters submitted to the stockholders of the Corporation.
5. RANKING. The convertible Preferred Stock shall rank senior to any
other class of capital stock of the Corporation now or hereafter issued as to
the payment of dividends and the distribution of assets on redemption,
liquidation, dissolution or winding up of the Corporation.
6. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time when any shares of
Convertible Preferred Stock shall be- outstanding, the holders of the then
outstanding shares of Convertible Preferred Stock shall have a preference in
distribution of the Corporation's property available for the distribution to the
holders of any other class of capital stock of the Corporation, including but
not limited to, the Common Stock, equal to $10,000.00 consideration per share,
together with an amount equal to al.". accrued but unpaid dividends thereon, if
any, to the date of payment of such distribution, whether or not declared by the
Board.
7. ADJUSTMENTS DUE TO MERGER OR CONSOLIDATION, ETC. In the case of any
consolidation with or merger of the Coloration with or into another corporation,
or in the case of any sale, lease or conveyance to another corporation of the
assets of the Corporation as an entirety or substantially as an entirety, each
share of Convertible Preferred Stock shall after the date of such consolidation,
merger, sale, lease or conveyance be convertible into the number of shares of
stock or other securities or property (including cash) to which the Common Stock
issuable (at the time of such consolidation, merger, sale, lease or conveyance)
upon conversion of such share of Convertible Preferred Stock would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any
such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holders of the shares of Convertible
Preferred Stock shall be appropriately adjusted so as to be applicable, as
nearly as may reasonably be, to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares of Convertible
Preferred Stock.
IN WITNESS WHEREOF, this Amended and Restated Amendment to the Articles
of Incorporation has been executed and attested by the undersigned duly
authorized officers of the Corporation as of the 8th day of April 1999
ATTEST:
<TABLE>
<CAPTION>
<S> <C>
Allan Schwartz, Executive Vice President Linda B. Grable, President and Director
</TABLE>
3
DEBENTURE
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
CONVERTIBLE DEBENTURE ISSUED March 31, 1999
A. DUE MARCH 31, 2001
PRINCIPAL AMOUNT $ 1,100,000
B. NUMBER 101
FOR VALUE RECEIVED, IMAGING DIAGNOSTIC SYSTEMS, INC., a New York
corporation (the "Company"), hereby promises to pay CHARLTON AVENUE,
LLC or registered assigns (the "Holder") on March 31, 2001, (the
"Maturity Date"), the principal amount of $1,100,000 ONE MILLION ONE
HUNDRED THOUSAND Dollars ($1,100,000) U.S., and to pay interest on the
principal amount hereof, in such amounts, at such times and on such
terms and conditions as are specified herein.
Article 1. INTEREST
The Company shall pay interest on the unpaid principal amount of this
Debenture (the "Debenture") at the rate of Seven Percent (7.0%) per year,
payable at the time of each conversion until the principal amount hereof is paid
in full or has been converted. Interest shall be computed on the basis of a 360
day year of 12, 30 day months. Each payment shall be paid in cash or in freely
trading Common Stock of the Company, at the Company's option. If paid in Common
Stock, the number of shares of the Company's Common Stock to be received shall
be determined by dividing the dollar amount of the interest by the then
applicable Market Price as of the interest payment date. "Market Price" shall
mean 75% of the average of the 5-day closing bid prices, as reported by
Bloomberg, LP for the five (5) consecutive trading days immediately preceding
the date of conversion. If the interest is to be paid in cash, the Company shall
make such payment within 5 business days of the date of conversion. If the
interest is to be paid in Common Stock, said Common Stock shall be delivered to
the Holder, or per Holder's instructions, within 5 business days of the receipt
of the Notice of Conversion and the original Debenture. The Debentures are
subject to automatic conversion at the end of two years from the date of
issuance at which time all Debentures outstanding will be automatically
converted based upon the formula set forth in Section 3.2. The closing shall be
deemed to have occurred on the date the funds are received by the Company or its
Counsel (the "Closing Date").
Article 2. METHOD OF PAYMENT
This Debenture must be surrendered to the Company in order for the
Holder to receive payment of the principal amount hereof. The Company shall have
the option of paying the interest on this Debenture in United States dollars or
in common stock upon conversion pursuant to Article 1 hereof. The Company may
draw a check for the payment of interest to the order of the Holder of this
Debenture and mail it to the Holder's address as shown on the Register (as
defined in Section 7.2 below). Interest and principal payments shall be subject
to withholding under applicable United States Federal Internal Revenue Service
Regulations.
Article 3. CONVERSION
Section 3.1. CONVERSION PRIVILEGE
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(a) The Holder of this Debenture shall have the right, at its option,
to convert it into shares of common stock, no par value per share, of the
Company ("Common Stock") at any time following the Closing Date and which is
before the close of business on the Maturity Date, except as set forth in
Section 3.1(c) below. The number of shares of Common Stock issuable upon the
conversion of this Debenture is determined pursuant to Section 3.2 and rounding
the result to the nearest whole share.
(b) Less than all of the principal amount of this Debenture may be
converted into Common Stock if the portion converted is at least $10,000 or a
whole multiple of $10,000 and the provisions of this Article 3 that apply to the
conversion of all of the Debenture shall also apply to the conversion of a
portion of it. This Debenture may not be converted, whether in whole or in part,
except in accordance with Article 3.
(c) In the event all or any portion of this Debenture remains
outstanding on the second anniversary of the date hereof, the unconverted
portion of such Debenture will automatically be converted into shares of Common
Stock on such date in the manner set forth in Section 3.2.
Section 3.2. CONVERSION PROCEDURE.
(a) DEBENTURES. Upon receipt by the Company or its designated attorney
of a facsimile or original of Holder's signed Notice of Conversion and the
receipt of the original Debenture to be converted in whole or in part in the
manner set forth in 3.2(b) below, the Company shall instruct its transfer agent
to issue one or more Certificates representing that number of shares of Common
Stock into which the Debenture is convertible in accordance with the provisions
regarding conversion set forth in Exhibit A hereto. The Seller's transfer agent
or attorney shall act as Registrar and shall maintain an appropriate ledger
containing the necessary information with respect to each Debenture.
(b) CONVERSION PROCEDURES. The face amount of this Debenture may be
converted anytime ninety (90) calendar days following the Closing Date. Such
conversion shall be effectuated by surrendering to the Company, or its attorney,
this Debenture to be converted together with a facsimile or original of the
signed Notice of Conversion, which evidences Holder's intention to convert the
Debenture, indicated. The date on which the Notice of Conversion is effective
("Conversion Date") shall be deemed to be the date on which the Holder has
delivered to the Company or its designated attorney a facsimile or original of
the signed Notice of Conversion, as long as the original Debenture(s) to be
converted are received by the Company or its designated attorney within 5
business days thereafter.
(c) COMMON STOCK TO BE ISSUED. Upon the conversion of any Debentures
and upon receipt by the Company or its attorney of a facsimile or original of
Holder's signed Notice of Conversion Seller shall instruct Seller's transfer
agent to issue Stock Certificates without restrictive legend or stop transfer
instructions, if at that time the Registration Statement has been deemed
effective (or with proper restrictive legend if the Registration Statement has
not as yet been declared effective), in the name of Holder (or its nominee) and
in such denominations to be specified at conversion representing the number of
shares of Common Stock issuable upon such conversion, as applicable. Seller
warrants that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely transferable on the books and records of Seller, except as may be set
forth herein.
(d) (i) CONVERSION RATE. Holder is entitled, at its option to convert
the face amount of this Debenture, plus accrued interest, anytime following the
Closing Date, at 75% of the 5-day average closing bid price, as reported by
Bloomberg LP, for the five (5) consecutive trading days immediately preceding
the applicable Conversion Date (the "Conversion Price"). No fractional shares or
scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share.
(ii) MOST FAVORED FINANCING. If after the Closing Date, but prior to
the Holder's conversion of all the Debentures, the Company raises money under
either Regulation D or Regulation S on terms that are more favorable than those
terms set forth in this Debenture, then in such event, the Holder at its sole
option shall be entitled to completely replace the terms of this Debenture with
the terms of the more beneficial Debenture as to that balance, including accrued
interest and any accumulated liquidated damages, remaining on Holder's original
investment. The Debentures are subject to a mandatory, 24 month conversion
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feature at the end of which all Debentures outstanding will be automatically
converted, upon the terms set forth in this section ("Mandatory Conversion
Date").
(e) Nothing contained in this Debenture shall be deemed to establish or
require the payment of interest to the Holder at a rate in excess of the maximum
rate permitted by governing law. In the event that the rate of interest required
to be paid exceeds the maximum rate permitted by governing law, the rate of
interest required to be paid thereunder shall be automatically reduced to the
maximum rate permitted under the governing law and such excess shall be returned
with reasonable promptness by the Holder to the Company.
(f) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue the Certificate of Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
shareholder of record on and after the conversion date. Upon surrender of any
Debentures that are to be converted in part, the Company shall issue to the
Holder a new Debenture equal to the unconverted amount, if so requested in
writing by Holder.
(g) In the event the Common Stock is not delivered per the written
instructions of the Holder, within five business days after the receipt of the
Notice of Conversion and original stock certificate (the "Delivery Date"), then
in such event the Company shall pay to Holder in cash or Common Stock, at the
Company's option, one percent (1%) of the purchase price of the Debentures being
converted per each day after the fifth business day following the Conversion
Date that the Common Stock is not delivered.
The Company acknowledges that its failure to deliver the Common Stock
on or before the Delivery Date will cause the Holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Debenture a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section represents the parties' good faith effort to quantify
such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. The payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Debenture.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this section is due to the unavailability of authorized but unissued
shares of Common Stock, the provisions of this section shall not apply, but
instead the provisions of Section 3.2(h) shall apply.
The Company shall make any payments incurred under this section in
immediately available funds within three business days from the date of issuance
of the applicable Common Stock. Nothing herein shall limit a Holder's right to
pursue actual damages or cancel the conversion for the Company's failure to
issue and deliver Common Stock to the Holder within 10 business days after the
Conversion Date.
(h) The Company shall at all times reserve (or make alternative written
arrangements for reservation or contribution of shares or stockholder approval
to authorize additional shares as described in the proxy statement for the
August 31, 1998, meeting) and have available all Common Stock necessary to meet
conversion of the Debentures by all Holders of the entire amount of Debentures
then outstanding. If, at any time Holder submits a Notice of Conversion and the
Company does not have sufficient authorized but unissued shares of Common Stock
(or alternative shares of Common Stock as may be contributed by Stockholders)
available to effect, in full, a conversion of the Debentures (a "Conversion
Default", the date of such default being referred to herein as the "Conversion
Default Date"), the Company shall issue to the Holder all of the shares of
Common Stock which are available, and the Notice of Conversion as to any
Debentures requested to be converted but not converted (the "Unconverted
Debentures"), upon Holder's sole option, may be deemed null and void. The
Company shall provide notice of such Conversion Default ("Notice of Conversion
Default") to all existing Holders of outstanding Debentures, by facsimile,
within three (3) business day of such default (with the original delivered by
overnight or two day courier), and the Holder shall give notice to the Company
by facsimile within five business days of receipt of the original Notice of
Conversion Default (with the original delivered by overnight or two day courier)
of its election to either nullify or confirm the Notice of Conversion.
The Company agrees to pay to all Holders of outstanding Debentures
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Debentures held by each Holder where N = the number
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of days from the Conversion Default Date to the date (the "Authorization Date")
that the Company authorizes a sufficient number of shares of Common Stock to
effect conversion of all remaining Debentures. The Company shall send notice
("Authorization Notice") to each Holder of outstanding Debentures that
additional shares of Common Stock have been authorized, the Authorization Date
and the amount of Holder's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Holder's option, payable as follows: (i) in
the event Holder elects to take such payment in cash, cash payments shall be
made to such Holder of outstanding Debentures by the fifth day of the following
calendar month, or (ii) in the event Holder elects to take such payment in
stock, the Holder may convert such payment amount into Common Stock at the
conversion rate set forth in section 4(d) at anytime after the 5th day of the
calendar month following the month in which the Authorization Notice was
received, until the expiration of the mandatory 24 month conversion period.
The Company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Debentures will cause the Holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Debenture a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section represents the parties' good faith effort to quantify
such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. The payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Debenture.
Nothing herein shall limit the Holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock.
(i) The Company shall furnish to Holder such number of prospectuses and
other documents incidental to the registration of the shares of Common Stock
underlying the Debentures, including any amendment of or supplements thereto.
(j) Other than the Mandatory Conversion provisions contained in this
Debenture which are not limited by the following, in no other event shall the
Holder be entitled to convert that amount of Debentures in excess of that amount
upon conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Debentures), and (2) the number of shares of Common
Stock issuable upon the conversion of the Debentures with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.9% of the outstanding
shares of Common Stock of the Company. For purposes of this provision to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13 (d) of the Securities Exchange Act of 1934, as
amended, and Regulations 13 D and G thereunder, except as otherwise provided in
clause (1) of such provision. Furthermore, the Company shall not permit such
conversions that would violate the provisions of this section.
Section 3.3. FRACTIONAL SHARES. The Company shall not issue fractional
shares of Common Stock, or scrip representing fractions of such shares, upon the
conversion of this Debenture. Instead, the Company shall round up or down, as
the case may be, to the nearest whole share.
Section 3.4. TAXES ON CONVERSION. The Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of shares
of Common Stock upon the conversion of this Debenture. However, the Holder shall
pay any such tax, which is due because the shares are issued in a name other
than its name.
Section 3.5. COMPANY TO RESERVE STOCK. The Company shall reserve the
number of shares of Common Stock required pursuant to and upon the terms set
forth in Section 3(a) of the Subscription Agreement related to this Debenture,
to permit the conversion of this Debenture subject to certain options granted to
the Company and referred to in Section 3(a) of the Subscription Agreement. All
shares of Common Stock, which may be issued upon the conversion hereof, shall
upon issuance be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issuance thereof.
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Section 3.6. RESTRICTIONS ON TRANSFER. This Debenture has not been
registered under the Securities Act of 1933, as amended, (the "Act") and is
being issued under Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. This Debenture and the Common Stock issuable upon the
conversion thereof may only be offered or sold pursuant to registration under or
an exemption from the Act.
Section 3.7. MERGERS, ETC. If the Company merges or consolidates with
another corporation or sells or transfers all or substantially all of its assets
to another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or in exchange for Common Stock,
then as a condition of such merger, consolidation, sale or transfer, the Company
and any such successor, purchaser or transferee shall amend this Debenture to
provide that it may thereafter be converted on the terms and subject to the
conditions set forth above into the kind and amount of stock, securities or
property receivable upon such merger, consolidation, sale or transfer by a
holder of the number of shares of Common Stock into which this Debenture might
have been converted immediately before such merger, consolidation, sale or
transfer, subject to adjustments which shall be as nearly equivalent as may be
practicable to adjustments provided for in this Article 3.
Article 4. MERGERS AND ADJUSTMENTS
Section 4.1 Mergers. The Company shall not consolidate or merge into,
or transfer all or substantially all of its assets to, any person, unless such
person assume in writing the obligations of the Company under this Debenture and
immediately after such transaction no Event of Default exists. Any reference
herein to the Company shall refer to such surviving or transferee corporation
and the obligations of the Company shall terminate upon such written assumption.
Section 4.2 PREFERENCES
No preferences or distribution will be given to the common shareholders
in preference to the preferred shareholders, and for the purpose of such
distributions the debentureholder shall be treated as a preferred shareholder .
Article 5. REPORTS
The Company will mail to the Holder hereof at its address as shown on
the Register a copy of any annual, quarterly or current report that it files
with the Securities and Exchange Commission promptly after the filing thereof
and a copy of any annual, quarterly or other report or proxy statement that it
gives to its shareholders generally at the time such report or statement is sent
to shareholders.
Article 6. DEFAULTS AND REMEDIES
Section 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment, other than a payment of principal, for a period
of 5 business days thereafter, (c) the Company fails to comply with any of its
other agreements in this Debenture and such failure continues for the period and
after the notice specified below, (d) the Company pursuant to or within the
meaning of any Bankruptcy Law (as hereinafter defined): (i) commences a
voluntary case; (ii) consents to the entry of an order for relief against it in
an involuntary case; (iii) consents to the appointment of a Custodian (as
hereinafter defined) of it or for all or substantially all of its property or
(iv) makes a general assignment for the benefit of its creditors or (v) a court
of competent jurisdiction enters an order or decree under any Bankruptcy Law
that: (A) is for relief against the Company in an involuntary case; (B) appoints
a Custodian of the Company or for all or substantially all of its property or
(C) orders the liquidation of the Company, and the order or decree remains
unstayed and in effect for 60 days, (e) the Company's Common Stock is no longer
listed on any recognized exchange including electronic over-the-counter bulletin
board. As used in this Section 6.1, the term "Bankruptcy Law" means Title 11 of
the United States Code or any similar federal or state law for the relief of
debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator
or similar official under any Bankruptcy Law. A default under clause (c) above
is not an Event of Default until the holders of at least 25% of the aggregate
principal amount of the Debentures outstanding notify the Company of such
default and the Company does not cure it within five (5) business days after the
receipt of such notice, which must specify the default, demand that it be
remedied and state that it is a "Notice of Default".
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Section 6.2. ACCELERATION. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
remaining principal amount of this Debenture to be due and payable. Upon such
declaration, the remaining principal amount shall be due and payable
immediately.
Article 7. REGISTERED DEBENTURES
Section 7.1. SERIES. This Debenture is one of a numbered series of
Debentures which are identical except as to the principal amount and date of
issuance thereof and as to any restriction on the transfer thereof in order to
comply with the Securities Act of 1933 and the regulations of the Securities and
Exchange Commission promulgated thereunder. Such Debentures are referred to
herein collectively as the "Debentures". The Debentures shall be issued in whole
multiples of $10,000.
Section 7.2. RECORD OWNERSHIP. The Company, or its attorney, shall
maintain a register of the holders of the Debentures (the "Register") showing
their names and addresses and the serial numbers and principal amounts of
Debentures issued to or transferred of record by them from time to time. The
Register may be maintained in electronic, magnetic or other computerized form.
The Company may treat the person named as the Holder of this Debenture in the
Register as the sole owner of this Debenture. The Holder of this Debenture is
the person exclusively entitled to receive payments of interest on this
Debenture, receive notifications with respect to this Debenture, convert it into
Common Stock and otherwise exercise all of the rights and powers as the absolute
owner hereof.
Section 7.3. REGISTRATION OF TRANSFER. Transfers of this Debenture may
be registered on the books of the Company maintained for such purpose pursuant
to Section 7.2 above (i.e., the Register). Transfers shall be registered when
this Debenture is presented to the Company with a request to register the
transfer hereof and the Debenture is duly endorsed by the appropriate person,
reasonable assurances are given that the endorsements are genuine and effective,
and the Company has received evidence satisfactory to it that such transfer is
rightful and in compliance with all applicable laws, including tax laws and
state and federal securities laws. When this Debenture is presented for transfer
and duly transferred hereunder, it shall be canceled and a new Debenture showing
the name of the transferee as the record holder thereof shall be issued in lieu
hereof. When this Debenture is presented to the Company with a reasonable
request to exchange it for an equal principal amount of Debentures of other
denominations, the Company shall make such exchange and shall cancel this
Debenture and issue in lieu thereof Debentures having a total principal amount
equal to this Debenture in such denominations as agreed to by the Company and
Holder.
Section 7.4. WORN OR LOST DEBENTURES. If this Debenture becomes worn,
defaced or mutilated but is still substantially intact and recognizable, the
Company or its agent may issue a new Debenture in lieu hereof upon its
surrender. Where the Holder of this Debenture claims that the Debenture has been
lost, destroyed or wrongfully taken, the Company shall issue a new Debenture in
place of the original Debenture if the Holder so requests by written notice to
the Company actually received by the Company before it is notified that the
Debenture has been acquired by a bona fide purchaser and the Holder has
delivered to the Company an indemnity bond in such amount and issued by such
surety as the Company deems satisfactory together with an affidavit of the
Holder setting forth the facts concerning such loss, destruction or wrongful
taking and such other information in such form with such proof or verification
as the Company may request.
Article 8. INVESTMENT INTENT
Holder is acquiring this Debenture and the underlying common stock for
his own account, for investment and not with a view to, or for his own account,
for investment and not with a view to, or for resale in connection with, the
distribution thereof. Holder has no present intention of reselling or
distributing any of the securities. Holder does not have any contract,
undertaking, agreement or arrangement with any person to sell or transfer to
such person or to any third person any of the securities. The acquisition of the
securities for investment is consistent with Holder's financial needs.
Article 9 NOTICES
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Any notice which is required or convenient under the terms of this
Debenture shall be duly given if it is in writing and delivered in person or
mailed by first class mail, postage prepaid and directed to the Holder of the
Debenture at its address as it appears on the Register or if to the Company to
its principal executive offices. The time when such notice is sent shall be the
time of the giving of the notice.
Article 10. TIME
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture. A "business day" shall
mean a day on which the banks in New York are not required or allowed to be
closed.
Article 11. WAIVERS
The holders of a majority in principal amount of the Debentures may
waive a default or rescind the declaration of an Event of Default and its
consequences except for a default in the payment of principal or conversion into
Common Stock.
Article 12. RULES OF CONSTRUCTION
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in the Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof. Wherever,
in this Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
Article 13. GOVERNING LAW
The validity, terms, performance and enforcement of this Debenture
shall be governed and construed by the provisions hereof and in accordance with
the laws of the State of Florida applicable to agreements that are negotiated,
executed, delivered and performed solely in the State of Florida.
Article 14. ACCESS TO INFORMATION.
The Holder has had the opportunity to ask questions of, and receive
answers from management of the Company regarding the terms and conditions of
this Debenture, and the transactions contemplated thereby, as well as the
affairs of the Company and related matters. The Holder may have access to
whatever additional information concerning the Company, its financial condition,
its business, its prospects, its management, its capitalization, and other
similar matters that the Holder or his purchaser representative, if any,
desires, provided that the Company can acquire such information without
unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a) thereunder, the
Holder and his purchaser representative may have, at the offices of the Company,
at any reasonable hour, after reasonable prior notice, access to the materials
set forth in the Rule which the Company can obtain without unreasonable effort
or expense.
The Holder has had the opportunity to obtain additional information
necessary to verify the accuracy of the information referred to the above
paragraph.
Article 15. SEVERABILITY.
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In the event any parts of this Debenture are found to be void, the
remaining provisions of this Debenture shall nevertheless be binding with the
same effect as though the void parts were deleted.
. ARTICLE 16. LITIGATION
(a) FORUM SELECTION AND CONSENT TO JURISDICTION. Any litigation based
thereon, or arising out of, under, or in connection with, this Debenture or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Holder shall be brought and maintained exclusively in
the courts of the State of Florida. The Company and Holder hereby expressly and
irrevocably submits to the jurisdiction of the federal Courts of the State of
Florida for the purpose of any such litigation as set forth above and
irrevocably agree to be bound by any final judgment rendered thereby in
connection with such litigation. The Company and Holder further irrevocably
consent to the service of process by registered mail, postage prepaid, or by
personal service within or without the State of Florida. The Company and Holder
hereby expressly and irrevocably waives, to the fullest extent permitted by law,
any objection which it may have or hereafter may have to the laying of venue of
any such litigation brought in any such court referred to above and any claim
that any such litigation has been brought in any inconvenient forum. To the
extent that the Company or Holder have or hereafter may acquire any immunity
from jurisdiction of any court or from any legal process (whether through
service or notice, attachment prior to judgment, attachment in aid of execution
or otherwise) with respect to itself or its property the Company and Holder
hereby irrevocably waive such immunity in respect of their obligations under
this Debenture and the other loan documents.
(b) WAIVER OF JURY TRIAL. The Holder and the Company hereby knowingly,
voluntarily and intentionally waive any rights they may have to a trial by jury
in respect of any litigation based hereon, or arising out of, under, or in
connection with, this agreement, or any course of conduct, course of dealing,
statements (whether oral or written) or actions of the Holder or the Company.
The Company acknowledges and agrees that it has received full and sufficient
consideration for this provision and that this provision is a material
inducement for the Holder entering into this agreement.
(c) SUBMISSION TO JURISDICTION. Any legal action or proceeding in
connection with this Debenture or the performance hereof may be brought in the
state and federal courts located in Florida, and the parties hereby irrevocably
submit to the exclusive jurisdiction of such courts for the purpose of any such
action or proceeding.
Article 17. SECURITY INTEREST
This Debenture is secured, by a mortgage (in the form attached hereto
as Exhibit ____ and incorporated herein) from the Company to the Holder,
encumbering the Company's real property located at 6531 NW 18th Court,
Plantation Florida, up to an amount equal to the principal amount of this
Debenture and all accrued interest.
Article 18. RELEASE OF MORTGAGE
Once the registration statement covering the Common Stock underlying
this Debenture is declared effective, the mortgage securing this Debenture shall
be released upon the earlier of (a) the day the Company qualifies for listing on
AMEX or NASDAQ, as long as said listing requirements are not being met through a
reverse split of the Company's Common Stock or (b) 180 days from the date the
Company receives its third funding tranche as set forth in a separate
Subscription Agreement between the Purchaser and the Company concerning the
Company's convertible debentures.
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of the date
first written above.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By /s/ Linda B. Grable its President duly authorized
8
IMAGING DIAGNOSTIC SYSTEMS, INC.
[Letterhead of Registrant]
April 9, 1999
Imaging Diagnostic Systems, Inc.
6531 N.W. 18th Court
Plantation, FL 33313
Re: Registration Statement on Form S-2
Gentleman:
This opinion is submitted pursuant to applicable rules of the Securities and
Exchange Commission with respect to the registration by Imaging Diagnostic
Systems, Inc. (the "Company") of an aggregate of 7,130,467 shares of Common
Stock, no par value (the "Common Stock") pursuant to a Registration Statement on
Form S-2.
In my capacity as general counsel to the Company, I have examined the original,
certified, conformed, or other copies of the Company's Certificate of
Incorporation, Bylaws and corporate minutes provided to me by the Company. In
all such examinations, I have assumed the genuineness of all signatures on
original documents, and the conformity to originals or certified documents of
all copies submitted to me as conformed, Photostat or other copies. .In passing
upon certain corporate records and documents of the Company, I have necessarily
assumed the correctness and completeness of the statements made or included
therein by the Company, and I express no opinion thereon. Based upon and in
reliance of the foregoing, I am of the opinion that the Common Stock has been
and the common stock, shares underlying the Series H Preferred Stock and the
Warrants will be, upon conversion exercise or issuance, validly issued, fully
paid and non-assessable. I hereby consent to the use of this opinion in the
Registration Statement on Form S-2 to be filed with the Commission.
/s/Rebecca J. Del Medico ------------------------
Rebecca J. Del Medico General Counsel
IMAGING DIAGNOSTIC SYSTEMS, INC.
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into as
of February 9, 1999, by and between FOCUS Surgical Ltd., a corporation organized
and existing under the laws of the United Kingdom (the "Distributor"), and
Imaging Diagnostic Systems, Inc., a corporation organized and existing under the
laws of the State of Florida ("IDSI").
WITNESSETH:
RECITALS
WHEREAS, IDSI is the owner, and manufacturer of a state of the art
laser imaging system for detection and analysis of masses in the breast, and
ancillary equipment as more fully described on Exhibit A hereto and incorporated
herein (the "Equipment").
WHEREAS, IDSI is the owner of a certain Patent, Patent pending and
Patent applications, trade secrets and other proprietary information in
connection with the Equipment and represents that it has the legal right to
manufacture, sell and distribute the Equipment, either individually or through
others;
WHEREAS, IDSI wishes to grant to Distributor and Distributor wishes to
obtain the exclusive right to be supplied with, sell, distribute and market the
Equipment, individually or through others, in Holland, Belgium and Luxembourg
(the "Territory").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement the following terms shall
have the definition set forth below.
(a) EQUIPMENT. The term "Equipment" shall mean and include only those
products listed on Exhibit A, as amended from time to time. IDSI may add to,
upgrade or change the Equipment from time to time by providing written notice
not less than thirty (30) days prior to any such change.
(b) TERRITORY. The term "Territory" shall mean Holland, Belgium and
Luxembourg.
2. TERM. This Agreement shall be for a term of one year from the date of
its execution by Distributor. This Agreement will automatically renew for an
additional one year term provided that Distributor meets the Performance
Standards set forth in Section 5. and, provided that Distributor satisfactorily
fulfills all other terms and conditions of this Agreement.
3. RIGHT TO SELL, DISTRIBUTE AND MARKET. During the term of this
Agreement and any renewal hereof, IDSI hereby grants to Distributor, as its
exclusive agent, the right to sell, distribute, individually or through outside
distributors, and market the Equipment in the Territory. Distributor shall also
have the right to use the trade names, and trademarks associated with the
Equipment in connection with the promotion, sale, marketing and distribution of
the Equipment. Distributor hereby acknowledges and agrees that all trade names
and trademarks associated with the Equipment are the property of and proprietary
to IDSI.
4. DISTRIBUTOR'S DUTIES, REPRESENTATIONS AND WARRANTIES. Distributor
agrees to use its best efforts to sell, market and/or distribute the Equipment
in the Territory. Distributor agrees that it will perform at its expense the
following duties to IDSI's reasonable satisfaction
(a) PROMOTION AND MARKETING.
(i) Distributor will maintain a qualified sales and
distribution organization which will provide sales personnel, advertisement,
marketing and distribution support for the solicitation of customers and
potential customers in the Territory for the sale of the Equipment.
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(ii) Any sales promotion, promotional activities, marketing or
advertising strategies, pamphlets, advertisements, brochures or other
promotional materials, other than those provided by IDSI, must have the prior
written approval of IDSI. At least one copy of all Distributor's advertising and
sales promotion materials in which the Equipment of IDSI is mentioned, must be
provided for IDSI's review and approval prior to the time of first use. All
advertisements, pamphlets, brochures or other promotional materials, other than
those provided by IDSI shall be at the sole cost of the Distributor. The
Distributor shall have the continuing right to use any promotional materials
produced by IDSI while this Agreement is in effect. (iii) Distributor, at its
sole cost, will attend the RSNA and be present in the IDSI booth for at least 4
hours per day.
(iv) Distributor will exhibit the CTLM(TM) in at least one
major exhibit in the Territory or in the countries surrounding the Territory.
(b) QUARTERLY REPORTS. Distributor shall promptly prepare and deliver
to IDSI, within 15 days of the end of each quarter, reports identifying each
purchaser of Equipment by name, address and designation of type of business and
the date of sale, model and serial number for each unit of Equipment sold during
the preceding three months and a forecast of requirements for Equipment for the
following six months, as well as a description of all training, support, and
advertising and sales promotional activities undertaken during such period. In
addition, such Report shall contain a statement of the Distributor' then current
inventory of spare parts and technical literature available for customer
service, maintenance and support of the Equipment. The Report shall be certified
by an officer of the Distributor.
(c) GENERAL CONDUCT. Distributor shall at all times conduct its
business in a manner that reflects favorably on IDSI and its Equipment and will
not engage in any deceptive, misleading, illegal or unethical business
practices.
(d) SERVICE AND SUPPORT. Distributor's personnel will be required to be
trained at IDSI headquarter facilities in sales and support techniques for all
of the Equipment and services. IDSI will not charge for such training, however
Distributor shall be responsible for all travel, accommodation and other
expenses. Distributor will provide adequate installation, customer service, and
maintenance and support for the Equipment in the Territory. Distributor will
establish and maintain a staff of trained technicians and purchase and maintain
stock of spare parts and technical literature necessary in order to provide
adequate installation, customer service, maintenance and support of the
Equipment in the Territory. Distributor hereby agrees to provide such service
and support in a prompt and workmanlike manner to any user of the Equipment in
the Territory.
(e) COMPETITIVE PRODUCTS. Distributor will do everything within its
power to feature, promote, and advertise, as part of its merchandising and sales
policy, the Equipment and use its best efforts to stimulate and increase
interest in IDSI's Equipment. IDSI understands that some existing and some new
customers may request competitors' products. Distributor will use its best
efforts to sell, market and distribute the IDSI Equipment to such customers.
Distributor will give IDSI the opportunity to assist with these accounts.
(f) CUSTOMER REQUIREMENTS. With a view to maximizing the potential
market for the Equipment within the Territory, Distributor will report to IDSI
on a quarterly basis, and assist IDSI in the assessment of the needs and
requirements of the potential customer base in the Territory with respect to the
Equipment, including, but not limited to: (i) a rolling twelve-month quantity
forecast, (ii) quality of the Equipment, (iii) design, functional capability and
additional features of the Equipment and related modifications, improvements and
enhancements, and (iv) general market conditions of the Territory.
(g) CO-MARKETING PROTECTION. Distributor will maintain confidentiality
of IDSI supplied prospective customers and not conduct any direct efforts to
persuade such clients toward competitive equipment or services.
(h) PURCHASE ORDERS. Distributor shall forward all orders promptly to
IDSI. The orders shall state clearly the name of the purchaser, the quantity
purchased, and the time and place of delivery.
(i) DELIVERY. Distributor shall give IDSI at least 180 days prior
written notice before each shipment is required.
(j) EXPENSES AND TAXES. Distributor is an independent contractor, and
as such shall pay all expenses, including compensation of salesmen, rentals,
travel, and all taxes, including assessments, which may be made against the
salary or wages of those directly employed by Distributor.
(k) RELATIONSHIP OF PARTIES. Except as set forth herein, Distributor
shall have no right or authority to create any obligation on the part of IDSI or
bind IDSI to any agreement.
(1) OFFICES. Distributor shall maintain a suitable office in the
Territory with a telephone and facsimile line suitable for use for the sale of
the Equipment. The office shall contain a suitable display area where the
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Equipment shall be prominently displayed at all times. This display area or
another area shall be suitable for and used for the demonstration of and
training in the use of, the Equipment. The office shall be staffed from 9:00
a.m. to 5:00 p.m., Monday through Friday, subject to recognized national
holidays. 5. PERFORMANCE STANDARDS. Prior to the PMA, Distributor will purchase
one clinical CTLM(TM), at IDSI's cost, for sale to a major medical facility to
be used for clinical study comparisons. The sale to the medical facility shall
be approved by IDSI and shall be conditioned upon and provide Distributor with
the unlimited right, subject to scheduling, to use the Equipment for sale
demonstrations. Demonstrations of the equipment must be complete and must show
all features and functions of the Equipment.If the following performance
standards (the "Minimum Performance Standards") are not met, IDSI will notify
Distributor, in writing, that it is in default of this Agreement. If Distributor
does not cure the deficiency within 30 days from receipt of the notice, IDSI, at
its sole option, may: (i) continue this Agreement on a nonexclusive basis; (ii)
continue this Agreement on a nonexclusive basis and limit the Territory; or
(iii) terminate this Agreement. Any such action taken by IDSI shall be without
prejudice to the rights of the parties with respect to Equipment already
ordered, sold or delivered. For the purpose of this Agreement Year 1 shall begin
upon PMA acceptance.
YEAR. NUMBER OF CTLM(TM) UNITS
- ----- ------------------------
1 4
6. PURCHASE OF EQUIPMENT.
(a) ORDERS. Orders from Distributor for equipment shall be made by
delivery of a purchase order to IDSI. As soon as practicable after receipt of
such purchase order, IDSI will: (i) if such order is accepted, return to
Distributor IDSI's standard form of Sales Acknowledgment (the "Acknowledgment")
setting forth dates on which delivery will be made, or (ii) notify Distributor
in writing that such order is rejected. IDSI will use its best efforts to make
prompt delivery of the Equipment accepted by IDSI on the delivery dates
specified in the Acknowledgment, F.O.B. Fort Lauderdale, at the time and to the
entities and destinations listed in the purchase orders. IDSI shall not be
liable for any failure to deliver, if such failure has been occasioned by fire,
embargo, strike, failure to secure materials from a usual source of supply, or
any circumstance beyond IDSI's control, which shall prevent IDSI from making
deliveries in the normal course of its business. IDSI shall not, however, be
relieved from making delivery when the causes interfering with deliveries shall
have been removed. In particular, the Parties acknowledge that IDSI is reliant
on outside suppliers, which supply the components for its Equipment. Should
these suppliers fail to produce the required components in a timely manner, than
IDSI shall be excused from the delivery obligations under this Agreement until
such time as the components can be manufactured, delivered and installed in the
Equipment. In no event shall IDSI be responsible for any loss or liability
suffered by Distributor as a result of delay in delivery of any order.
(b) CANCELLATION OF ORDERS. Distributor may cancel any order (or any
part thereof) for Equipment by giving IDSI written notice of such cancellation
at least 15 days prior to the shipping date. If Distributor cancels an order for
Equipment (or any part thereof), Distributor will be subject to a charge based
upon the purchase price relating to the Equipment so affected as set forth on
Exhibit B attached hereto. In the event of such cancellation, Distributor will
have no rights in partially completed goods.
(c) RESCHEDULING ORDERS. Distributor may at any time, upon not less
than thirty (30) days written notice to IDSI, reschedule and/or postpone the
delivery date relating to an order (or any part thereof) for up to thirty (30)
days. The postponement of delivery to a date more than thirty (30) days from the
delivery date specified in the initial order shall be deemed a cancellation of
such order. DISTRIBUTOR MAY NOT POSTPONE THE DELIVERY DATE MORE THAN ONCE WITH
RESPECT TO ANY ORDER. If Distributor cancels a previously rescheduled delivery
of Equipment, the applicable cancellation charges shall be based on the delivery
date specified in the initial order submitted by Distributor for such delivery.
7. PRICE.
(a) PURCHASE PRICE. The purchase price for the Equipment to be sold
hereunder shall initially be as set forth on IDSI's Price List attached hereto
as Exhibit A, which may be discounted based on the cumulative quantities of such
Equipment purchased by Distributor during the term hereof or any Additional
Term. Discounts shall not apply retroactively to prior purchases of Equipment.
IDSI shall have the sole right to set the price and other terms of the sales of
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the Equipment. IDSI, at its sole discretion, reserves the right to change
prices, materials used, Equipment line and the components of the Equipment. IDSI
will provide reasonable notice of any price or other changes to Distributor as
to not disrupt the sales and distribution of the Equipment. IDSI reserves the
right to amend Exhibit A with respect to any Additional Term.
(b) PRICE CHANGES. IDSI may change the prices to be charged for
Equipment sold hereunder by amending its published Price List and giving
Distributor thirty (30) days prior notice. All orders received and accepted by
IDSI prior to the effective date of the price increase for shipment within
thirty (30) days of such effective date will be billed at the prices in effect
at the time of acceptance of the order; provided, however, that if Distributor
notifies IDSI in writing prior to the effective date of such price increase that
it quoted the original price in an outstanding bid submitted prior to receipt of
IDSI's amended Price Lists, any order relating to such bid accepted by IDSI
prior to the effective date of such price increase for shipment within ninety
(90) days of such effective date will be billed at the prices in effect at the
time of acceptance. All other shipments after thirty (30) days (or ninety days,
if applicable) of such effective date shall be billed at the prices set forth in
the amended Price List.
(c) PAYMENT. All payments hereunder shall be in United States dollars
and shall be effected by means of confirmed, irrevocable letters of credit on a
United States bank established, upon execution of this Agreement, to IDSI's
satisfaction. All exchange, interest, banking, collection and other charges
shall be the sole expense of the Distributor. Distributor shall have the option
to wire transfer funds in advance of shipment to IDSI as follows:
First Union National Bank of Florida, Jacksonville, Florida
Account of Imaging Diagnostic Systems, Inc.
Account Number 2090000
ABA Number 06300002
Shipment will be made upon either receipt of the letter of credit approved by
IDSI or confirmation that a wire transfer has been received.
8. TERMS AND CONDITIONS OF SALE. This Agreement and all sales of Equipment
hereunder by IDSI to Distributor shall be subject to IDSI's standard terms and
conditions of sale as set forth on the applicable Acknowledgment. A copy of
IDSI's current Standard Terms and Conditions of Sale is attached hereto as
Exhibit D and incorporated herein. To the extent that IDSI's standard terms and
conditions are inconsistent with express provisions of this Agreement, the
provisions of this Agreement shall prevail. Distributor agrees that although it
may use its standard forms for others or other notices hereunder, said standard
forms will be governed by the terms and conditions of this Agreement and any
applicable Acknowledgment shall have no force and effect. Distributor agrees to
place the following legend on its standard forms submitted to IDSI hereunder:
"NOTWITHSTANDING ANY OTHER TERMS AND CONDITIONS APPEARING HEREON, THIS PURCHASE
SHALL BE GOVERNED BY THE TERMS AND CONDITIONS OF SALE SET FORTH IN THE IDSI
DISTRIBUTION AGREEMENT."
9. PRODUCT WARRANTY.
(a) DISTRIBUTOR WARRANTY. The sole warranties provided by IDSI to
Distributor with respect to the Equipment are those contained in IDSI's Standard
Terms and Conditions. Notwithstanding the foregoing, with respect to Equipment
for which IDSI is not the original manufacturer, the sole warranties provided by
IDSI to Distributor shall be equivalent to the sole warranties provided by the
original manufacturer to IDSI (current original manufacturer warranties and the
Equipment to which they pertain are set forth on Exhibit A).
IDSI DISCLAIMS ALL OTHER WARRANTIES, WARRANTS OF TITLE, MERCHANTABILITY, AND
FITNESS FOR A PARTICULAR PURPOSE AND AGAINST INFRINGEMENT UPON THE RIGHTFUL
CLAIM OF ANY THIRD PERSON. IDSI DISCLAIMS LIABILITY FOR ALL CONSEQUENTIAL
DAMAGES IN ANY FORM, EVEN THOUGH IDSI MAY HAVE BEEN ADVISED OR MAY OTHERWISE
KNOW OF THE POSSIBILITY OF SUCH DAMAGES.
Nothing contained in this warranty shall make IDSI liable beyond the express
limitations of this warranty for loss or damage to the business of Distributor,
including any claims as to breach of contract, lost receipts or profits,
business interruptions or other tangible business loss.
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(b) END-USER WARRANTY. Distributor is hereby authorized, subject to the
succeeding sentence, to offer the warranties set forth in Section 9 (a) to
customers to whom it sells the Equipment, and IDSI agrees to honor such
warranties. Distributor acknowledges and agrees that the warranty period set
forth in the Acknowledgment commences, with respect to both Distributor and its
customers, on the date of delivery to Customer provided however, in no event
shall the warranty period exceed fifteen months. In the event that the
Distributor extends or otherwise represents to a customer that the warranties
are more extensive or encompassing than those set forth herein, the Distributor
shall indemnify IDSI for any warranty claims made by a customer based on
Distributor's representations.
10. SUBLICENSES.
(a) PROGRAMS SUBLICENSE. Distributor is authorized to grant
restrictive, nonexclusive, nontransferable sublicenses to customers to use the
Programs (as defined in the Acknowledgment) or any portion thereof, provided
that each such Customer (sublicensee) enters into an agreement with Distributor
pursuant to which the sublicensee expressly accepts and agrees to the terms and
conditions of the license set forth in the Acknowledgment. In addition to any
other remedy IDSI may have, IDSI reserves the right to terminate any
sublicensee's sublicense if said sublicensee fails to comply with any term or
condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Programs.
(b) PROPRIETARY TECHNICAL MATERIALS SUBLICENSE. Distributor is
authorized to grant restrictive, nonexclusive, nontransferable sublicenses to
customers to use the Proprietary Technical Materials or any portion thereof,
provided that each such customer (sublicensee) enters into an agreement with
Distributor pursuant to which the sublicensee expressly accepts and agrees to
the terms and conditions of the license set forth in the Acknowledgment. In
addition to any other remedy IDSI may have, IDSI reserves the right to terminate
any sublicensee's sublicense if said sublicensee fails to comply with any term
or condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Proprietary Technical Materials.
11. MAINTENANCE.
(a) DISTRIBUTOR'S OBLIGATION TO PROVIDE SERVICE. Distributor agrees
that IDSI shall have no obligation to maintain the Equipment except for the
warranty obligations specified in Section 9. Distributor acknowledges and agrees
that it will perform, at no expense to IDSI, maintenance and repair of Equipment
sold or leased to the Distributors customers
(b) CONSIGNMENT OF SPARES PARTS. IDSI may, at its sole discretion,
consign to Distributor, from time to time, as it may deem necessary, spare parts
to support warranty repair service in Distributor's Territory. The title to such
parts shall at all times remain with IDSI and Distributor shall have no right,
title or interest therein until such time as payment is made to IDSI as set
forth below. In the event that such parts used for non-warranty repair service,
Distributor will purchase the part used or to be used for non-warranty repair
services at prices listed in Exhibit A, as may be amended from time to time.
Distributor will provide IDSI with a monthly report, not later than 15 days
after the first day of each month, which will indicate the Customers name,
address and phone number, the work performed, the parts used and whether the
repair was under warranty. The report shall also include a total dollar amount
for parts used for non-warranty repair and be accompanied by a check for full
payment therefor.
12. TERMINATION.
(a) Either party may, by written notice to the other party, terminate
this Agreement upon the occurrence of any one or more of the following events:
(i) Upon the failure of the other party to pay any monies when
due hereunder, if such default continues for five (5) business days or more
after written notice to the defaulting party;
(ii) Upon material failure of a party to observe, keep or
perform any of the covenants, terms or conditions herein, if such default
continues for thirty (30) business days or more after written notice to the
defaulting party;
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(iii) In the event: (A) a party makes a general assignment for
the benefit of creditors or transfers all or a substantial portion of its
assets; (B) a receiver is appointed and not discharged within 30 days of
appointment, or (C) the other party has become insolvent.
(b) IDSI may, by written notice to Distributor, terminate this
Agreement upon occurrence of any one more of the following events:
(i) In the event that Distributor solicits orders for
Equipment outside its Territory;
(ii) In the event of any dispute, disagreement or controversy
between or among the owners, partners, managers, officers or stockholders of
Distributor which in the opinion of IDSI adversely affects the ownership,
operation, management, business or interests of Distributor, or in the event of
a change in control or majority ownership of Distributor; (iii) If Distributor
ceases to function as a going concern or to conduct its operations in the normal
course of business, or
(c) If Distributor fails to meet the Minimum Performance Standards set
forth in Section 5, IDSI shall have the right, upon 30 days written notice to
the Distributor, to terminate this Agreement. Distributor shall have the right
to cure the deficiency within such 30-day period. If Distributor does not cure
the Deficiency within such 30-day period, IDSI may terminate this Agreement on
the 30th day.
(d) Upon termination or expiration of this Agreement, for any reason
Distributor shall discontinue the use of IDSI's name, trademarks, trade names,
labels, copyrights, and other advertising media and shall remove all signs and
displays relating thereto: and will no longer identify itself as a distributor
of IDSI or indicate, in any way, that it is associated with IDSI. Distributor
shall promptly return to IDSI all marketing and selling materials, all manuals,
all technical data, all other documents and copies thereof previously supplied
by IDSI and all spare parts consigned to Distributor by IDSI.
(e) Upon termination or expiration of this Agreement, for any reason,
IDSI shall have the option to repurchase its Equipment and spare parts then in
possession of the Distributor, at prices originally billed to the Distributor if
the Equipment and spare parts are new and at an adjusted price if the Equipment
is used, and with deductions for money due or to become due to IDSI under this
Agreement. As to any of the IDSI's Equipment or spare parts not repurchased by
IDSI, Distributor shall have the right to dispose of them in the regular course
of its business and for this purpose only, the restrictions of preceding sub
paragraph shall be deferred until three months after the termination of this
Agreement.
(f) It is expressly understood and agreed that the rights of
termination as provided in this Agreement are absolute and that both parties
hereto have considered the costs and expenditures associated with the
preparation and performance of this Agreement and the possible losses and
damages which may be incurred by both parties in the event of its termination.
The parties hereto acknowledge and agree, by execution hereof that they have
entered into this Agreement with full knowledge of such possibilities, and
except as provided herein neither party hereto shall be responsible to the other
for compensation, damages, losses, or otherwise, for termination of this
Agreement as set forth above.
13. TRADEMARKS: MARKINGS.
(a) TRADEMARKS AND NAMES. Distributor is hereby granted permission to
use during the term of this Agreement, and any renewal hereof, the trademarks
and trade names used by IDSI in connection with the Equipment. Such permission
is expressly limited to uses by Distributor necessary to performance of
Distributor's obligations under this Agreement, and Distributor hereby admits
and recognizes IDSI's exclusive ownership of such marks and names and the renown
of IDSI's marks and names, both worldwide and specifically in the Territory.
Distributor agrees not to take any action, inconsistent with such ownership and
further agrees to take any action, including without limitation the conduct of
legal proceedings, which IDSI deems necessary to establish and preserve IDSI's
exclusive rights in and to its trademarks and trade names. Reproductions of
IDSI'S trademarks, logos, symbols, etc. shall be true reproductions and shall be
done photographically, in a manner, which enhances the reputation and status of
IDSI.
(b) MARKINGS. Distributor will not remove or make or permit any
alterations in any labels or other identifying markings placed by IDSI on any of
the Equipment without written consent by IDSI.
(c) NO ADDITIONAL RIGHTS. No rights to manufacture, alter, or use the
Equipment for purposes other than those contained herein are granted by this
Agreement. Moreover, no licenses are granted or implied by this Agreement under
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any patents owned or controlled by IDSI or under which IDSI has a right, except
the right to sell, market and distribute IDSI's Equipment, as contemplated
herein, during the term of this Agreement.
14. INDEMNIFICATION. Distributor shall indemnify and hold harmless
IDSI, its officers, directors, employees, or agents (collectively referred to in
this Section 14 as "IDSI") for damages or expenses resulting from any claim,
suit or proceeding brought against IDSI, with regard to any untrue statement or
alleged untrue statement, misrepresentation or alleged misrepresentations,
promise or agreements made or allegedly made by Distributor or its
sub-distributors or arising from the marketing, sale or distribution of the
Product by Distributor or its sub-distributors. This provision shall not apply
to Distributor or any person controlling Distributor in respect of any losses,
claims, damages, liabilities or actions arising out of or based upon any untrue
statement or alleged untrue statement, misrepresentation or alleged
misrepresentations, promise or agreement made or allegedly made by Distributor
or arising from the marketing, sale or distribution of the Product by
Distributor, if such untrue statement or alleged untrue statement,
misrepresentation or alleged misrepresentations, promise or agreement was made
in reliance upon information furnished in writing to Distributor by IDSI
specifically for use in connection with the sale, marketing or distribution of
the Equipment. IDSI agrees that Distributor has the right to defend, or at its
option to settle, and Distributor agrees, at its own expense, to defend or at
its option to settle, any claim, suit or proceeding brought against IDSI.
Distributor agrees to pay any costs of litigation, investigation or defense
incurred by IDSI, including reasonable attorney fees, and final judgement,
entered against IDSI on such issue in any such suit or proceeding. Distributor
shall be relieved of the foregoing obligations unless IDSI notifies Distributor
in writing, within fifteen days of receipt of notification of such suit, claim
or proceeding, and gives Distributor authority to proceed as contemplated
herein.
15. RISK OF LOSS. Title to the Equipment shipped shall pass upon shipping,
subject to full payment. Distributor assumes the risk of loss and damage of the
Equipment in transit from IDSI's shipping point to the point of destination.
16. COMPLIANCE WITH LAWS. Distributor shall comply with all material
applicable present and future federal, state, county, local and foreign laws,
ordinances and regulations relating to the importation and sale of the
Equipment. Distributor will take all steps necessary to obtain the proper import
licenses, if applicable and Distributor shall be solely responsible for any
excise tax, duties or other costs for the importation of the Equipment.
17. NON-CIRCUMVENTION AGREEMENT. The respective Parties involved in
this Agreement, agree not to circumvent each other. The Parties agree that they
will not make any contact, directly or indirectly, written, oral, electronic or
by any medium of contact whatsoever, with any Sources without the express
written consent of the other introducing Party. Each of the listed Parties
hereto, accepts and understands that any overt or covert action of
circumvention, or unauthorized disclosure shall constitute a breach of trust and
shall be considered a breach of the terms and conditions of this agreement. Such
action shall be subject to judicial action, and recompense.
If either Party shall bring an action to recover payment or other compensation
pursuant to the terms of this Agreement, the prevailing Party shall be entitled
to reasonable attorney's fees and expenses as may be awarded, including legal
fees and costs, and recovery for liquidated damages and punitive damages as may
be awarded by and through any legal process or jurisdiction.
For the purposes of this Section 17, the term "Party" or "Parties" shall be
considered to include and be binding upon the parties to this Agreement, any
individual, entity or entities, including but not limited to, associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated, associations,
collateral providers or the like, which the Parties hereto may now or in the
future be associated with during the term of this Agreement and any renewal
thereof.
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For the purposes of this Section 17, the term "Sources" shall be considered to
include any business opportunity, principal, individual, entity or entities,
including but not limited to, customers and distributors, their associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated partnerships,
associations or the like, introduced to or brought to the attention of a Party
to the other Party during the term of this Agreement or any renewal thereof.
Distributor acknowledges and agrees that no separate or additional payment will
be required to be made to it in consideration of its undertakings in this
Section 17.
18. NO COPYING. Without the prior written consent of IDSI, Distributor shall
refrain from copying, reverse engineering, disassembling, translating or
modifying the Equipment for its benefit, or granting any other person or entity
the right to do so.
19. NOTICES. Any notice required or permitted by this Agreement shall be in
writing and shall be delivered by U.S. Certified Mail, return receipt requested,
or by special messenger service with receipt (such as Federal Express), by
facsimile delivery or by hand, to the parties at the following addresses or such
substitute person or address of which notice is given in like manner:
Imaging Diagnostics Systems, Inc.
6531 NW 18 Court
Plantation, Florida 33313
Phone (954). 581-9800
Fax (.954).
581-0555
Distributor
Focus
8 Buckland Crescent
London NW3 5DX
Phone +44 0 171 722 1758
Fax +44 0 171 722 0499
or to such other address as either of them, by notice to the other may designate
from time to time. The transmission confirmation receipt from the sender's
facsimile machine shall be conclusive evidence of successful facsimile delivery.
Time shall be counted to, or from, as the case may be, the delivery in person or
by mailing.
20. GOVERNING LAW. VENUE AND ARBITRATION. This Agreement shall be
deemed to be executed in the State of Florida and governed by the laws of the
State of Florida. Any controversy or claim arising out of or relating to this
Agreement or to the interpretation, breach or enforcement thereof, except a
claim for injunctive relief, shall be submitted to an arbitrator and settled by
arbitration in Broward County, Florida, in accordance with the rules then
obtaining of the American Arbitration Association. Any award made by the
arbitrator shall be final, binding and conclusive on all parties hereto for all
purposes, and judgement may be entered thereon in any court having jurisdiction
thereof. Nothing contained herein shall serve to prohibit the parties from
seeking injunctive relief in a court of competent jurisdiction.
21. GENERAL.
(a) INDEPENDENT CONTRACTOR. Distributor will act as an independent
contractor under the terms of this Agreement and not an agent or legal
representative of IDSI for any purpose, whatsoever, and, except for the
extension of the warranty set forth in Section 9, Distributor has no right or
authority to assume or create any obligation of any kind, express or implied, on
behalf of IDSI to Distributor's customers or to any other person.
(b) PRODUCT CHANGES. IDSI reserves the right to make design and other
modifications in the Equipment at any time but shall not be obligated to
implement such modifications in Equipment that has previously been delivered.
(c) CONFIDENTIAL INFORMATION. Distributor agrees not to disclose to any
person outside of its employ, and not to use for any purpose other than to
fulfill its obligations under this Agreement, any information which is disclosed
to Distributor by IDSI and which is not otherwise publicly available.
Distributor agrees to take all preventative measures and precautions to guard
against and prevent any use or disclosure of such confidential information by
its partners, employees, agents, or other persons consistent with the intent of
this paragraph. Distributor further agrees not to disclose to IDSI any
information, which Distributor deems to be confidential, and it is understood
that any information received by IDSI will not be of a confidential nature.
(d) WAIVER AND AMENDMENT. Any party shall not construe the waiver by
any party to this Agreement of a breach of any provision hereof by any other
party as a waiver of any subsequent breach. The failure by either party at any
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time to enforce the provisions of this Agreement, or to exercise any election or
option provided herein, shall in no way be construed as a waiver of such
provisions or options, nor in any way to affect the validity of this Agreement
or any part thereof, or the right of either party thereafter to enforce each and
every such provision. No provision of this Agreement may be terminated, amended,
supplemented, waived or modified other than by an instrument in writing signed
by the party against whom the enforcement of the termination, amendment,
supplement, waiver or modification is sought.
(e) NO OTHER WARRANTY OR REPRESENTATION. Distributor hereby
acknowledges that it has not entered into this Agreement in reliance upon any
warranty or representation by any person or entity except for the warranties or
representations specifically set forth herein.
(f) LANGUAGE. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications and materials made or given pursuant to this
Agreement, including without limitation any operations and maintenance manuals,
shall be in the English language. IDSI shall have no obligations or liabilities
to Distributor or any other person for loss of profits, loss of use or
incidental, special or consequential damages, even if IDSI has been advised of
the possibility thereof, arising out of or in connection with the translation
from English into any other language of any materials made or given pursuant to
this Agreement, including without limitation any operations and maintenance
manuals.
(g) LICENSES AND PERMITS. IDSI will use its best efforts to secure all
export licenses and permits required by the United States government, and
Distributor will secure all import licenses and permits required in connection
with the importation, marketing, sale and distribution of the Equipment. Each
party will furnish any information and assistance reasonably required by the
other party in connection with securing any such licenses and permits.
(h) IMPORT/EXPORT CONTROLS. IDSI's obligations hereunder shall be at
all times subject to the export administration and control laws and regulations
of the United States Government, and any amendments thereof and the import
administration and control laws and regulations of the Territory, and any
amendments thereof. Distributor shall provide IDSI with any written assurances
it may reasonably request with respect to Distributor's compliance with such
laws or regulations. Distributor agrees that, with respect to the import, resale
or any other disposition of Equipment and any printed commercial and technical
data and information supplied by IDSI, Distributor will comply fully with the
import/export administration and control laws and regulations of the United
States of America and the Territory, and any amendments of such laws and
regulations.
(i) COMPLIANCE WITH LAWS. IDSI represents that, with respect to the
production of Equipment to be furnished hereunder, IDSI will fully comply with
all applicable laws of the United States and the State of Florida. Distributor
represents that, with respect to the purchase, marketing, sale and distribution
of the Equipment furnished hereunder, Distributor will comply with all
applicable laws of the Territory.
(j) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding between the parties concerning the subject matter hereof and
supersedes all prior agreements, negotiations and understandings of the parties
with respect thereto. No representation, promise, modification or amendments
shall be binding upon either party as a warranty or otherwise, unless in writing
and signed on behalf of each party by a duly authorized representative. Although
Distributor may use its standard purchase order form to give any order or other
notice provided for hereunder, said order or notice will be governed by the
terms and conditions of this Agreement any applicable Acknowledgment, and any
term or condition set forth in any such standard form which is inconsistent with
or in addition to the terms and conditions of this Agreement and any applicable
Acknowledgment shall have no force or effort.
(k) ATTORNEY'S FEES. In the event any action is commenced with regard
to this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs and expenses.
(l) SEVERABILITY CLAUSE. In the event any parts of this Agreement are
found to be void, the remaining provisions of this Agreement shall nevertheless
be binding with the same effect as though the void parts were deleted.
(m) SUCCESSORS. Subject to the provisions of this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
(n) SECTION AND PARAGRAPH HEADINGS. The section and paragraph headings
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
(o) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. The execution of this
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<PAGE>
Agreement may be by actual or facsimile signature, provided however that
original signatures must be provided within ten days from the date of signing.
(p) FURTHER ASSURANCES. The Parties hereto agree to execute and deliver
from time to time at the other Party's request, without further consideration,
such additional documents and to take such other action necessary to consummate
the transactions contemplated herein.
(q) ASSIGNMENT. This Agreement may be assigned by IDSI. Distributor
will not be permitted to assign this Agreement with out the prior written
consent of IDSI.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year set forth below.
Dated: February 9, 1999
In the presence of: Imaging Diagnostic Systems, Inc.
/s/ Allan Schwartz BY: /s/ Linda Grable, President
Dated: February 9, 1999
In the presence of: Focus Surgical LTD.
______________________________ BY: /s/ Walter Solomon, Managing Director
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IMAGING DIAGNOSTIC SYSTEMS, INC.
STANDARD TERMS AND CONDITIONS
1. PAYMENT
Payments hereunder shall be made through a confirmed, irrevocable
letters of credit in U.S. dollars, opened by DISTRIBUTOR and advised through
First Union National Bank of Florida, in the full amount of the Purchase Price
for all Equipment, including an amount estimated for freight and insurance.
DISTRIBUTOR shall open the letter of credit upon issuance of any purchase order.
COMPANY shall receive disbursement under the letter of credit upon presentment
to the issuing/confirming bank of (i) an airway bill, bill of lading or similar
certificate issued by the transportation company, and (ii) a copy of COMPANY's
invoice for goods shipped (including freight and insurance). No other documents
shall be required. All interest, banking, collection, or other charges shall be
at the sole expense of DISTRIBUTOR. Payment shall be made without regard to
whether DISTRIBUTOR has made or may make any inspection or use of the Equipment.
Each shipment shall be treated as a separate transaction, but in the
event of any default of DISTRIBUTOR, COMPANY may decline to make further
shipments without in any way affecting its rights hereunder. If, despite any
default by DISTRIBUTOR, COMPANY elects to continue to make shipments, COMPANY's
action shall not constitute a waiver of any default by DISTRIBUTOR or in any way
effect COMPANY's legal remedies for any such default.
2. TAXES
The purchase price is exclusive of any sales, use or privilege tax,
customs or import duty, excise tax based on gross revenue or any similar tax or
charge which might be levied as a result of the production, sale or shipment of
any Equipment or the use of any Equipment by DISTRIBUTOR. DISTRIBUTOR agrees to
pay and otherwise be fully responsible for any such taxes (except for taxes
based on the net income of COMPANY). Any personal property taxes assessable on
the Equipment after delivery shall be borne by DISTRIBUTOR. COMPANY shall have
the right, but shall not be obligated, to pay any such taxes directly, in which
event DISTRIBUTOR shall promptly reimburse COMPANY in the amount thereof upon
presentation by COMPANY of evidence of payment.
3. DELIVERY
The Equipment shall be delivered to DISTRIBUTOR F.O.B. COMPANY's plant
in Sunrise, Florida. Delivery of the Equipment to a common carrier shall be
deemed a satisfactory delivery by COMPANY to DISTRIBUTOR. DISTRIBUTOR agrees to
pay all freight, insurance, packing and other transportation charges related to
said delivery. COMPANY shall have the right, but shall not be obligated, to
prepay such charges, in which event DISTRIBUTOR shall promptly reimburse COMPANY
in the amount thereof upon presentation by COMPANY of evidence of payment. In
connection with the delivery of the Equipment, DISTRIBUTOR may designate in
writing, not less than ten (10) business days prior to the shipment date, the
carrier for shipment and the amount of insurance and nature of coverage. If
DISTRIBUTOR fails to so designate any or all such items, COMPANY, at its
discretion, may specify any item not so designated. COMPANY shall select, at its
discretion, the types, amount of crating, and the carrier of any insurance. The
purchase price does not include any maintenance, installation, or training.
4. RISK OF LOSS; SECURITY INTEREST
Title and risk of loss or damage to the Equipment shall pass to
DISTRIBUTOR upon delivery by COMPANY to a common carrier for shipment.
COMPANY retains a security interest in the Equipment, any replacements
of the Equipment, and all proceeds of the Equipment or its replacements,
including, but not limited to, insurance proceeds, to secure performance of all
Distributor's payment obligations under this Agreement. If DISTRIBUTOR shall
fail to pay any portion of the purchase price or any related charges when due,
COMPANY shall have the right, without liability, to repossess the Equipment and
to avail itself of any legal remedy. DISTRIBUTOR agrees to execute and deliver
such financing statements and other documentation as COMPANY may reasonably
request to perfect and protect COMPANY's interests in the Equipment.
5. PROGRAMS
As used herein, the word "Programs" shall include COMPANY's Firmware
and Software, each of which is defined as follows:
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(a) "Firmware" shall mean all fixed electrical circuits (including
printed circuit boards and chips embodying such circuits) placed in the
Equipment by COMPANY that performs predetermined programs and routines in the
Equipment in response to specific inputs.
(b) "Software" shall mean all alterable programs and routines for the
internal operation of the Equipment placed in the Equipment by COMPANY, or
furnished with or for the Equipment by COMPANY.
6. PROGRAMS LICENSE
COMPANY hereby grants to DISTRIBUTOR a nonexclusive license to use and
sublicense to customers the Programs solely in connection with the sale and use
of the Equipment as contemplated under this Agreement. Any grant of a sublicense
of Programs to a Customer shall be by written sublicense agreement which
provides for all terms, conditions, restrictions and requirements as to the
ownership, use and confidentiality of such Programs as set forth in, and imposed
upon DISTRIBUTOR by, this Agreement. DISTRIBUTOR shall obtain COMPANY'S prior
approval of the form of sublicense agreement with Customers. COMPANY shall not
assign, transfer, or sublicense any Programs to any third party other than as
contemplated in this Agreement, without the express written consent of COMPANY.
Notwithstanding any contrary provision in this or in any other agreement between
COMPANY and DISTRIBUTOR, COMPANY shall retain all right, title and interest in
and to any Programs provided licensed to DISTRIBUTOR or sublicensed to customers
in connection with the sale and use of the Equipment being acquired by
DISTRIBUTOR or customers hereunder. DISTRIBUTOR agrees to maintain the
confidentiality of the Programs and to instruct and obligate its employees and
agents to do the same.
Without limiting the generality of the foregoing, DISTRIBUTOR shall not
reproduce or modify all or any portion of the Programs, nor shall DISTRIBUTOR
disclose, sell, sublicense or otherwise transfer or make available all or any
portion of the Programs to any third party, without the prior express written
consent of COMPANY.
In addition to any other remedy COMPANY may have, COMPANY reserves the
right to terminate Distributor's license or customers sublicense, if DISTRIBUTOR
or customer fails to comply with any term or condition hereof. Distributor's
license or customer's sublicense, as the case may be, granted pursuant to this
paragraph 6 shall also terminate at such time as DISTRIBUTOR shall permanently
cease to use the Equipment. DISTRIBUTOR agrees, upon notice from COMPANY of any
termination of the license granted pursuant to this paragraph 6 and, in
accordance with any more specific directions from COMPANY, to deliver
immediately to COMPANY all Software and copies thereof, and all Firmware chips
and printed circuit boards and other tangible items and materials in the
possession or custody of DISTRIBUTOR embodying the Programs.
7. PROPRIETARY TECHNICAL MATERIALS
Documentation, maintenance manuals and drawings relating to the
Equipment or the Programs (collectively, "Proprietary Technical Material") that
COMPANY may furnish shall be in DISTRIBUTOR's or customer's possession pursuant
only to a restrictive, nonexclusive license under which DISTRIBUTOR or customer
may use such Proprietary Technical Materials solely for the purpose of
operating, servicing and repairing the Equipment and the Programs and for no
other purpose. One installation, maintenance and operation manual will be
provided with each system purchased hereunder. DISTRIBUTOR agrees to maintain
the confidentially of all Proprietary Technical Materials and to instruct and
obligate its employees and agents to do the same. Without limiting the
generality of the foregoing, DISTRIBUTOR may not reproduce or copy any
Proprietary Technical Material or transfer, assign, sublicense, loan, disclose
or otherwise make available all or any portion of such Proprietary Technical
Materials to any other person or entity, without prior express written consent
of COMPANY. Title to and ownership of the Proprietary Technical Materials shall
at all time remain in COMPANY. In addition to any other remedy COMPANY may have,
COMPANY reserves the right to terminate DISTRIBUTOR's license granted pursuant
to this paragraph 7 if DISTRIBUTOR fails to comply with any term or condition
hereof. DISTRIBUTOR's license granted pursuant to this paragraph 7 shall also
terminate at such time as DISTRIBUTOR shall permanently cease to use the
Equipment. DISTRIBUTOR agrees, upon notice from COMPANY of any termination of
the license granted pursuant to this paragraph 7 and, in accordance with any
more specific directions from COMPANY, to deliver immediately to COMPANY all
Proprietary Technical Material and all copies thereof.
8. LIMITED WARRANTY
With respect to Equipment for which COMPANY is the original Company,
COMPANY warrants to DISTRIBUTOR that, for a period of twelve (12) months from
installation each item of Equipment will conform in all materials and
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workmanship. COMPANY's obligation under this warranty is limited to, at
COMPANY's option, repairing or replacing, at COMPANY's facility or at the
location of the Equipment, any Equipment or parts thereof that do not conform to
this warranty. DISTRIBUTOR shall promptly notify COMPANY in writing of any
alleged defects in the Equipment and specifically describe the problem. COMPANY
shall have no obligations under this warranty with respect to any defect unless
it receives notice and a description of such defect no later than ten (10)
working days following the expiration of the warranty period. Upon receipt of
such notice, COMPANY shall either advise DISTRIBUTOR that warranty service shall
be provided at the location of the Equipment or shall instruct DISTRIBUTOR as to
the part or parts of the Equipment that DISTRIBUTOR shall ship back to COMPANY
for repair or replacement. COMPANY will pay the costs of transporting Equipment
to COMPANY which to have been defective; otherwise, DISTRIBUTOR shall pay all
costs of transportation in both directions.
With respect to Equipment for which COMPANY is the original Company,
COMPANY warrants to DISTRIBUTOR that the Programs provided to DISTRIBUTOR in
connection with such Equipment will conform to and perform in accordance with
the then existing Equipment documentation for a period of one (1) year from
shipment of the last item of Equipment in conjunction with which the Programs
are to be used if properly used on the Equipment. COMPANY's obligation under
this warranty is limited to, at COMPANY's option, correcting, repairing or
replacing, at COMPANY's option, at COMPANY's facility or the location of the
Programs, any Program or parts thereof that do not conform to this warranty.
With respect to Equipment for which COMPANY is not the original Company
and the Programs provided to DISTRIBUTOR in connection with such Equipment, the
sole warranties provided by COMPANY to DISTRIBUTOR shall be equivalent to the
sole warranties provided by the original Company to COMPANY (current original
Company warranties and the identification of Equipment to which they pertain
shall be provided to DISTRIBUTOR upon request).
The foregoing warranties shall not apply to any Equipment or Programs
which have been (i) used or operated in a manner inconsistent with the license
granted by COMPANY, (ii) modified or repaired by anyone other than COMPANY
personnel or COMPANY's authorized service representatives in a manner which
adversely affects their operations or reliability, or (iii) damaged because of
accident, neglect or misuse by anyone other than COMPANY personnel, failure or
surge of electrical power, air conditioning or humidity control, transportation,
or other than ordinary use.
THE FOREGOING WARRANTIES APPLY ONLY TO THE ORIGINAL PURCHASER AND ARE IN LIEU OF
ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT
LIMITATION IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY UPON THE RIGHTFUL CLAIM
OF ANY THIRD PERSON.
9. LIMITATION OF LIABILITY
COMPANY shall in no event have obligations or liabilities to
DISTRIBUTOR or any other person for loss of profits, loss of use or incidental,
special or consequential damages, whether based on contract, tort (including
negligence), strict liability, or any other theory or form of action, even if
COMPANY has been advised of the possibility thereof, arising out of, or in
connection with, the sale, delivery, use, repair or performance of the Equipment
or the Programs, or any failure or delay in connection with any of the
foregoing. Without limiting the generality of the preceding sentence, COMPANY
shall not be liable for personal injury or property damage. In no event shall
the liability of COMPANY arising in connection with any Equipment sold hereunder
exceed the actual amount paid by DISTRIBUTOR to COMPANY for Equipment delivered
hereunder.
10. PATENT AND TRADEMARK INDEMNITY
COMPANY will defend, at its own expense, any suit or proceeding against
DISTRIBUTOR in a court of the United States for the direct infringement of
United States patents and trademarks by Equipment from which COMPANY is the
original Company purchased from COMPANY hereunder. COMPANY shall pay all damages
and costs finally awarded against DISTRIBUTOR because of direct infringement;
provided, however, that COMPANY shall not be obligated to defend or be liable
for costs or damages awarded in any suit or proceeding for infringement of
patents by any other products, or any completed equipment, system, assembly,
combination, method or process, in which, or in the manufacture or testing of
which, any Equipment purchased from COMPANY may be used; and provided further
that COMPANY's obligations to pay such damages and costs shall not apply to any
alleged infringement occurring after DISTRIBUTOR has received notice of such
alleged infringement unless COMPANY thereafter gives to DISTRIBUTOR written
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consent for such continuing alleged infringement. COMPANY's liability hereunder
shall not exceed the purchase price paid by DISTRIBUTOR for the infringing
Equipment, and COMPANY shall not be liable for any collateral, incidental, or
consequential damages awarded against DISTRIBUTOR.
COMPANY's duties under this paragraph 10 are conditioned upon
DISTRIBUTOR giving COMPANY prompt written notice of commencement of any suit or
proceeding or any claim of infringement and furnishing to COMPANY a copy of each
communication relating to the alleged infringement and giving to COMPANY all
authority (including the right to exclusive control of the defense of any such
suit or proceeding), information and assistance (at COMPANY's expense) necessary
to defend or settle such suit or proceeding. COMPANY shall not be bound by any
settlement made without COMPANY's prior written consent.
If in any such suit or proceeding, DISTRIBUTOR's continued use of any
item Equipment is enjoined or, if by reason of any claim of infringement,
COMPANY deems it advisable to do so, COMPANY may, at its option and expense, (i)
procure for DISTRIBUTOR the right to continue using such Equipment, (ii) modify
or replace such Equipment with non-infringing Equipment, provided that such
modification does not materially affect performance, or (iii) remove such
Equipment, grant DISTRIBUTOR a credit thereon as depreciated on a
straight-line-3-year basis and accept its return. If an infringement is alleged
prior to completion of deliveries of the Equipment, COMPANY may decline to make
further shipments without being in breach hereunder.
COMPANY shall not be obligated to defend any suit or proceeding, or be
liable for any costs or damages, if the infringement arises out of compliance
with DISTRIBUTOR's specifications or any marking or branding applied at the
request of DISTRIBUTOR. DISTRIBUTOR agrees, at its own expense, to defend and to
pay costs and damages finally awarded in any suit or proceeding against COMPANY
based on any such infringement, provided that DISTRIBUTOR is promptly notified
by COMPANY in writing of the commencement or threat of such suit or proceeding
or claim of infringement and is given all authority (including the right to
exclusive control of the defense of any such suit or proceeding), information
and assistance (at DISTRIBUTOR's expense) necessary to defend or settle such
suit proceeding.
11. FORCE MAJEURE
If the performance hereof or any obligation hereunder, except the
making of payments hereunder, is prevented, restricted or interfered with by
reason by fire, flood, earthquake, explosion or other casualty or accident;
strikes or labor disputes; inability to procure parts, supplies or power; war or
other violence; any law, order, proclamation, regulation, ordinance, demand or
requirement of any government agency; or any other or condition whatsoever
beyond the reasonable control of the affected party, the party so affected, upon
giving prompt notice to the other party, shall be excused from such performance
to the extent of such prevention, restriction or interference; provided,
however, that the party so affected shall take all reasonable steps to avoid or
remove such causes of nonperformance and shall resume performance hereunder with
dispatch whenever such causes are removed.
12. ASSIGNMENT
The rights of DISTRIBUTOR hereunder may not be assigned in whole or in
part, by operation of law or otherwise, without the express written consent of
COMPANY.
13. APPLICABLE LAW
The validity, construction and effect of this Agreement and the
respective rights and obligations of the parties hereunder, shall be governed by
and determined in accordance with the laws of the state of Florida in the United
States of America as such laws are applied to contracts between Florida
residents entered into and to be performed entirely within the state of Florida,
without reference to principles of conflicts of law. The parties hereby agree to
opt out of coverage of the United Nations Convention on Contracts for the
International Sale of Good. The parties hereby agree that this Agreement shall
be governed by the Uniform Commercial Code ("UCC") as adopted by the state of
Florida.
14. FORUM AND SERVICE OF PROCESS
All actions and proceedings arising out of or relating to this
Agreement shall be heard and determined in a state or federal court sitting in
the County of Dade, State of Florida. Service of process shall be considered
effective if done pursuant to any of the methods set forth in Rule 4(i), Federal
Rule of Civil Procedure or pursuant to Florida law.
15. ATTORNEY'S FEES AND COSTS OF LITIGATION
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If any action or proceeding arising out of or relating to this
Agreement is commenced the prevailing party shall be entitled to its reasonable
attorney's fees, costs, and expenses including the costs, expenses, and fees
associated with the enforcement or collection of any judgment.
15
PURCHASE & DISTRIBUTION AGREEMENT
This Agreement is made and entered into as of this ______ day of December 1996,
by and between Syncor Overseas Ltd., a company organized under the laws of the
British Virgin Islands, with registered office and agent at Citco Building,
Wickhams Cay, P.O. Box 662, Road Town, Tortola ("DISTRIBUTOR") and Imaging
Diagnostic Systems, Inc., incorporated in the State of [Florida], U.S.A., with
principal address at 6531 N.W. 18th Court, Plantation, FL 33313 ("SUPPLIER").
RECITALS
WHEREAS Supplier and Distributor enter into this Agreement for Distributor to
purchase and distribute, and for Supplier to sell, the CT Laser Mammography
system, including associated computer workstation and software (the "PRODUCT"),
as detailed in Schedule "A";
WHEREAS Distributor owns and operates a distribution and service business,
including nine (9) such operations outside the U.S.A.;
WHEREAS Distributor has built a strong reputation and has substantial contacts
within these foreign medical markets;
AND WHEREAS Supplier sees a potential for business in these high growth markets;
NOW, THEREFORE for and in consideration of the mutual agreements and promises
set forth herein, the parties hereto covenant and agree as follows:
AGREEMENT
1. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR. Supplier hereby appoints and
Distributor hereby accepts appointment as Supplier's exclusive distributor for
the Product in the countries, territories and/or political units as specified in
Schedule "B" (the "TERRITORY").
2. TERM. The term of this Agreement shall commence on the date initially set
forth above and shall continue for seven (7) years beyond the date the Product
receives final USFDA approval (the "TERM"), with subsequent two (2) year renewal
periods ("RENEWAL TERM"), unless either party chooses to terminate this
Agreement by giving notice at least 180-days prior to the beginning of a Renewal
Term.
3. PRICE. Distributor agrees to pay the prices for the Product pursuant to
Schedule "A," less any applicable price incentives as set forth in Schedule "C."
4. PAYMENT TERMS & CURRENCY. Payment terms are as specified in Schedule "D." All
currencies and payments in this Agreement shall be payable in United States
Dollars.
5. DUTIES OF SUPPLIER: DOCUMENTATION, INSTALLATION, TRAINING & PARTS. For the
Product supplied under this Agreement, Supplier hereby agrees to the following:
(a) to provide, in a prompt manner, Distributor with all documentation
required by the regulatory authority(s) in the Territory in order to enable
Distributor to sell the Product in the Territory, and to provide Supplier a
liaison employee for this purpose;
(b) Supplier's liaison shall be [Linda Grable];
(c) upon installation, to take all necessary steps to make the Product
fully functional as per Subsection 6.2;
(d) at no further cost and in a timely fashion, to provide a
reasonable program of training to a selected number of Distributor's personnel,
to enable said personnel to perform comprehensive routine and non-routine
service for each Product sold under this Agreement, and to provide continuing
training on an as-needed basis; and
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(e) to hold in inventory and generally make available to Distributor
such replacement and spare parts, components or any other portion of the Product
which would enable Distributor's trained personnel (trained in accordance with
Subsection 5.5), to affect comprehensive service and repair to the Product(s)
sold under this Agreement.
6. DELIVERY & SHIPPING TERMS. The definitions of INCOTERMS 1990 (as published by
the International Chamber of Commerce) as used in this Agreement, are hereby
incorporated into this Agreement by reference, except as for the specific
derogation contained in Subsection 6.2.
7. PARTS. Supplier shall make the Product, all spare parts, components of the
Product available FCA ("Free Carrier")3 at 222 Calvary Street, Waltham, MA
02154, U.S.A. Supplier agrees to provide coordination to transport such items at
Distributor's request, including recommending local transport companies and
procuring shipping insurance on Distributor's behalf (at Distributor's expense).
8. DELIVERY ONLY AFTER FINAL INSPECTION AND ACCEPTANCE: As a specific derogation
to the INCOTERMS 1990 definition used in this Agreement (IN PARTICULAR,
MODIFYING Section A4 OF THE INCOTERM DEFINITION ENTITLED "DELIVERY"4),
Distributor will take legal title and ownership of each Product only after each
Product is deemed to be fully functional by both Supplier and Distributor. The
effective delivery date for purposes of legal title and ownership transfer shall
be the day after that particular installed Product is thus deemed fully
functional (the "DELIVERY DATE").
9. ORDERS. To order a Product, Distributor shall submit a purchase order to
Supplier. Supplier may freely reject such purchase order if the terms of said
purchase order are not consistent with the terms and conditions of this
Agreement.
10. WARRANTY. Supplier warrants that the Product:
(a) conforms to the specifications contained in Schedule "A," and are
safe and effective under normal conditions of use for the
Product(s);
(b) currently meets with USFDA approval, including being an approved
"medical device;"
(c) complies with all applicable U.S. regulations, administrative
orders, etc. applicable to the Product; and
(d) the Supplier agrees not to manufacture or sell the Product in
violation of any of the provisions of the following U.S. laws:
the Fair Labor Standards Act of 1938, the Civil Rights Act of
1964 as amended by the Equal Employment Opportunity Act of 1972,
and the Occupational Safety and Health Act of 1970.
11. PRODUCT SUPPORT. The Seller warrants that the products delivered under this
Agreement, including components, subassemblies, spare parts, and service thereof
shall be available to Distributor during the operational life of the items or
seven (7) years after date of the last Delivery Date under this Agreement,
whichever is later. If, Supplier discontinues the manufacture or supply of the
aforementioned products, components, subassemblies, spare parts, and/or training
programs thereof and does not provide for another qualified source, the Supplier
shall make available to the Distributor a total compendium of all drawings,
specifications and know-how which will enable the Distributor to service, and to
make, have made or procure said Product, components, subassemblies, spare parts,
and service under a royalty-free license which is hereby granted.
12. NO CHANGE TO SPECIFICATIONS
2
Supplier shall not change or modify the specifications of any of the Product
without the prior consent of the USFDA. Supplier shall notify Distributor of
USFDA approved specification changes prior to implementation.
13. INFRINGEMENT OF PATENTS, TRADEMARKS OR COPYRIGHTS. Supplier shall indemnify
Distributor, its parent company, subsidiaries, partners and/or customers for any
loss, damage, expense or liability that may result by reason of any infringement
or claim of infringement of any United States or foreign patent, trademark or
copyright, based on the manufacture, sale or distribution of any of the products
furnished hereunder. Supplier shall defend or settle, at its expense, any suit
against Distributor for which it is responsible hereunder. Distributor shall
notify Supplier promptly of any claim of infringement for which Supplier may be
responsible hereunder and shall cooperate with Supplier in every reasonable way
to facilitate the defense hereof.
14. SUPPLIER'S INDEMNIFICATION. Supplier hereby agrees, upon receipt from
Distributor of reasonable written notice, to defend, indemnify and hold harmless
Distributor, its officers, directors, employees, agents, parent company,
subsidiaries, partners and customers from and against any and all damages,
charges, losses (including the cost of any of the products lost by libel,
condemnation or recall), actions and proceedings brought by any federal,
provincial, state or local government entity, agent or agency or instrumentality
thereof, or any foreign government, agency or representative thereof, against
the Distributor, its officers, directors, agents and/or employees or customers
or against any products by reason of any claim or finding by said public
authority or by Distributor that any such products are not as herein warranted.
In all cases Distributor agrees to give prompt notice to Supplier concerning any
claim as to which these provisions may apply.
15. OTHER WARRANTIES
(a) The Supplier warrants that the Product shall conform with the
requirements and specifications contained in this Agreement, and are free from
defects in design, material and workmanship.
(b) Approvals by the Distributor of Supplier's design or materials used
shall not release the Supplier from any obligations under the warranties set
forth in this Agreement.
(c) All Supplier's and Supplier's subcontractors' warranties, if any,
respecting any service, the Product, components, parts, spare parts and/or Other
Items (AS DEFINED IN 13.4) to be supplied under this Agreement, at the direction
of the Distributor, shall be enforced by the Supplier for the benefit of the
Distributor. The Supplier shall obtain any warranties, which would be given in
normal commercial practice. Copies of Supplier's warranties will be provided to
the Distributor and attached as a part of Schedule "A."
(d) The term "OTHER ITEMS" as used herein includes, but is not limited
to related services, computer workstation and software, and data to be delivered
under this Agreement.
(e) The aforesaid warranty shall survive acceptance and payment and
shall run to the Distributor, its customers and the users of these items and
shall not be deemed to be the exclusive rights of the Distributor but shall be
in addition to the other rights of the Distributor under law and the terms of
this Agreement.
16. TERMINATION. If any party hereto materially defaults in the performance of
any obligation hereunder, then the other party shall have the right to terminate
this Agreement upon 30-days prior written notice unless such defaulting party
shall substantially cure such default to the reasonable satisfaction of the
other party during the 30-day notice period. In such event, this Agreement shall
continue in effect and such notice of termination shall be of no effect.
17. ASSIGNMENT This Agreement and the rights hereunder shall not be assignable
by either party or transferred by merger without the prior written consent of
the other party, except that Distributor may assign this Agreement to its parent
or subsidiary all or part of this Agreement.
18. NOTICES. Except as otherwise provided herein, any notice, report, invoice or
other communication or request required hereunder shall be deemed to have been
sufficiently given when deposited, prepaid U.S. Certified Mail Return Receipt
Requested, addressed to the recipient at its address set forth below or to such
other address as may be furnished in writing by the recipient.
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to Distributor: Syncor Overseas Ltd.
20001 Prairie Street
Chatsworth, CA 91311
U.S.A.
Attention: General Counsel
to Supplier: Imaging Diagnostic Systems, Inc.
6531 N.W. 18th Court
Plantation, FL 33313
U.S.A.
Attention: Linda Grable, President
19. ARBITRATION; GOVERNING LAW. Any controversy or claim arising out of or
relating to this contract, or the breach thereof, shall be settled by
arbitration in accordance with the arbitration rules of the International
Chamber of Commerce, and judgment upon the award rendered by the arbitrator(s)
may be entered into in any court having jurisdiction thereof. Arbitration shall
take place in Los Angeles, California. The validity, performance and
construction of this Agreement shall be construed and enforced in accordance
with the procedural and substantive laws of the State of California.
20. WAIVER. Waiver of or failure to enforce, by any party hereto, any of the
terms of this Agreement at any time shall not in any way limit or waive such
party's rights thereafter to enforce or require compliance with the terms of
this Agreement.
21. ENTIRE AGREEMENT. The provisions set forth herein constitute the entire
agreement between the parties with respect to the subject matter hereof. This
Agreement supersedes all previous communications, representations or agreements,
whether oral or written, between the parties relating to the subject matter
hereof. The language contained herein supercedes any contradicting terms and
conditions in the attached Schedules. Neither party shall be bound by any
provisions additional to or at variance with the terms hereof that may appear in
the other party's quotation, purchase order, acknowledgment, confirmation,
invoice or in any other prior or later communication unless such provision is
specifically referenced and expressly agreed to in a separate writing signed by
both parties.
22. AMENDMENTS. Modification or amendment of this Agreement shall not be of any
force or effect unless such modification or amendment is in writing and signed
by the party to be bound thereby.
23. BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns. Notwithstanding anything contained in this Agreement to the contrary,
nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
24. COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same instrument; but in making proof of this Agreement, it shall not be
necessary to produce or account for more than one such counterpart. It is not
necessary that each party hereto execute the same counterpart, so long as
identical counterparts are executed by all parties.
25. INCORPORATION OF SCHEDULES. All Schedules attached hereto are by this
reference incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
26. DRAFTING. The parties acknowledge and confirm that each of their respective
attorneys have participated jointly in the review and revision of this Agreement
and that it has not been written solely by counsel for one party. The parties
hereto therefore stipulate and agree that the rule of construction to the effect
that any ambiguities are to be or may be resolved against the drafting party
shall not be employed in the interpretation of this Agreement to favor any party
against another.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the day and year first written above.
"DISTRIBUTOR"
SYNCOR OVERSEAS LTD.
a British Virgin Islands company
By: /s/ Monty Fu, President
"SUPPLIER"
IMAGING DIAGNOSTICS SYSTEMS, INC.
a [Florida], U.S.A. corporation
By: /s/ Linda Grable, President
5
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SCHEDULE "A"
PRODUCT, PRODUCT SPECIFICATION, PRICES & WARRANTEE
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SCHEDULE "B"
THE TERRITORY:
New Zealand
Australia
Indonesia
Malaysia
Singapore
Brunei
Thailand
China
Taiwan
Hong Kong
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SCHEDULE "C"
VOLUME TARGETS & CORRESPONDING PRICE INCENTIVES:
Sale of First Product = base price per Schedule "A"
Sale of Second Product = base price per Schedule "A" less 10%
Sale of Third Product Onwards = base price per Schedule "A" less 15%
8
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SCHEDULE "D"
PAYMENT TERMS:
10% down payment with purchase order
40% payment upon physical installation
50% upon final acceptance of fully functional system
9
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SCHEDULE "E"
DEFINITION OF SHIPPING/DELIVERY TERMS:
In accordance with INCOTERMS 1990 as published
by the International Chamber of Commerce, except as specified.
10
IMAGING DIAGNOSTIC SYSTEMS, INC.
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into as
of Dec 3, 1998, by and between Consultronix, SA, a corporation organized and
existing under the laws of above (the "Distributor"), and Imaging Diagnostic
Systems, Inc., a corporation organized and existing under the laws of the State
of Florida ("IDSI").
WITNESSETH:
RECITALS
WHEREAS, IDSI is the owner, and manufacturer of a state of the art
laser imaging system for detection and analysis of masses in the breast, and
ancillary equipment as more fully described on Exhibit A hereto and incorporated
herein (the "Equipment").
WHEREAS, IDSI is the licensee of a certain Patent and owner of certain
Patent pending and Patent applications, trade secrets and other proprietary
information in connection with the Equipment and represents that it has the
legal right to manufacture, sell and distribute the Equipment, either
individually or through others;
WHEREAS, IDSI wishes to grant to Distributor and Distributor wishes to
obtain the exclusive right to be supplied with, sell, distribute and market the
Equipment, individually or through others, in the Territory.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement the following terms shall have
the definition set forth below.
(a) EQUIPMENT. The term "Equipment" shall mean and include only those
products listed on Exhibit A, as amended from time to time. IDSI may add to,
upgrade or change the Equipment from time to time by providing written notice
not less than thirty (30) days prior to any such change.
(b) TERRITORY. The term "Territory" shall mean the territories set
forth on Exhibit B hereto and incorporated herein.
2. TERM. This Agreement shall be for a term of thirty-six (36) months from the
date of its execution by Distributor. This Agreement will automatically renew
for an additional one year term provided that Distributor meets the Performance
Standards set forth in Section 5. and provided that Distributor satisfactorily
fulfills all other terms and conditions of this Agreement.
3. RIGHT TO SELL, DISTRIBUTE AND MARKET. During the term of this Agreement and
any renewal hereof, IDSI hereby grants to Distributor, as its exclusive agent,
the right to sell, distribute, individually or through outside distributors, and
market the Equipment in the Territory. Distributor shall also have the right to
use the trade names, and trademarks associated with the Equipment in connection
with the promotion, sale, marketing and distribution of the Equipment.
Distributor hereby acknowledges and agrees that all trade names and trademarks
associated with the Equipment are the property of and proprietary to IDSI.
4. DISTRIBUTOR'S DUTIES, REPRESENTATIONS AND WARRANTIES. Distributor agrees to
use its best efforts to sell, market and/or distribute the Equipment in the
Territory. Distributor agrees that it will perform at its expense the following
duties to IDSI's reasonable satisfaction
(a) PROMOTION AND MARKETING.
(i) Distributor will maintain a qualified sales and
distribution organization which will provide sales personnel, advertisement,
marketing and distribution support for the solicitation of customers and
potential customers in the Territory for the sale of the Equipment.
(ii) Any sales promotion, promotional activities, marketing or
advertising strategies, pamphlets, advertisements, brochures or other
promotional materials, other than those provided by IDSI, must have the prior
written approval of IDSI. At least one copy of all Distributor's advertising and
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sales promotion materials in which the Equipment is mentioned, must be provided
for IDSI's review and approval prior to the time of first use. Distributor shall
not use any such advertising and sales promotion materials or translations of
manuals or other materials until IDSI has approved such use in writing. All
advertisements, pamphlets, brochures or other promotional materials, other than
those provided by IDSI shall be at the sole cost of the Distributor. The
Distributor shall have the continuing right to use any promotional materials
produced by IDSI while this Agreement is in effect. (iii) DISTRIBUTOR, AT ITS
SOLE COST, WILL ATTEND THE ENTIRE RSNA CONFERENCE EACH YEAR DURING THE TERM OF
THIS AGREEMENT AND WILL BE PRESENT IN THE IDSI BOOTH FOR AT LEAST 4 HOURS PER
DAY DURING THE RSNA CONFERENCE.
(iv) Distributor will exhibit the CTLM(TM) in at least one
major trade show or exhibit, per year during the Term of this Agreement, in the
Territory or in the countries surrounding the Territory.
(b) QUARTERLY REPORTS. Distributor shall promptly prepare and deliver
to IDSI, within 15 days of the end of each quarter, reports identifying each
purchaser of Equipment by name, address and designation of type of business and
the date of sale, model and serial number for each unit of Equipment sold during
the preceding three months and a forecast of requirements for Equipment for the
following six months, as well as a description of all training, support, and
advertising and sales promotional activities undertaken during such period. In
addition, such Report shall contain a statement of the Distributor' then current
inventory of spare parts and technical literature available for customer
service, maintenance and support of the Equipment. The Report shall be certified
by an officer of the Distributor.
(c) GENERAL CONDUCT. Distributor shall at all times conduct its
business in a manner that reflects favorably on IDSI and its Equipment and will
not engage in any deceptive, misleading, illegal or unethical business
practices.
(d) SERVICE AND SUPPORT. DISTRIBUTOR WILL BE REQUIRED TO PROVIDE, NO
LATER THAN TWO MONTHS PRIOR TO THE FIRST INSTALLATION OF A CTLM(TM) UNIT, AT
LEAST ONE FIELD SERVICE ENGINEER AND AT LEAST ONE CLINICAL APPLICATION
SPECIALISTS FOR TRAINING AT IDSI HEADQUARTER FACILITIES. THESE PERSONS WILL BE
TRAINED IN OPERATION, SUPPORT AND SERVICE TECHNIQUES FOR ALL OF THE EQUIPMENT
AND SERVICES. IDSI WILL NOT CHARGE FOR SUCH TRAINING, HOWEVER DISTRIBUTOR SHALL
BE RESPONSIBLE FOR ALL TRAVEL, ACCOMMODATION AND OTHER EXPENSES.
DISTRIBUTOR WILL PROVIDE ADEQUATE TECHNICAL TRAINING, INSTALLATION,
CUSTOMER SERVICE, AND MAINTENANCE AND SUPPORT FOR THE EQUIPMENT IN THE
TERRITORY. DISTRIBUTOR WILL ESTABLISH AND MAINTAIN A STAFF OF TRAINED CLINICAL
AND SERVICE TECHNICIANS AND PURCHASE AND MAINTAIN STOCK OF SPARE PARTS AND
TECHNICAL LITERATURE NECESSARY IN ORDER TO PROVIDE ADEQUATE TRAINING,
INSTALLATION, CUSTOMER SERVICE, MAINTENANCE AND SUPPORT OF THE EQUIPMENT IN THE
TERRITORY. DISTRIBUTOR HEREBY AGREES TO PROVIDE SUCH SERVICE AND SUPPORT IN A
PROMPT AND WORKMANLIKE MANNER TO ANY USER OF THE EQUIPMENT IN THE TERRITORY,
WHETHER OR NOT SUCH EQUIPMENT WAS PURCHASED FROM DISTRIBUTOR, PROVIDED, HOWEVER,
THAT ANY SUCH USER MAY BE REQUIRED TO PAY A REASONABLE RATE OR FEE TO
DISTRIBUTOR FOR SUCH SERVICE AND SUPPORT.
(e) COMPETITIVE PRODUCTS. Distributor will do everything within its
power to feature, promote, and advertise, as part of its merchandising and sales
policy, the Equipment and use its best efforts to stimulate and increase
interest in IDSI's Equipment. IDSI understands that some existing and some new
customers may request competitors' products. Distributor will use its best
efforts to sell, market and distribute the IDSI Equipment to such customers.
Distributor will give IDSI the opportunity to assist with these accounts.
(f) CUSTOMER REQUIREMENTS. With a view to maximizing the potential
market for the Equipment within the Territory, Distributor will report to IDSI
on a quarterly basis, and assist IDSI in the assessment of the needs and
requirements of the potential customer base in the Territory with respect to the
Equipment, including, but not limited to: (i) a rolling twelve-month quantity
forecast, (ii) quality of the Equipment, (iii) design, functional capability and
additional features of the Equipment and related modifications, improvements and
enhancements, and (iv) general market conditions of the Territory.
(g) CO-MARKETING PROTECTION. Distributor will maintain confidentiality
of IDSI supplied prospective customers and not conduct any direct efforts to
persuade such clients toward competitive equipment or services.
(h) PURCHASE ORDERS. Distributor shall forward all orders promptly to
IDSI. The orders shall state clearly the name of the purchaser, the quantity
purchased, and the time and place of delivery.
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(i) DELIVERY. Distributor shall give IDSI at least 180 days prior
written notice before each shipment is required.
(j) EXPENSES AND TAXES. Distributor is an independent contractor, and
as such shall pay all expenses, including compensation of salesmen, rentals,
travel, and all taxes, including assessments, which may be made against the
salary or wages of those directly employed by Distributor.
(k) RELATIONSHIP OF PARTIES. Except as set forth herein, Distributor
shall have no right or authority to create any obligation on the part of IDSI or
bind IDSI to any agreement.
(1) OFFICES. Distributor shall maintain a suitable office in Krakow
with a telephone and facsimile line suitable for use for the sale of the
Equipment. The office shall contain a suitable display area where the Equipment
shall be prominently displayed at all times. This display area or another area
shall be suitable for and used for the demonstration of and training in the use
of, the Equipment. The office shall be staffed from 9:00 a.m. to 5:00 p.m.,
Monday through Friday, subject to recognized national holidays.
5. PERFORMANCE STANDARDS. Prior to the PMA, Distributor will purchase one
clinical CTLM(TM), at IDSI's cost, for sale to a major medical facility to be
used for clinical study comparisons. The sale to the medical facility shall be
approved by IDSI and shall be conditioned upon and provide Distributor with the
unlimited right, subject to scheduling, to use the Equipment for sale
demonstrations. Demonstrations of the equipment must be complete and must show
all features and functions of the Equipment.
If the following performance standards (the "Minimum Performance Standards") are
not met, IDSI will notify Distributor, in writing, that it is in default of this
Agreement. If Distributor does not cure the deficiency within 30 days from
receipt of the notice, IDSI, at its sole option, may: (i) continue this
Agreement on a nonexclusive basis; (ii) continue this Agreement on a
nonexclusive basis and limit the Territory; or (iii) terminate this Agreement.
Any such action taken by IDSI shall be without prejudice to the rights of the
parties with respect to Equipment already ordered, sold or delivered. For the
purpose of this Agreement, Year 1 shall begin upon PMA acceptance.
YEAR. NUMBER OF CTLM(TM) UNITS
- ----- ------------------------
1 1
6. PURCHASE OF EQUIPMENT.
(a) ORDERS. Orders from Distributor for equipment shall be made by
delivery of a purchase order to IDSI. As soon as practicable after receipt of
such purchase order, IDSI will: (i) if such order is accepted, return to
Distributor IDSI's standard form of Sales Acknowledgment (the "Acknowledgment")
setting forth dates on which delivery will be made, or (ii) notify Distributor
in writing that such order is rejected. IDSI will use its best efforts to make
prompt delivery of the Equipment accepted by IDSI on the delivery dates
specified in the Acknowledgment, F.O.B. Fort Lauderdale, at the time and to the
entities and destinations listed in the purchase orders. IDSI shall not be
liable for any failure to deliver, if such failure has been occasioned by fire,
embargo, strike, failure to secure materials from a usual source of supply, or
any circumstance beyond IDSI's control, which shall prevent IDSI from making
deliveries in the normal course of its business. IDSI shall not, however, be
relieved from making delivery when the causes interfering with deliveries shall
have been removed. In particular, the Parties acknowledge that IDSI is reliant
on outside suppliers, which supply the components for its Equipment. Should
these suppliers fail to produce the required components in a timely manner, than
IDSI shall be excused from the delivery obligations under this Agreement until
such time as the components can be manufactured, delivered and installed in the
Equipment. In no event shall IDSI be responsible for any loss or liability
suffered by Distributor as a result of delay in delivery of any order.
(b) CANCELLATION OF ORDERS. Distributor may cancel any order (or any
part thereof) for Equipment by giving IDSI written notice of such cancellation
at least 15 days prior to the shipping date. If Distributor cancels an order for
Equipment (or any part thereof), Distributor will be subject to a charge based
upon the purchase price relating to the Equipment so affected, as set forth on
Exhibit C attached hereto. In the event of such cancellation, Distributor will
have no rights in partially completed goods.
(c) RESCHEDULING ORDERS. Distributor may at any time, upon not less
than thirty (30) days written notice to IDSI, reschedule and/or postpone the
delivery date relating to an order (or any part thereof) for up to thirty (30)
days. The postponement of delivery to a date more than thirty (30) days from the
delivery date specified in the initial order shall be deemed a cancellation of
such order. DISTRIBUTOR MAY NOT POSTPONE THE DELIVERY DATE MORE THAN ONCE WITH
RESPECT TO ANY ORDER. If Distributor cancels a previously rescheduled delivery
of Equipment, the applicable cancellation charges shall be based on the delivery
date specified in the initial order submitted by Distributor for such delivery.
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7. PRICE.
(a) PURCHASE PRICE. The purchase price for the Equipment to be sold
hereunder shall initially be as set forth on IDSI's Price List attached hereto
as Exhibit C and incorporated herein, which may be discounted based on the
cumulative quantities of such Equipment purchased by Distributor during the term
hereof or any Additional Term. Discounts shall not apply retroactively to prior
purchases of Equipment. IDSI shall have the sole right to set the price and
other terms of the sales of the Equipment. IDSI, at its sole discretion,
reserves the right to change prices, materials used, Equipment line and the
components of the Equipment. IDSI will provide reasonable notice of any price or
other changes to Distributor as to not disrupt the sales and distribution of the
Equipment. IDSI reserves the right to amend Exhibit C with respect to any
Additional Term.
(b) PRICE CHANGES. IDSI may change the prices to be charged for
Equipment sold hereunder by amending its published Price List and giving
Distributor thirty (30) days prior notice. All orders received and accepted by
IDSI prior to the effective date of the price increase for shipment within
thirty (30) days of such effective date will be billed at the prices in effect
at the time of acceptance of the order; provided, however, that if Distributor
notifies IDSI in writing prior to the effective date of such price increase that
it quoted the original price in an outstanding bid submitted prior to receipt of
IDSI's amended Price Lists, any order relating to such bid accepted by IDSI
prior to the effective date of such price increase for shipment within ninety
(90) days of such effective date will be billed at the prices in effect at the
time of acceptance. All other shipments after thirty (30) days (or ninety days,
if applicable) of such effective date shall be billed at the prices set forth in
the amended Price List.
(c) PAYMENT. All payments hereunder shall be in United States dollars
and shall be effected by means of confirmed, irrevocable letters of credit on a
Florida bank established, upon execution of this Agreement, to IDSI's
satisfaction. All exchange, interest, banking, collection and other charges
shall be the sole expense of the Distributor. Distributor shall have the option
to wire transfer funds in advance of shipment to IDSI as follows:
First Union National Bank of Florida, Jacksonville, Florida
Account of Imaging Diagnostic Systems, Inc.
Account Number 2090000
ABA Number 063000021
Shipment will be made upon either receipt of the letter of credit approved by
IDSI or confirmation that a wire transfer has been received.
8. TERMS AND CONDITIONS OF SALE. This Agreement and all sales of Equipment
hereunder by IDSI to Distributor shall be subject to IDSI's standard terms and
conditions of sale as set forth on the applicable Acknowledgment. A copy of
IDSI's current Standard Terms and Conditions of Sale is attached hereto as
Exhibit D and incorporated herein. To the extent that IDSI's standard terms and
conditions are inconsistent with express provisions of this Agreement, the
provisions of this Agreement shall prevail. Distributor agrees that although it
may use its standard forms for others or other notices hereunder, said standard
forms will be governed by the terms and conditions of this Agreement and any
applicable Acknowledgment shall have no force and effect. Distributor agrees to
place the following legend on its standard forms submitted to IDSI hereunder:
"NOTWITHSTANDING ANY OTHER TERMS AND CONDITIONS APPEARING HEREON, THIS PURCHASE
SHALL BE GOVERNED BY THE TERMS AND CONDITIONS OF SALE SET FORTH IN THE IDSI
DISTRIBUTION AGREEMENT DATED APRIL_____, 1998 BETWEEN DISTRIBUTOR AND IDSI."
9. PRODUCT WARRANTY.
(a) DISTRIBUTOR WARRANTY. The sole warranties provided by IDSI to
Distributor with respect to the Equipment are those contained in IDSI's Standard
Terms and Conditions. Notwithstanding the foregoing, with respect to Equipment
for which IDSI is not the original manufacturer, the sole warranties provided by
IDSI to Distributor shall be equivalent to the sole warranties provided by the
original manufacturer to IDSI (current original manufacturer warranties and the
Equipment to which they pertain.
4
<PAGE>
IDSI DISCLAIMS ALL OTHER WARRANTIES, WARRANTS OF TITLE, MERCHANTABILITY, AND
FITNESS FOR A PARTICULAR PURPOSE AND AGAINST INFRINGEMENT UPON THE RIGHTFUL
CLAIM OF ANY THIRD PERSON. IDSI DISCLAIMS LIABILITY FOR ALL CONSEQUENTIAL
DAMAGES IN ANY FORM, EVEN THOUGH IDSI MAY HAVE BEEN ADVISED OR MAY OTHERWISE
KNOW OF THE POSSIBILITY OF SUCH DAMAGES.
Nothing contained in this warranty shall make IDSI liable beyond the express
limitations of this warranty for loss or damage to the business of Distributor,
including any claims as to breach of contract, lost receipts or profits,
business interruptions or other tangible business loss.
(b) END-USER WARRANTY. Distributor is hereby authorized, subject to the
succeeding sentence, to offer the warranties set forth in Section 9 (a) to
customers to whom it sells the Equipment, and IDSI agrees to honor such
warranties. Distributor acknowledges and agrees that the warranty period set
forth in the Acknowledgment commences, with respect to both Distributor and its
customers, on the date of delivery to Distributor and not the date of any
subsequent delivery by Distributor to its customers. In no event however shall
the warranty period exceed fifteen months. In the event that the Distributor
extends or otherwise represents to a customer that the warranties are more
extensive or encompassing than those set forth herein, the Distributor shall
indemnify IDSI for any warranty claims made by a customer based on Distributor's
representations.
10. SUBLICENSES.
(a) PROGRAMS SUBLICENSE. Distributor is authorized to grant
restrictive, nonexclusive, nontransferable sublicenses to customers to use the
Programs (as defined in the Acknowledgment) or any portion thereof, provided
that each such Customer (sublicensee) enters into an agreement with Distributor
pursuant to which the sublicensee expressly accepts and agrees to the terms and
conditions of the license set forth in the Acknowledgment. In addition to any
other remedy IDSI may have, IDSI reserves the right to terminate any
sublicensee's sublicense if said sublicensee fails to comply with any term or
condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Programs.
(b) PROPRIETARY TECHNICAL MATERIALS SUBLICENSE. Distributor is
authorized to grant restrictive, nonexclusive, nontransferable sublicenses to
customers to use the Proprietary Technical Materials or any portion thereof,
provided that each such customer (sublicensee) enters into an agreement with
Distributor pursuant to which the sublicensee expressly accepts and agrees to
the terms and conditions of the license set forth in the Acknowledgment. In
addition to any other remedy IDSI may have, IDSI reserves the right to terminate
any sublicensee's sublicense if said sublicensee fails to comply with any term
or condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Proprietary Technical Materials.
11. MAINTENANCE.
(a) DISTRIBUTOR'S OBLIGATION TO PROVIDE SERVICE. Distributor agrees
that IDSI shall have no obligation to maintain the Equipment except for the
warranty obligations specified in Section 9. Distributor acknowledges and agrees
that it will perform, at no expense to IDSI, maintenance and repair of Equipment
sold or leased to the Distributors customers
(b) CONSIGNMENT OF SPARES PARTS. IDSI may, at its sole discretion,
consign to Distributor, from time to time, as it may deem necessary, spare parts
to support warranty repair service in Distributor's Territory. The title to such
parts shall at all times remain with IDSI and Distributor shall have no right,
title or interest therein until such time as payment is made to IDSI as set
forth below. In the event that such parts used for non-warranty repair service,
Distributor will purchase the part used or to be used for non-warranty repair
services at prices listed in Exhibit C, as may be amended from time to time.
Distributor will provide IDSI with a monthly report, not later than 15 days
after the first day of each month, which will indicate the Customers name,
address and phone number, the work performed, the parts used and whether the
repair was under warranty. The report shall also include a total dollar amount
for parts used for non-warranty repair and be accompanied by a check for full
payment therefor.
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12. TERMINATION.
(a) Either party may, by written notice to the other party, terminate
this Agreement upon the occurrence of any one or more of the following events:
(i) Upon the failure of the other party to pay any monies when
due hereunder, if such default continues for five (5) business days or more
after written notice to the defaulting party;
(ii) Upon material failure of a party to observe, keep or
perform any of the covenants, terms or conditions herein, if such default
continues for twenty (20) business days or more after written notice to the
defaulting party;
(iii) In the event that (A) a party makes a general assignment
for the benefit of creditors or transfers all or a substantial portion of its
assets; (B) a receiver is appointed and not discharged within 30 days of
appointment, or (C) the other party has become insolvent.
(b) IDSI may, by written notice to Distributor, terminate this
Agreement upon occurrence of any one more of the following events:
(i) In the event that Distributor solicits orders for
Equipment outside its Territory;
(ii) In the event of any dispute, disagreement or controversy
between or among the owners, partners, managers, officers or stockholders of
Distributor which in the opinion of IDSI adversely affects the ownership,
operation, management, business or interests of Distributor, or in the event of
a change in control or majority ownership of Distributor;
(iii) If Distributor ceases to function as a going concern or
to conduct its operations in the normal course of business, or
(iv) If Distributor fails to meet the Minimum Performance
Standards set forth in Section 5, IDSI shall have the right, upon 30 days
written notice to the Distributor, to terminate this Agreement. Distributor
shall have the right to cure the deficiency within such 30-day period. If
Distributor does not cure the Deficiency within such 30-day period, IDSI may
terminate this Agreement on the 30th day.
(c) Upon termination or expiration of this Agreement, for any reason
Distributor shall discontinue the use of IDSI's name, trademarks, trade names,
labels, copyrights, and other advertising media and shall remove all signs and
displays relating thereto: and will no longer identify itself as a distributor
of IDSI or indicate, in any way, that it is associated with IDSI. Distributor
shall promptly return to IDSI all marketing and selling materials, all manuals,
all technical data, all other documents and copies thereof previously supplied
by IDSI and all spare parts consigned to Distributor by IDSI.
(d) Upon termination or expiration of this Agreement, for any reason,
IDSI shall have the option to repurchase its Equipment and spare parts then in
possession of the Distributor, at prices originally billed to the Distributor if
the Equipment and spare parts are new and at an adjusted price if the Equipment
is used, and with deductions for money due or to become due to IDSI under this
Agreement. As to any of the IDSI's Equipment or spare parts not repurchased by
IDSI, Distributor shall have the right to dispose of them in the regular course
of its business and for this purpose only, the restrictions of preceding sub
paragraph shall be deferred until three months after the termination of this
Agreement.
(e) It is expressly understood and agreed that the rights of
termination as provided in this Agreement are absolute and that both parties
hereto have considered the costs and expenditures associated with the
preparation and performance of this Agreement and the possible losses and
damages which may be incurred by both parties in the event of its termination.
The parties hereto acknowledge and agree, by execution hereof that they have
entered into this Agreement with full knowledge of such possibilities, and
except as provided herein neither party hereto shall be responsible to the other
for compensation, damages, losses, or otherwise, for termination of this
Agreement as set forth above.
13. TRADEMARKS: MARKINGS.
(a) TRADEMARKS AND NAMES. Distributor is hereby granted permission to
use during the term of this Agreement, and any renewal hereof, the trademarks
and trade names used by IDSI in connection with the Equipment. Such permission
is expressly limited to uses by Distributor necessary to performance of
Distributor's obligations under this Agreement, and Distributor hereby admits
and recognizes IDSI's exclusive ownership of such marks and names and the renown
of IDSI's marks and names, both worldwide and specifically in the Territory.
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<PAGE>
Distributor agrees not to take any action, inconsistent with such ownership and
further agrees to take any action, including without limitation the conduct of
legal proceedings, which IDSI deems necessary to establish and preserve IDSI's
exclusive rights in and to its trademarks and trade names. Reproductions of
IDSI'S trademarks, logos, symbols, etc. shall be true reproductions and shall be
done photographically, in a manner, which enhances the reputation and status of
IDSI.
(b) MARKINGS. Distributor will not remove or make or permit any
alterations in any labels or other identifying markings placed by IDSI on any of
the Equipment without written consent by IDSI.
(c) NO ADDITIONAL RIGHTS. No rights to manufacture, alter, or use the
Equipment for purposes other than those contained herein are granted by this
Agreement. Moreover, no licenses are granted or implied by this Agreement under
any patents owned or controlled by IDSI or under which IDSI has a right, except
the right to sell, market and distribute IDSI's Equipment, as contemplated
herein, during the term of this Agreement.
14. INDEMNIFICATION. Distributor shall indemnify and hold harmless IDSI, its
officers, directors, employees, or agents (collectively referred to in this
Section 14 as "IDSI") for damages or expenses resulting from any claim, suit or
proceeding brought against IDSI, with regard to any untrue statement or alleged
untrue statement, misrepresentation or alleged misrepresentations, promise or
agreements made or allegedly made by Distributor or its sub-distributors or
arising from the marketing, sale or distribution of the Product by Distributor
or its sub-distributors. This provision shall not apply to Distributor or any
person controlling Distributor in respect of any losses, claims, damages,
liabilities or actions arising out of or based upon any untrue statement or
alleged untrue statement, misrepresentation or alleged misrepresentations,
promise or agreement made or allegedly made by Distributor or arising from the
marketing, sale or distribution of the Product by Distributor, if such untrue
statement or alleged untrue statement, misrepresentation or alleged
misrepresentations, promise or agreement was made in reliance upon information
furnished in writing to Distributor by IDSI specifically for use in connection
with the sale, marketing or distribution of the Equipment. IDSI agrees that
Distributor has the right to defend, or at its option to settle, and Distributor
agrees, at its own expense, to defend or at its option to settle, any claim,
suit or proceeding brought against IDSI. Distributor agrees to pay any costs of
litigation, investigation or defense incurred by IDSI, including reasonable
attorney fees, and final judgement, entered against IDSI on such issue in any
such suit or proceeding. Distributor shall be relieved of the foregoing
obligations unless IDSI notifies Distributor in writing, within fifteen days of
receipt of notification of such suit, claim or proceeding, and gives Distributor
authority to proceed as contemplated herein.
15. RISK OF LOSS. Title to the Equipment shipped shall pass upon shipping,
subject to full payment. Distributor assumes the risk of loss and damage of the
Equipment in transit from IDSI's shipping point to the point of destination.
16. COMPLIANCE WITH LAWS. Distributor shall comply with all material applicable
present and future federal, state, county, local and foreign laws, ordinances
and regulations relating to the importation and sale of the Equipment.
Distributor will take all steps necessary to obtain the proper import licenses,
if applicable and Distributor shall be solely responsible for any excise tax,
duties or other costs for the importation of the Equipment. 17.
NON-CIRCUMVENTION AGREEMENT. The respective Parties involved in this Agreement,
agree not to circumvent each other. The Parties agree that they will not make
any contact, directly or indirectly, written, oral, electronic or by any medium
of contact whatsoever, with any Sources without the express written consent of
the other introducing Party. Each of the listed Parties hereto, accepts and
understands that any overt or covert action of circumvention, or unauthorized
disclosure shall constitute a breach of trust and shall be considered a breach
of the terms and conditions of this agreement. Such action shall be subject to
judicial action, and recompense.
If either Party shall bring an action to recover payment or other compensation
pursuant to the terms of this Agreement, the prevailing Party shall be entitled
to reasonable attorney's fees and expenses as may be awarded, including legal
fees and costs, and recovery for liquidated damages and punitive damages as may
be awarded by and through any legal process or jurisdiction.
For the purposes of this Section 17, the term "Party" or "Parties" shall be
considered to include and be binding upon the parties to this Agreement, any
individual, entity or entities, including but not limited to, associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated, associations,
collateral providers or the like, which the Parties hereto may now or in the
future be associated with during the term of this Agreement and any renewal
thereof.
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<PAGE>
For the purposes of this Section 17, the term "Sources" shall be considered to
include any business opportunity, principal, individual, entity or entities,
including but not limited to, customers and distributors, their associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated partnerships,
associations or the like, introduced to or brought to the attention of a Party
to the other Party during the term of this Agreement or any renewal thereof.
Distributor acknowledges and agrees that no separate or additional payment will
be required to be made to it in consideration of its undertakings in this
Section 17.
18. NO COPYING. Without the prior written consent of IDSI, Distributor shall
refrain from copying, reverse engineering, disassembling, translating or
modifying the Equipment for its benefit, or granting any other person or entity
the right to do so.
19. NOTICES. Any notice required or permitted by this Agreement shall be in
writing and shall be delivered by U.S. Certified Mail, return receipt requested,
or by special messenger service with receipt (such as Federal Express), by
facsimile delivery or by hand, to the parties at the following addresses or such
substitute person or address of which notice is given in like manner:
IDSI Imaging Diagnostics Systems, Inc.
6531 NW 18 Court Plantation, Florida 33313
Phone (954) 581-9800 Fax (954) 581-0555
Distributor Consultronix
________________________
________________________
Phone: _________________
Fax: ___________________
or to such other address as either of them, by notice to the other may designate
from time to time. The transmission confirmation receipt from the sender's
facsimile machine shall be conclusive evidence of successful facsimile delivery.
Time shall be counted to, or from, as the case may be, the delivery in person or
by mailing.
20. GOVERNING LAW. VENUE AND ARBITRATION. This Agreement shall be deemed to be
executed in the State of Florida and governed by the laws of the State of
Florida. Any controversy or claim arising out of or relating to this Agreement
or to the interpretation, breach or enforcement thereof, except a claim for
injunctive relief, shall be submitted to an arbitrator and settled by
arbitration in Broward County, Florida, in accordance with the rules then
obtaining of the American Arbitration Association. Any award made by the
arbitrator shall be final, binding and conclusive on all parties hereto for all
purposes, and judgement may be entered thereon in any court having jurisdiction
thereof. Nothing contained herein shall serve to prohibit the parties from
seeking injunctive relief in a court of competent jurisdiction.
21. GENERAL.
(a) INDEPENDENT CONTRACTOR. Distributor will act as an independent
contractor under the terms of this Agreement and not an agent or legal
representative of IDSI for any purpose, whatsoever, and, except for the
extension of the warranty set forth in Section 9, Distributor has no right or
authority to assume or create any obligation of any kind, express or implied, on
behalf of IDSI to Distributor's customers or to any other person.
(b) LIMITATION. Nothing in this Agreement shall be construed to
preclude IDSI from selling or leasing or otherwise marketing any Equipment
directly to any other customer, or through other distribution channels outside
the Territory.
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<PAGE>
(c) PRODUCT CHANGES. IDSI reserves the right to make design and other
modifications in the Equipment at any time but shall not be obligated to
implement such modifications in Equipment that has previously been delivered.
(d) CONFIDENTIAL INFORMATION. Distributor agrees not to disclose to any
person outside of its employ, and not to use for any purpose other than to
fulfill its obligations under this Agreement, any information which is disclosed
to Distributor by IDSI and which is not otherwise publicly available.
Distributor agrees to take all preventative measures and precautions to guard
against and prevent any use or disclosure of such confidential information by
its partners, employees, agents, or other persons consistent with the intent of
this paragraph. Distributor further agrees not to disclose to IDSI any
information, which Distributor deems to be confidential, and it is understood
that any information received by IDSI will not be of a confidential nature.
(e) WAIVER AND AMENDMENT. Any party shall not construe the waiver by
any party to this Agreement of a breach of any provision hereof by any other
party as a waiver of any subsequent breach. The failure by either party at any
time to enforce the provisions of this Agreement, or to exercise any election or
option provided herein, shall in no way be construed as a waiver of such
provisions or options, nor in any way to affect the validity of this Agreement
or any part thereof, or the right of either party thereafter to enforce each and
every such provision. No provision of this Agreement may be terminated, amended,
supplemented, waived or modified other than by an instrument in writing signed
by the party against whom the enforcement of the termination, amendment,
supplement, waiver or modification is sought.
(f) NO OTHER WARRANTY OR REPRESENTATION. Distributor hereby
acknowledges that it has not entered into this Agreement in reliance upon any
warranty or representation by any person or entity except for the warranties or
representations specifically set forth herein.
(g) LANGUAGE. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications and materials made or given pursuant to this
Agreement, including without limitation any operations and maintenance manuals,
shall be in the English language. IDSI shall have no obligations or liabilities
to Distributor or any other person for loss of profits, loss of use or
incidental, special or consequential damages, even if IDSI has been advised of
the possibility thereof, arising out of or in connection with the translation
from English into any other language of any materials made or given pursuant to
this Agreement, including without limitation any operations and maintenance
manuals.
(h) LICENSES AND PERMITS. IDSI will use its best efforts to secure all
export licenses and permits required by the United States government, and
Distributor will secure all import licenses and permits required in connection
with the importation, marketing, sale and distribution of the Equipment. Each
party will furnish any information and assistance reasonably required by the
other party in connection with securing any such licenses and permits.
(i) IMPORT/EXPORT CONTROLS. IDSI's obligations hereunder shall be at
all times subject to the export administration and control laws and regulations
of the United States Government, and any amendments thereof and the import
administration and control laws and regulations of the Territory, and any
amendments thereof. Distributor shall provide IDSI with any written assurances
it may reasonably request with respect to Distributor's compliance with such
laws or regulations. Distributor agrees that, with respect to the import, resale
or any other disposition of Equipment and any printed commercial and technical
data and information supplied by IDSI, Distributor will comply fully with the
import/export administration and control laws and regulations of the United
States of America and the Territory, and any amendments of such laws and
regulations.
(j) COMPLIANCE WITH LAWS. IDSI represents that, with respect to the
production of Equipment to be furnished hereunder, IDSI will fully comply with
all applicable laws of the United States and the State of Florida. Distributor
represents that, with respect to the purchase, marketing, sale and distribution
of the Equipment furnished hereunder, Distributor will comply with all
applicable laws of the Territory.
(k) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding between the parties concerning the subject matter hereof and
supersedes all prior agreements, negotiations and understandings of the parties
with respect thereto. No representation, promise, modification or amendments
shall be binding upon either party as a warranty or otherwise, unless in writing
and signed on behalf of each party by a duly authorized representative. Although
Distributor may use its standard purchase order form to give any order or other
notice provided for hereunder, said order or notice will be governed by the
terms and conditions of this Agreement any applicable Acknowledgment, and any
term or condition set forth in any such standard form which is inconsistent with
or in addition to the terms and conditions of this Agreement and any applicable
Acknowledgment shall have no force or effort.
(l) ATTORNEY'S FEES. In the event any action is commenced with regard
to this Agreement, or the terms and conditions herein, the prevailing party
shall be entitled to reasonable attorney's fees, costs and expenses.
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(m) SEVERABILITY CLAUSE. In the event any parts of this Agreement are
found to be void, the remaining provisions of this Agreement shall nevertheless
be binding with the same effect as though the void parts were deleted.
(n) SUCCESSORS. Subject to the provisions of this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
(o) SECTION AND PARAGRAPH HEADINGS. The section and paragraph headings
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
(p) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature, provided however that
original signatures must be provided within ten days from the date of signing.
(q) FURTHER ASSURANCES. The Parties hereto agree to execute and deliver
from time to time at the other Party's request, without further consideration,
such additional documents and to take such other action necessary to consummate
the transactions contemplated herein.
(r) ASSIGNMENT. This Agreement may be assigned by IDSI. Distributor
will not be permitted to assign this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year set forth below.
Dated: 12/3/1998
In the presence of: Imaging Diagnostic Systems, Inc.
______________________________ BY:/s/Linda Grable, President
Dated: 12/3/1998
In the presence of: Consultronix, SA
______________________________ BY: /s/Leszek Piateck,
Special Project Manager
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EXHIBIT A
TERRITORY
Poland
<PAGE>
EXHIBIT B
EQUIPMENT
CTLM(TM)
<PAGE>
EXHIBIT C
PRICE
<PAGE>
EXHIBIT D
STANDARD TERMS AND CONDITIONS
1. PAYMENT
Payments hereunder shall be made through a confirmed, irrevocable
letters of credit in U.S. dollars, opened by DISTRIBUTOR and advised through
First Union National Bank of Florida, in the full amount of the Purchase Price
for all Equipment, including an amount estimated for freight and insurance.
DISTRIBUTOR shall open the letter of credit upon issuance of any purchase order.
COMPANY shall receive disbursement under the letter of credit upon presentment
to the issuing/confirming bank of (i) an airway bill, bill of lading or similar
certificate issued by the transportation company, and (ii) a copy of COMPANY's
invoice for goods shipped (including freight and insurance). No other documents
shall be required. All interest, banking, collection, or other charges shall be
at the sole expense of DISTRIBUTOR. Payment shall be made without regard to
whether DISTRIBUTOR has made or may make any inspection or use of the Equipment.
Each shipment shall be treated as a separate transaction, but in the
event of any default of DISTRIBUTOR, COMPANY may decline to make further
shipments without in any way affecting its rights hereunder. If, despite any
default by DISTRIBUTOR, COMPANY elects to continue to make shipments, COMPANY's
action shall not constitute a waiver of any default by DISTRIBUTOR or in any way
effect COMPANY's legal remedies for any such default.
2. TAXES
The purchase price is exclusive of any sales, use or privilege tax,
customs or import duty, excise tax based on gross revenue or any similar tax or
charge which might be levied as a result of the production, sale or shipment of
any Equipment or the use of any Equipment by DISTRIBUTOR. DISTRIBUTOR agrees to
pay and otherwise be fully responsible for any such taxes (except for taxes
based on the net income of COMPANY). Any personal property taxes assessable on
the Equipment after delivery shall be borne by DISTRIBUTOR. COMPANY shall have
the right, but shall not be obligated, to pay any such taxes directly, in which
event DISTRIBUTOR shall promptly reimburse COMPANY in the amount thereof upon
presentation by COMPANY of evidence of payment.
3. DELIVERY
The Equipment shall be delivered to DISTRIBUTOR F.O.B. COMPANY's plant
in Sunrise, Florida. Delivery of the Equipment to a common carrier shall be
deemed a satisfactory delivery by COMPANY to DISTRIBUTOR. DISTRIBUTOR agrees to
pay all freight, insurance, packing and other transportation charges related to
said delivery. COMPANY shall have the right, but shall not be obligated, to
prepay such charges, in which event DISTRIBUTOR shall promptly reimburse COMPANY
in the amount thereof upon presentation by COMPANY of evidence of payment. In
connection with the delivery of the Equipment, DISTRIBUTOR may designate in
writing, not less than ten (10) business days prior to the shipment date, the
carrier for shipment and the amount of insurance and nature of coverage. If
DISTRIBUTOR fails to so designate any or all such items, COMPANY, at its
discretion, may specify any item not so designated. COMPANY shall select, at its
discretion, the types, amount of crating, and the carrier of any insurance. The
purchase price does not include any maintenance, installation, or training.
4. RISK OF LOSS; SECURITY INTEREST
Title and risk of loss or damage to the Equipment shall pass to
DISTRIBUTOR upon delivery by COMPANY to a common carrier for shipment.
COMPANY retains a security interest in the Equipment, any replacements
of the Equipment, and all proceeds of the Equipment or its replacements,
including, but not limited to, insurance proceeds, to secure performance of all
Distributor's payment obligations under this Agreement. If DISTRIBUTOR shall
fail to pay any portion of the purchase price or any related charges when due,
COMPANY shall have the right, without liability, to repossess the Equipment and
to avail itself of any legal remedy. DISTRIBUTOR agrees to execute and deliver
such financing statements and other documentation as COMPANY may reasonably
request to perfect and protect COMPANY's interests in the Equipment.
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5. PROGRAMS
As used herein, the word "Programs" shall include COMPANY's Firmware
and Software, each of which is defined as follows:
(a) "Firmware" shall mean all fixed electrical circuits (including
printed circuit boards and chips embodying such circuits) placed in the
Equipment by COMPANY that performs predetermined programs and routines in the
Equipment in response to specific inputs.
(b) "Software" shall mean all alterable programs and routines for the
internal operation of the Equipment placed in the Equipment by COMPANY, or
furnished with or for the Equipment by COMPANY.
6. PROGRAMS LICENSE
COMPANY hereby grants to DISTRIBUTOR a nonexclusive license to use and
sublicense to customers the Programs solely in connection with the sale and use
of the Equipment as contemplated under this Agreement. Any grant of a sublicense
of Programs to a Customer shall be by written sublicense agreement which
provides for all terms, conditions, restrictions and requirements as to the
ownership, use and confidentiality of such Programs as set forth in, and imposed
upon DISTRIBUTOR by, this Agreement. DISTRIBUTOR shall obtain COMPANY'S prior
approval of the form of sublicense agreement with Customers. COMPANY shall not
assign, transfer, or sublicense any Programs to any third party other than as
contemplated in this Agreement, without the express written consent of COMPANY.
Notwithstanding any contrary provision in this or in any other agreement between
COMPANY and DISTRIBUTOR, COMPANY shall retain all right, title and interest in
and to any Programs provided licensed to DISTRIBUTOR or sublicensed to customers
in connection with the sale and use of the Equipment being acquired by
DISTRIBUTOR or customers hereunder. DISTRIBUTOR agrees to maintain the
confidentiality of the Programs and to instruct and obligate its employees and
agents to do the same.
Without limiting the generality of the foregoing, DISTRIBUTOR shall not
reproduce or modify all or any portion of the Programs, nor shall DISTRIBUTOR
disclose, sell, sublicense or otherwise transfer or make available all or any
portion of the Programs to any third party, without the prior express written
consent of COMPANY.
In addition to any other remedy COMPANY may have, COMPANY reserves the
right to terminate Distributor's license or customers sublicense, if DISTRIBUTOR
or customer fails to comply with any term or condition hereof. Distributor's
license or customer's sublicense, as the case may be, granted pursuant to this
paragraph 6 shall also terminate at such time as DISTRIBUTOR shall permanently
cease to use the Equipment. DISTRIBUTOR agrees, upon notice from COMPANY of any
termination of the license granted pursuant to this paragraph 6 and, in
accordance with any more specific directions from COMPANY, to deliver
immediately to COMPANY all Software and copies thereof, and all Firmware chips
and printed circuit boards and other tangible items and materials in the
possession or custody of DISTRIBUTOR embodying the Programs.
7. PROPRIETARY TECHNICAL MATERIALS
Documentation, maintenance manuals and drawings relating to the
Equipment or the Programs (collectively, "Proprietary Technical Material") that
COMPANY may furnish shall be in DISTRIBUTOR's or customer's possession pursuant
only to a restrictive, nonexclusive license under which DISTRIBUTOR or customer
may use such Proprietary Technical Materials solely for the purpose of
operating, servicing and repairing the Equipment and the Programs and for no
other purpose. One installation, maintenance and operation manual will be
provided with each system purchased hereunder. DISTRIBUTOR agrees to maintain
the confidentially of all Proprietary Technical Materials and to instruct and
obligate its employees and agents to do the same. Without limiting the
generality of the foregoing, DISTRIBUTOR may not reproduce or copy any
Proprietary Technical Material or transfer, assign, sublicense, loan, disclose
or otherwise make available all or any portion of such Proprietary Technical
Materials to any other person or entity, without prior express written consent
of COMPANY. Title to and ownership of the Proprietary Technical Materials shall
at all time remain in COMPANY. In addition to any other remedy COMPANY may have,
COMPANY reserves the right to terminate DISTRIBUTOR's license granted pursuant
to this paragraph 7 if DISTRIBUTOR fails to comply with any term or condition
hereof. DISTRIBUTOR's license granted pursuant to this paragraph 7 shall also
terminate at such time as DISTRIBUTOR shall permanently cease to use the
Equipment. DISTRIBUTOR agrees, upon notice from COMPANY of any termination of
the license granted pursuant to this paragraph 7 and, in accordance with any
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<PAGE>
more specific directions from COMPANY, to deliver immediately to COMPANY all
Proprietary Technical Material and all copies thereof.
8. LIMITED WARRANTY
With respect to Equipment for which COMPANY is the original Company,
COMPANY warrants to DISTRIBUTOR that, for a period of twelve (12) months from
installation each item of Equipment will conform in all materials and
workmanship. COMPANY's obligation under this warranty is limited to, at
COMPANY's option, repairing or replacing, at COMPANY's facility or at the
location of the Equipment, any Equipment or parts thereof that do not conform to
this warranty. DISTRIBUTOR shall promptly notify COMPANY in writing of any
alleged defects in the Equipment and specifically describe the problem. COMPANY
shall have no obligations under this warranty with respect to any defect unless
it receives notice and a description of such defect no later than ten (10)
working days following the expiration of the warranty period. Upon receipt of
such notice, COMPANY shall either advise DISTRIBUTOR that warranty service shall
be provided at the location of the Equipment or shall instruct DISTRIBUTOR as to
the part or parts of the Equipment that DISTRIBUTOR shall ship back to COMPANY
for repair or replacement. COMPANY will pay the costs of transporting Equipment
to COMPANY which to have been defective; otherwise, DISTRIBUTOR shall pay all
costs of transportation in both directions.
With respect to Equipment for which COMPANY is the original Company,
COMPANY warrants to DISTRIBUTOR that the Programs provided to DISTRIBUTOR in
connection with such Equipment will conform to and perform in accordance with
the then existing Equipment documentation for a period of one (1) year from
shipment of the last item of Equipment in conjunction with which the Programs
are to be used if properly used on the Equipment. COMPANY's obligation under
this warranty is limited to, at COMPANY's option, correcting, repairing or
replacing, at COMPANY's option, at COMPANY's facility or the location of the
Programs, any Program or parts thereof that do not conform to this warranty.
With respect to Equipment for which COMPANY is not the original Company
and the Programs provided to DISTRIBUTOR in connection with such Equipment, the
sole warranties provided by COMPANY to DISTRIBUTOR shall be equivalent to the
sole warranties provided by the original Company to COMPANY (current original
Company warranties and the identification of Equipment to which they pertain
shall be provided to DISTRIBUTOR upon request).
The foregoing warranties shall not apply to any Equipment or Programs
which have been (i) used or operated in a manner inconsistent with the license
granted by COMPANY, (ii) modified or repaired by anyone other than COMPANY
personnel or COMPANY's authorized service representatives in a manner which
adversely affects their operations or reliability, or (iii) damaged because of
accident, neglect or misuse by anyone other than COMPANY personnel, failure or
surge of electrical power, air conditioning or humidity control, transportation,
or other than ordinary use.
THE FOREGOING WARRANTIES APPLY ONLY TO THE ORIGINAL PURCHASER AND ARE IN LIEU OF
ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT
LIMITATION IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY UPON THE RIGHTFUL CLAIM
OF ANY THIRD PERSON.
9. LIMITATION OF LIABILITY
COMPANY shall in no event have obligations or liabilities to
DISTRIBUTOR or any other person for loss of profits, loss of use or incidental,
special or consequential damages, whether based on contract, tort (including
negligence), strict liability, or any other theory or form of action, even if
COMPANY has been advised of the possibility thereof, arising out of, or in
connection with, the sale, delivery, use, repair or performance of the Equipment
or the Programs, or any failure or delay in connection with any of the
foregoing. Without limiting the generality of the preceding sentence, COMPANY
shall not be liable for personal injury or property damage. In no event shall
the liability of COMPANY arising in connection with any Equipment sold hereunder
exceed the actual amount paid by DISTRIBUTOR to COMPANY for Equipment delivered
hereunder.
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10. PATENT AND TRADEMARK INDEMNITY
COMPANY will defend, at its own expense, any suit or proceeding against
DISTRIBUTOR in a court of the United States for the direct infringement of
United States patents and trademarks by Equipment from which COMPANY is the
original Company purchased from COMPANY hereunder. COMPANY shall pay all damages
and costs finally awarded against DISTRIBUTOR because of direct infringement;
provided, however, that COMPANY shall not be obligated to defend or be liable
for costs or damages awarded in any suit or proceeding for infringement of
patents by any other products, or any completed equipment, system, assembly,
combination, method or process, in which, or in the manufacture or testing of
which, any Equipment purchased from COMPANY may be used; and provided further
that COMPANY's obligations to pay such damages and costs shall not apply to any
alleged infringement occurring after DISTRIBUTOR has received notice of such
alleged infringement unless COMPANY thereafter gives to DISTRIBUTOR written
consent for such continuing alleged infringement. COMPANY's liability hereunder
shall not exceed the purchase price paid by DISTRIBUTOR for the infringing
Equipment, and COMPANY shall not be liable for any collateral, incidental, or
consequential damages awarded against DISTRIBUTOR.
COMPANY's duties under this paragraph 10 are conditioned upon
DISTRIBUTOR giving COMPANY prompt written notice of commencement of any suit or
proceeding or any claim of infringement and furnishing to COMPANY a copy of each
communication relating to the alleged infringement and giving to COMPANY all
authority (including the right to exclusive control of the defense of any such
suit or proceeding), information and assistance (at COMPANY's expense) necessary
to defend or settle such suit or proceeding. COMPANY shall not be bound by any
settlement made without COMPANY's prior written consent.
If in any such suit or proceeding, DISTRIBUTOR's continued use of any
item Equipment is enjoined or, if by reason of any claim of infringement,
COMPANY deems it advisable to do so, COMPANY may, at its option and expense, (i)
procure for DISTRIBUTOR the right to continue using such Equipment, (ii) modify
or replace such Equipment with non-infringing Equipment, provided that such
modification does not materially affect performance, or (iii) remove such
Equipment, grant DISTRIBUTOR a credit thereon as depreciated on a
straight-line-3-year basis and accept its return. If an infringement is alleged
prior to completion of deliveries of the Equipment, COMPANY may decline to make
further shipments without being in breach hereunder.
COMPANY shall not be obligated to defend any suit or proceeding, or be
liable for any costs or damages, if the infringement arises out of compliance
with DISTRIBUTOR's specifications or any marking or branding applied at the
request of DISTRIBUTOR. DISTRIBUTOR agrees, at its own expense, to defend and to
pay costs and damages finally awarded in any suit or proceeding against COMPANY
based on any such infringement, provided that DISTRIBUTOR is promptly notified
by COMPANY in writing of the commencement or threat of such suit or proceeding
or claim of infringement and is given all authority (including the right to
exclusive control of the defense of any such suit or proceeding), information
and assistance (at DISTRIBUTOR's expense) necessary to defend or settle such
suit proceeding.
11. FORCE MAJEURE
If the performance hereof or any obligation hereunder, except the
making of payments hereunder, is prevented, restricted or interfered with by
reason by fire, flood, earthquake, explosion or other casualty or accident;
strikes or labor disputes; inability to procure parts, supplies or power; war or
other violence; any law, order, proclamation, regulation, ordinance, demand or
requirement of any government agency; or any other or condition whatsoever
beyond the reasonable control of the affected party, the party so affected, upon
giving prompt notice to the other party, shall be excused from such performance
to the extent of such prevention, restriction or interference; provided,
however, that the party so affected shall take all reasonable steps to avoid or
remove such causes of nonperformance and shall resume performance hereunder with
dispatch whenever such causes are removed.
12. ASSIGNMENT
The rights of DISTRIBUTOR hereunder may not be assigned in whole or in
part, by operation of law or otherwise, without the express written consent of
COMPANY.
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13. APPLICABLE LAW
The validity, construction and effect of this Agreement and the
respective rights and obligations of the parties hereunder, shall be governed by
and determined in accordance with the laws of the state of Florida in the United
States of America as such laws are applied to contracts between Florida
residents entered into and to be performed entirely within the state of Florida,
without reference to principles of conflicts of law. The parties hereby agree to
opt out of coverage of the United Nations Convention on Contracts for the
International Sale of Good. The parties hereby agree that this Agreement shall
be governed by the Uniform Commercial Code ("UCC") as adopted by the state of
Florida.
14. FORUM AND SERVICE OF PROCESS
All actions and proceedings arising out of or relating to this
Agreement shall be heard and determined in a state or federal court sitting in
the County of Dade, State of Florida. Service of process shall be considered
effective if done pursuant to any of the methods set forth in Rule 4(i), Federal
Rule of Civil Procedure or pursuant to Florida law.
15. ATTORNEY'S FEES AND COSTS OF LITIGATION
If any action or proceeding arising out of or relating to this
Agreement is commenced the prevailing party shall be entitled to its reasonable
attorney's fees, costs, and expenses including the costs, expenses, and fees
associated with the enforcement or collection of any judgment.
5
IMAGING DIAGNOSTIC SYSTEMS, INC.
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into as
of 30th November 1999, by and between Iberadac, S.A., a corporation organized
and existing under the laws of Portugal (the "Distributor"), and Imaging
Diagnostic Systems, Inc., a corporation organized and existing under the laws of
the State of Florida ("IDSI").
WITNESSETH:
RECITALS
WHEREAS, IDSI is the owner, and manufacturer of a state of the art
laser imaging system for detection and analysis of masses in the breast, and
ancillary equipment (the "Equipment").
WHEREAS, IDSI is the licensee of a certain Patent, and owner of certain
Patent pending and Patent applications, trade secrets and other proprietary
information in connection with the Equipment and represents that it has the
legal right to manufacture, sell and distribute the Equipment, either
individually or through others;
WHEREAS, IDSI wishes to grant to Distributor and Distributor wishes to
obtain the exclusive right to be supplied with, sell, distribute and market the
Equipment, individually or through others, in the territories set forth on
Exhibit A hereto and incorporated herein (the "Territory").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement the following terms shall have
the definition set forth below.
(a) EQUIPMENT. The term "Equipment" shall mean and include only those
products listed on Exhibit B, as amended from time to time. IDSI may add to,
upgrade or change the Equipment from time to time by providing written notice
not less than thirty (30) days prior to any such change. (B) TERRITORY. The term
"Territory" shall mean the territories set forth on Exhibit A.
2. TERM. This Agreement shall be for a term of 36 months from the date of its
execution by Distributor. This Agreement will automatically renew for an
additional one year term provided that Distributor meets the Performance
Standards set forth in Section 5. and, provided that Distributor satisfactorily
fulfills all other terms and conditions of this Agreement.
3. RIGHT TO SELL, DISTRIBUTE AND MARKET. During the term of this Agreement and
any renewal hereof, IDSI hereby grants to Distributor, as its exclusive agent,
the right to sell, distribute, individually or through outside distributors, and
market the Equipment in the Territory. Distributor shall also have the right to
use the trade names, and trademarks associated with the Equipment in connection
with the promotion, sale, marketing and distribution of the Equipment.
Distributor hereby acknowledges and agrees that all trade names and trademarks
associated with the Equipment are the property of and proprietary to IDSI.
4. DISTRIBUTOR'S DUTIES, REPRESENTATIONS AND WARRANTIES. Distributor agrees to
use its best efforts to sell, market and/or distribute the Equipment in the
Territory. Distributor agrees that it will perform at its expense the following
duties to IDSI's reasonable satisfaction
(a) PROMOTION AND MARKETING
(i) Maintain a qualified sales and distribution organization which will
provide sales personnel, advertisement, marketing and distribution support for
the solicitation of customers and potential customers in the Territory for the
sale of the Equipment.
(ii) Any sales promotion, promotional activities, marketing or
advertising strategies, pamphlets, advertisements, brochures or other
promotional materials, other than those provided by IDSI, must have the prior
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written approval of IDSI. At least one copy of all Distributor's advertising and
sales promotion materials in which the Equipment of IDSI is mentioned, must be
provided for IDSI's review and approval prior to the time of first use. All
advertisements, pamphlets, brochures or other promotional materials, other than
those provided by IDSI shall be at the sole cost of the Distributor. The
Distributor shall have the continuing right to use any promotional materials
produced by IDSI while this Agreement is in effect.
(iii) Distributor, at its sole cost, will attend the RSNA and be
present in the IDSI booth for at least 4 hours per day.
(iv) Distributor will exhibit the CTLM(TM) in at least one major
exhibit in the Territory or in tHE countries surrounding the Territory.
(v) ANY COSTS INCURRED IN THE PROMOTION, PROMOTIONAL ACTIVITIES,
ADVERTISING, MARKETING AND EXHIBITS OF THE EQUIPMENT WILL BE THE FULL
RESPONSIBILITY OF THE DISTRIBUTOR
(b) QUARTERLY REPORTS. Distributor shall promptly prepare and deliver
to IDSI, within 15 days of the end of each quarter, reports identifying each
purchaser of Equipment by name, address and designation of type of business and
the date of sale, model and serial number for each unit of Equipment sold during
the preceding three months and a forecast of requirements for Equipment for the
following six months, as well as a description of all training, support, and
advertising and sales promotional activities undertaken during such period. In
addition, such Report shall contain a statement of the Distributor' then current
inventory of spare parts and technical literature available for customer
service, maintenance and support of the Equipment. The Report shall be certified
by an officer of the Distributor.
(c) GENERAL CONDUCT. Distributor shall at all times conduct its
business in a manner that reflects favorably on IDSI and its Equipment and will
not engage in any deceptive, misleading, illegal or unethical business
practices.
(d) SERVICE AND SUPPORT. Distributor's personnel will be required to be
trained at IDSI headquarter facilities in sales and support techniques for all
of the Equipment and services. IDSI will not charge for such training, however
Distributor shall be responsible for all travel, accommodation and other
expenses. Distributor will provide adequate installation, customer service, and
maintenance and support for the Equipment in the Territory. Distributor will
establish and maintain a staff of trained technicians and purchase and maintain
stock of spare parts and technical literature necessary in order to provide
adequate installation, customer service, maintenance and support of the
Equipment in the Territory. Distributor hereby agrees to provide such service
and support in a prompt and workmanlike manner to any user of the Equipment in
the Territory.
(e) COMPETITIVE PRODUCTS. Distributor will do everything within its
power to feature, promote, and advertise, as part of its merchandising and sales
policy, the Equipment and use its best efforts to stimulate and increase
interest in IDSI's Equipment. IDSI understands that some existing and some new
customers may request competitors' products. Distributor will use its best
efforts to sell, market and distribute the IDSI Equipment to such customers.
Distributor will give IDSI the opportunity to assist with these accounts.
(f) CUSTOMER REQUIREMENTS. With a view to maximizing the potential
market for the Equipment within the Territory, Distributor will report to IDSI
on a quarterly basis, and assist IDSI in the assessment of the needs and
requirements of the potential customer base in the Territory with respect to the
Equipment, including, but not limited to: (i) a rolling twelve-month quantity
forecast, (ii) quality of the Equipment, (iii) design, functional capability and
additional features of the Equipment and related modifications, improvements and
enhancements, and (iv) general market conditions of the Territory.
(g) CO-MARKETING PROTECTION. Distributor will maintain confidentiality
of IDSI supplied prospective customers and not conduct any direct efforts to
persuade such clients toward competitive equipment or services.
(h) PURCHASE ORDERS. Distributor shall forward all orders promptly to
IDSI. The orders shall state clearly the name of the purchaser, the quantity
purchased, and the time and place of delivery.
(i) DELIVERY. Distributor shall give IDSI at least 180 days prior
written notice before each shipment is required.
(j) EXPENSES AND TAXES. Distributor is an independent contractor, and
as such shall pay all expenses, including compensation of salesmen, rentals,
travel, and all taxes, including assessments, which may be made against the
salary or wages of those directly employed by Distributor.
(k) RELATIONSHIP OF PARTIES. Except as set forth herein, Distributor
shall have no right or authority to create any obligation on the part of IDSI or
bind IDSI to any agreement.
(1) OFFICES. Distributor shall maintain suitable offices in at lease
each country represented in Territory. Each office shall be equipped with a
telephone and facsimile line suitable for use for the sale of the Equipment. The
office shall contain a suitable display area where the Equipment shall be
prominently displayed at all times. This display area or another area shall be
suitable for and used for the demonstration of and training in the use of, the
Equipment. The office shall be staffed from 9:00 a.m. to 5:00 p.m., Monday
through Friday, subject to recognized national holidays.
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5. PERFORMANCE STANDARDS. Prior to the PMA, Distributor will purchase one
clinical CTLM(TM), at IDSI'S cost, for sale to a major medical facility to be
used for clinical study comparisons. The sale to the medical facility shall be
approved by IDSI and shall be conditioned upon and provide Distributor with the
unlimited right, subject to scheduling, to use the Equipment for sale
demonstrations. Demonstrations of the equipment must be complete and must show
all features and functions of the Equipment.If the following performance
standards (the "Minimum Performance Standards") are not met, IDSI will notify
Distributor, in writing, that it is in default of this Agreement. If Distributor
does not cure the deficiency within 30 days from receipt of the notice, IDSI, at
its sole option, may: (i) continue this Agreement on a nonexclusive basis; (ii)
continue this Agreement on a nonexclusive basis and limit the Territory; or
(iii) terminate this Agreement. Any such action taken by IDSI shall be without
prejudice to the rights of the parties with respect to Equipment already
ordered, sold or delivered. For the purpose of this Agreement Year 1 shall begin
upon PMA acceptance.
YEAR. NUMBER OF CTLM(TM) UNITS
- ----- ------------------------
1 1
6. PURCHASE OF EQUIPMENT.
(a) ORDERS. Orders from Distributor for equipment shall be made by
delivery of a purchase order to IDSI. As soon as practicable after receipt of
such purchase order, IDSI will: (i) if such order is accepted, return to
Distributor IDSI's standard form of Sales Acknowledgment (the "Acknowledgment")
setting forth dates on which delivery will be made, or (ii) notify Distributor
in writing that such order is rejected. IDSI will use its best efforts to make
prompt delivery of the Equipment accepted by IDSI on the delivery dates
specified in the Acknowledgment, F.O.B. Fort Lauderdale, at the time and to the
entities and destinations listed in the purchase orders. IDSI shall not be
liable for any failure to deliver, if such failure has been occasioned by fire,
embargo, strike, failure to secure materials from a usual source of supply, or
any circumstance beyond IDSI's control, which shall prevent IDSI from making
deliveries in the normal course of its business. IDSI shall not, however, be
relieved from making delivery when the causes interfering with deliveries shall
have been removed. In particular, the Parties acknowledge that IDSI is reliant
on outside suppliers, which supply the components for its Equipment. Should
these suppliers fail to produce the required components in a timely manner, than
IDSI shall be excused from the delivery obligations under this Agreement until
such time as the components can be manufactured, delivered and installed in the
Equipment. In no event shall IDSI be responsible for any loss or liability
suffered by Distributor as a result of delay in delivery of any order.
(b) CANCELLATION OF ORDERS. Distributor may cancel any order (or any
part thereof) for Equipment by giving IDSI written notice of such cancellation
at least 15 days prior to the shipping date. If Distributor cancels an order for
Equipment (or any part thereof), Distributor will be subject to a charge based
upon the purchase price relating to the Equipment so affected as set forth on
Exhibit B attached hereto. In the event of such cancellation, Distributor will
have no rights in partially completed goods.
(c) RESCHEDULING ORDERS. Distributor may at any time, upon not less
than thirty (30) days written notice to IDSI, reschedule and/or postpone the
delivery date relating to an order (or any part thereof) for up to thirty (30)
days. The postponement of delivery to a date more than thirty (30) days from the
delivery date specified in the initial order shall be deemed a cancellation of
such order. DISTRIBUTOR MAY NOT POSTPONE THE DELIVERY DATE MORE THAN ONCE WITH
RESPECT TO ANY ORDER. If Distributor cancels a previously rescheduled delivery
of Equipment, the applicable cancellation charges shall be based on the delivery
date specified in the initial order submitted by Distributor for such delivery.
7. PRICE.
(a) PURCHASE PRICE. The wholesale and retail purchase price for the
Equipment to be sold hereunder shall initially be as set forth on Exhibit C,
attached hereto, which may be discounted based on the cumulative quantities of
such Equipment purchased by Distributor during the term hereof or any Additional
Term. Discounts shall not apply retroactively to prior purchases of Equipment.
IDSI shall have the sole right to set the price and other terms of the sales of
the Equipment. IDSI, at its sole discretion, reserves the right to change
prices, materials used, Equipment line and the components of the Equipment. IDSI
will provide reasonable notice of any price or other changes to Distributor as
to not disrupt the sales and distribution of the Equipment. IDSI reserves the
right to amend Exhibit C with respect to any Additional Term.
(b) PRICE CHANGES. IDSI may change the prices to be charged for
Equipment sold hereunder by amending its published Price List and giving
Distributor thirty (30) days prior notice. All orders received and accepted by
IDSI prior to the effective date of the price increase for shipment within
thirty (30) days of such effective date will be billed at the prices in effect
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at the time of acceptance of the order; provided, however, that if Distributor
notifies IDSI in writing prior to the effective date of such price increase that
it quoted the original price in an outstanding bid submitted prior to receipt of
IDSI's amended Price Lists, any order relating to such bid accepted by IDSI
prior to the effective date of such price increase for shipment within ninety
(90) days of such effective date will be billed at the prices in effect at the
time of acceptance. All other shipments after thirty (30) days (or ninety days,
if applicable) of such effective date shall be billed at the prices set forth in
the amended Price List.
(c) PAYMENT. All payments hereunder shall be in United States dollars
and shall be effected by means of confirmed, irrevocable letters of credit on a
United States bank established, upon execution of this Agreement, to IDSI's
satisfaction. All exchange, interest, banking, collection and other charges
shall be the sole expense of the Distributor. Distributor shall have the option
to wire transfer funds in advance of shipment to IDSI as follows:
First Union National Bank of Florida, Jacksonville, Florida
Account of Imaging Diagnostic Systems, Inc.
Account Number 2090000
ABA Number 063000021
Shipment will be made upon either receipt of the letter of credit approved by
IDSI or confirmation that a wire transfer has been received.
8. TERMS AND CONDITIONS OF SALE. This Agreement and all sales of Equipment
hereunder by IDSI to Distributor shall be subject to IDSI's standard terms and
conditions of sale as set forth on the applicable Acknowledgment. A copy of
IDSI's current Standard Terms and Conditions of Sale is attached hereto as
Exhibit D and incorporated herein. To the extent that IDSI's standard terms and
conditions are inconsistent with express provisions of this Agreement, the
provisions of this Agreement shall prevail. Distributor agrees that although it
may use its standard forms for others or other notices hereunder, said standard
forms will be governed by the terms and conditions of this Agreement and any
applicable Acknowledgment shall have no force and effect. Distributor agrees to
place the following legend on its standard forms submitted to IDSI hereunder:
"NOTWITHSTANDING ANY OTHER TERMS AND CONDITIONS APPEARING HEREON, THIS PURCHASE
SHALL BE GOVERNED BY THE TERMS AND CONDITIONS OF SALE SET FORTH IN THE IDSI
DISTRIBUTION AGREEMENT."
9. PRODUCT WARRANTY.
(a) DISTRIBUTOR WARRANTY. The sole warranties provided by IDSI to
Distributor with respect to the Equipment are those contained in IDSI's Standard
Terms and Conditions. Notwithstanding the foregoing, with respect to Equipment
for which IDSI is not the original manufacturer, the sole warranties provided by
IDSI to Distributor shall be equivalent to the sole warranties provided by the
original manufacturer to IDSI.
IDSI DISCLAIMS ALL OTHER WARRANTIES, WARRANTS OF TITLE, MERCHANTABILITY, AND
FITNESS FOR A PARTICULAR PURPOSE AND AGAINST INFRINGEMENT UPON THE RIGHTFUL
CLAIM OF ANY THIRD PERSON. IDSI DISCLAIMS LIABILITY FOR ALL CONSEQUENTIAL
DAMAGES IN ANY FORM, EVEN THOUGH IDSI MAY HAVE BEEN ADVISED OR MAY OTHERWISE
KNOW OF THE POSSIBILITY OF SUCH DAMAGES.
Nothing contained in this warranty shall make IDSI liable beyond the express
limitations of this warranty for loss or damage to the business of Distributor,
including any claims as to breach of contract, lost receipts or profits,
business interruptions or other tangible business loss.
(b) END-USER WARRANTY. Distributor is hereby authorized, subject to the
succeeding sentence, to offer the warranties set forth in Section 9 (a) to
customers to whom it sells the Equipment, and IDSI agrees to honor such
warranties. Distributor acknowledges and agrees that the warranty period set
forth in the Acknowledgment commences, with respect to both Distributor and its
customers, on the date of delivery to Customer provided however, in no event
shall the warranty period exceed fifteen months. In the event that the
Distributor extends or otherwise represents to a customer that the warranties
are more extensive or encompassing than those set forth herein, the Distributor
shall indemnify IDSI for any warranty claims made by a customer based on
Distributor's representations.
4
10. SUBLICENSES.
(a) PROGRAMS SUBLICENSE. Distributor is authorized to grant
restrictive, nonexclusive, nontransferable sublicenses to customers to use the
Programs (as defined in the Acknowledgment) or any portion thereof, provided
that each such Customer (sublicensee) enters into an agreement with Distributor
pursuant to which the sublicensee expressly accepts and agrees to the terms and
conditions of the license set forth in the Acknowledgment. In addition to any
other remedy IDSI may have, IDSI reserves the right to terminate any
sublicensee's sublicense if said sublicensee fails to comply with any term or
condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Programs.
(b) PROPRIETARY TECHNICAL MATERIALS SUBLICENSE. Distributor is
authorized to grant restrictive, nonexclusive, nontransferable sublicenses to
customers to use the Proprietary Technical Materials or any portion thereof,
provided that each such customer (sublicensee) enters into an agreement with
Distributor pursuant to which the sublicensee expressly accepts and agrees to
the terms and conditions of the license set forth in the Acknowledgment. In
addition to any other remedy IDSI may have, IDSI reserves the right to terminate
any sublicensee's sublicense if said sublicensee fails to comply with any term
or condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Proprietary Technical Materials.
11. MAINTENANCE.
(a) DISTRIBUTOR'S OBLIGATION TO PROVIDE SERVICE. Distributor agrees
that IDSI shall have no obligation to maintain the Equipment except for the
warranty obligations specified in Section 9. Distributor acknowledges and agrees
that it will perform, at no expense to IDSI, maintenance and repair of Equipment
sold or leased to the Distributors customers
(b) CONSIGNMENT OF SPARES PARTS. IDSI may, at its sole discretion,
consign to Distributor, from time to time, as it may deem necessary, spare parts
to support warranty repair service in Distributor's Territory. The title to such
parts shall at all times remain with IDSI and Distributor shall have no right,
title or interest therein until such time as payment is made to IDSI as set
forth below. In the event that such parts used for non-warranty repair service,
Distributor will purchase the part used or to be used for non-warranty repair
services at prices listed in a distributors price sheet, provided by the
Company, as may be amended from time to time. Distributor will provide IDSI with
a monthly report, not later than 15 days after the first day of each month,
which will indicate the Customers name, address and phone number, the work
performed, the parts used and whether the repair was under warranty. The report
shall also include a total dollar amount for parts used for non-warranty repair
and be accompanied by a check for full payment therefor.
12. TERMINATION.
(a) Either party may, by written notice to the other party, terminate
this Agreement upon the occurrence of any one or more of the following events:
(i) Upon the failure of the other party to pay any monies when
due hereunder, if such default continues for five (5) business days or more
after written notice to the defaulting party;
(ii) Upon material failure of a party to observe, keep or
perform any of the covenants, terms or conditions herein, if such default
continues for thirty (30) business days or more after written notice to the
defaulting party;
(iii) In the event: (a) a party makes a general assignment for
the benefit of creditors or transfers all or a substantial portion of its
assets; (b) a receiver is appointed and not discharged within 30 days of
appointment, or (c) the other party has become insolvent.
(b) IDSI may, by written notice to Distributor, terminate this
Agreement upon occurrence of any one more of the following events:
(i) In the event that Distributor solicits orders for
Equipment outside its Territory;
(ii) In the event of any dispute, disagreement or controversy
between or among the owners, partners, managers, officers or stockholders of
Distributor which in the opinion of IDSI adversely affects the ownership,
operation, management, business or interests of Distributor, or in the event of
a change in control or majority ownership of Distributor;
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(iii) If Distributor ceases to function as a going concern or
to conduct its operations in the normal course of business, or
(c) If Distributor fails to meet the Minimum Performance Standards set
forth in Section 5, IDSI shall have the right, upon 30 days written notice to
the Distributor, to terminate this Agreement. Distributor shall have the right
to cure the deficiency within such 30-day period. If Distributor does not cure
the Deficiency within such 30-day period, IDSI may terminate this Agreement on
the 30th day.
(d) Upon termination or expiration of this Agreement, for any reason
Distributor shall discontinue the use of IDSI's name, trademarks, trade names,
labels, copyrights, and other advertising media and shall remove all signs and
displays relating thereto: and will no longer identify itself as a distributor
of IDSI or indicate, in any way, that it is associated with IDSI. Distributor
shall promptly return to IDSI all marketing and selling materials, all manuals,
all technical data, all other documents and copies thereof previously supplied
by IDSI and all spare parts consigned to Distributor by IDSI.
(e) Upon termination or expiration of this Agreement, for any reason,
IDSI shall have the option to repurchase its Equipment and spare parts then in
possession of the Distributor, at prices originally billed to the Distributor if
the Equipment and spare parts are new and at an adjusted price if the Equipment
is used, and with deductions for money due or to become due to IDSI under this
Agreement. As to any of the IDSI's Equipment or spare parts not repurchased by
IDSI, Distributor shall have the right to dispose of them in the regular course
of its business and for this purpose only, the restrictions of preceding sub
paragraph shall be deferred until three months after the termination of this
Agreement.
(f) It is expressly understood and agreed that the rights of
termination as provided in this Agreement are absolute and that both parties
hereto have considered the costs and expenditures associated with the
preparation and performance of this Agreement and the possible losses and
damages which may be incurred by both parties in the event of its termination.
The parties hereto acknowledge and agree, by execution hereof that they have
entered into this Agreement with full knowledge of such possibilities, and
except as provided herein neither party hereto shall be responsible to the other
for compensation, damages, losses, or otherwise, for termination of this
Agreement as set forth above.
13. TRADEMARKS: MARKINGS.
(a) TRADEMARKS AND NAMES. Distributor is hereby granted permission to
use during the term of this Agreement, and any renewal hereof, the trademarks
and trade names used by IDSI in connection with the Equipment. Such permission
is expressly limited to uses by Distributor necessary to performance of
Distributor's obligations under this Agreement, and Distributor hereby admits
and recognizes IDSI's exclusive ownership of such marks and names and the renown
of IDSI's marks and names, both worldwide and specifically in the Territory.
Distributor agrees not to take any action, inconsistent with such ownership and
further agrees to take any action, including without limitation the conduct of
legal proceedings, which IDSI deems necessary to establish and preserve IDSI's
exclusive rights in and to its trademarks and trade names. Reproductions of
IDSI'S trademarks, logos, symbols, etc. shall be true reproductions and shall be
done photographically, in a manner, which enhances the reputation and status of
IDSI.
(b) MARKINGS. Distributor will not remove or make or permit any
alterations in any labels or other identifying markings placed by IDSI on any of
the Equipment without written consent by IDSI.
(c) NO ADDITIONAL RIGHTS. No rights to manufacture, alter, or use the
Equipment for purposes other than those contained herein are granted by this
Agreement. Moreover, no licenses are granted or implied by this Agreement under
any patents owned or controlled by IDSI or under which IDSI has a right, except
the right to sell, market and distribute IDSI's Equipment, as contemplated
herein, during the term of this Agreement.
14. INDEMNIFICATION. Distributor shall indemnify and hold harmless IDSI, its
officers, directors, employees, or agents (collectively referred to in this
Section 14 as "IDSI") for damages or expenses resulting from any claim, suit or
proceeding brought against IDSI, with regard to any untrue statement or alleged
untrue statement, misrepresentation or alleged misrepresentations, promise or
agreements made or allegedly made by Distributor or its sub-distributors or
arising from the marketing, sale or distribution of the Product by Distributor
or its sub-distributors. This provision shall not apply to Distributor or any
person controlling Distributor in respect of any losses, claims, damages,
liabilities or actions arising out of or based upon any untrue statement or
alleged untrue statement, misrepresentation or alleged misrepresentations,
promise or agreement made or allegedly made by Distributor or arising from the
marketing, sale or distribution of the Product by Distributor, if such untrue
statement or alleged untrue statement, misrepresentation or alleged
misrepresentations, promise or agreement was made in reliance upon information
furnished in writing to Distributor by IDSI specifically for use in connection
with the sale, marketing or distribution of the Equipment. IDSI agrees that
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Distributor has the right to defend, or at its option to settle, and
Distributor agrees, at its own expense, to defend or at its option to settle,
any claim, suit or proceeding brought against IDSI. Distributor agrees to pay
any costs of litigation, investigation or defense incurred by IDSI, including
reasonable attorney fees, and final judgement, entered against IDSI on such
issue in any such suit or proceeding. Distributor shall be relieved of the
foregoing obligations unless IDSI notifies Distributor in writing, within
fifteen days of receipt of notification of such suit, claim or proceeding, and
gives Distributor authority to proceed as contemplated herein.
15. RISK OF LOSS. Title to the Equipment shipped shall pass upon shipping,
subject to full payment. Distributor assumes the risk of loss and damage of the
Equipment in transit from IDSI's shipping point to the point of destination.
16. COMPLIANCE WITH LAWS. Distributor shall comply with all material applicable
present and future federal, state, county, local and foreign laws, ordinances
and regulations relating to the importation and sale of the Equipment.
Distributor will take all steps necessary to obtain the proper import licenses,
if applicable and Distributor shall be solely responsible for any excise tax,
duties or other costs for the importation of the Equipment. 17.
NON-CIRCUMVENTION AGREEMENT. The respective Parties involved in this Agreement,
agree not to circumvent each other. The Parties agree that they will not make
any contact, directly or indirectly, written, oral, electronic or by any medium
of contact whatsoever, with any Sources without the express written consent of
the other introducing Party. Each of the listed Parties hereto, accepts and
understands that any overt or covert action of circumvention, or unauthorized
disclosure shall constitute a breach of trust and shall be considered a breach
of the terms and conditions of this agreement. Such action shall be subject to
judicial action, and recompense.
If either Party shall bring an action to recover payment or other compensation
pursuant to the terms of this Agreement, the prevailing Party shall be entitled
to reasonable attorney's fees and expenses as may be awarded, including legal
fees and costs, and recovery for liquidated damages and punitive damages as may
be awarded by and through any legal process or jurisdiction.
For the purposes of this Section 17, the term "Party" or "Parties" shall be
considered to include and be binding upon the parties to this Agreement, any
individual, entity or entities, including but not limited to, associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated, associations,
collateral providers or the like, which the Parties hereto may now or in the
future be associated with during the term of this Agreement and any renewal
thereof.
For the purposes of this Section 17, the term "Sources" shall be considered to
include any business opportunity, principal, individual, entity or entities,
including but not limited to, customers and distributors, their associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated partnerships,
associations or the like, introduced to or brought to the attention of a Party
to the other Party during the term of this Agreement or any renewal thereof.
Distributor acknowledges and agrees that no separate or additional payment will
be required to be made to it in consideration of its undertakings in this
Section 17.
18. NO COPYING. Without the prior written consent of IDSI, Distributor shall
refrain from copying, reverse engineering, disassembling, translating or
modifying the Equipment for its benefit, or granting any other person or entity
the right to do so.
19. NOTICES. Any notice required or permitted by this Agreement shall be in
writing and shall be delivered by U.S. Certified Mail, return receipt requested,
or by special messenger service with receipt (such as Federal Express), by
facsimile delivery or by hand, to the parties at the following addresses or such
substitute person or address of which notice is given in like manner:
IDSI
Imaging Diagnostics Systems, Inc.
6531 NW 18 Court
Plantation, Florida 33313
Phone (954) 581-9800
Fax (954) 581-0555
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DISTRIBUTOR
Iberadac S.A.
______________________
______________________
or to such other address as either of them, by notice to the other may designate
from time to time. The transmission confirmation receipt from the sender's
facsimile machine shall be conclusive evidence of successful facsimile delivery.
Time shall be counted to, or from, as the case may be, the delivery in person or
by mailing.
20. GOVERNING LAW. VENUE AND ARBITRATION. This Agreement shall be deemed to be
executed in the State of Florida and governed by the laws of the State of
Florida. Any controversy or claim arising out of or relating to this Agreement
or to the interpretation, breach or enforcement thereof, except a claim for
injunctive relief, shall be submitted to an arbitrator and settled by
arbitration in Broward County, Florida, in accordance with the rules then
obtaining of the American Arbitration Association. Any award made by the
arbitrator shall be final, binding and conclusive on all parties hereto for all
purposes, and judgement may be entered thereon in any court having jurisdiction
thereof. Nothing contained herein shall serve to prohibit the parties from
seeking injunctive relief in a court of competent jurisdiction.
21. GENERAL.
(a) INDEPENDENT CONTRACTOR. Distributor will act as an independent
contractor under the terms of this Agreement and not an agent or legal
representative of IDSI for any purpose, whatsoever, and, except for the
extension of the warranty set forth in Section 9, Distributor has no right or
authority to assume or create any obligation of any kind, express or implied, on
behalf of IDSI to Distributor's customers or to any other person.
(b) PRODUCT CHANGES. IDSI reserves the right to make design and other
modifications in the Equipment at any time but shall not be obligated to
implement such modifications in Equipment that has previously been delivered.
(c) CONFIDENTIAL INFORMATION. Distributor agrees not to disclose to any
person outside of its employ, and not to use for any purpose other than to
fulfill its obligations under this Agreement, any information which is disclosed
to Distributor by IDSI and which is not otherwise publicly available.
Distributor agrees to take all preventative measures and precautions to guard
against and prevent any use or disclosure of such confidential information by
its partners, employees, agents, or other persons consistent with the intent of
this paragraph. Distributor further agrees not to disclose to IDSI any
information, which Distributor deems to be confidential, and it is understood
that any information received by IDSI will not be of a confidential nature.
(d) WAIVER AND AMENDMENT. Any party shall not construe the waiver by
any party to this Agreement of a breach of any provision hereof by any other
party as a waiver of any subsequent breach. The failure by either party at any
time to enforce the provisions of this Agreement, or to exercise any election or
option provided herein, shall in no way be construed as a waiver of such
provisions or options, nor in any way to affect the validity of this Agreement
or any part thereof, or the right of either party thereafter to enforce each and
every such provision. No provision of this Agreement may be terminated, amended,
supplemented, waived or modified other than by an instrument in writing signed
by the party against whom the enforcement of the termination, amendment,
supplement, waiver or modification is sought.
(e) NO OTHER WARRANTY OR REPRESENTATION. Distributor hereby
acknowledges that it has not entered into this Agreement in reliance upon any
warranty or representation by any person or entity except for the warranties or
representations specifically set forth herein.
(f) LANGUAGE. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications and materials made or given pursuant to this
Agreement, including without limitation any operations and maintenance manuals,
shall be in the English language. IDSI shall have no obligations or liabilities
to Distributor or any other person for loss of profits, loss of use or
incidental, special or consequential damages, even if IDSI has been advised of
the possibility thereof, arising out of or in connection with the translation
from English into any other language of any materials made or given pursuant to
this Agreement, including without limitation any operations and maintenance
manuals.
(g) LICENSES AND PERMITS. IDSI will use its best efforts to secure all
export licenses and permits required by the United States government, and
Distributor will secure all import licenses and permits required in connection
with the importation, marketing, sale and distribution of the Equipment. Each
party will furnish any information and assistance reasonably required by the
other party in connection with securing any such licenses and permits.
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(h) IMPORT/EXPORT CONTROLS. IDSI's obligations hereunder shall be at
all times subject to the export administration and control laws and regulations
of the United States Government, and any amendments thereof and the import
administration and control laws and regulations of the Territory, and any
amendments thereof. Distributor shall provide IDSI with any written assurances
it may reasonably request with respect to Distributor's compliance with such
laws or regulations. Distributor agrees that, with respect to the import, resale
or any other disposition of Equipment and any printed commercial and technical
data and information supplied by IDSI, Distributor will comply fully with the
import/export administration and control laws and regulations of the United
States of America and the Territory, and any amendments of such laws and
regulations.
(i) COMPLIANCE WITH LAWS. IDSI represents that, with respect to the
production of Equipment to be furnished hereunder, IDSI will fully comply with
all applicable laws of the United States and the State of Florida. Distributor
represents that, with respect to the purchase, marketing, sale and distribution
of the Equipment furnished hereunder, Distributor will comply with all
applicable laws of the Territory.
(j) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding between the parties concerning the subject matter hereof and
supersedes all prior agreements, negotiations and understandings of the parties
with respect thereto. No representation, promise, modification or amendments
shall be binding upon either party as a warranty or otherwise, unless in writing
and signed on behalf of each party by a duly authorized representative. Although
Distributor may use its standard purchase order form to give any order or other
notice provided for hereunder, said order or notice will be governed by the
terms and conditions of this Agreement any applicable Acknowledgment, and any
term or condition set forth in any such standard form which is inconsistent with
or in addition to the terms and conditions of this Agreement and any applicable
Acknowledgment shall have no force or effort.
(k) ATTORNEY'S FEES. In the event any action is commenced with regard
to this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs and expenses.
(l) SEVERABILITY CLAUSE. In the event any parts of this Agreement are
found to be void, the remaining provisions of this Agreement shall nevertheless
be binding with the same effect as though the void parts were deleted.
(m) SUCCESSORS. Subject to the provisions of this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
(n) SECTION AND PARAGRAPH HEADINGS. The section and paragraph headings
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
(o) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature, provided however that
original signatures must be provided within ten days from the date of signing.
(p) FURTHER ASSURANCES. The Parties hereto agree to execute and deliver
from time to time at the other Party's request, without further consideration,
such additional documents and to take such other action necessary to consummate
the transactions contemplated herein.
(q) ASSIGNMENT. This Agreement may be assigned by IDSI. Distributor
will not be permitted to assign this Agreement
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year set forth below.
Dated: November 1, 1998
In the presence of: Imaging Diagnostic Systems, Inc.
______________________________ BY: /s/ Linda Grable, President
Dated: November 1, 1999
In the presence of: Iberadac S. A.
______________________________ BY: /s/ Rui Jorge Lopes de Almeida
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EXHIBIT A
TERRITORY
Portugal
Spain
<PAGE>
EXHIBIT B
EQUIPMENT
CTLM(TM)
<PAGE>
EXHIBIT C
PRICE
<PAGE>
EXHIBIT D
STANDARD TERMS AND CONDITIONS
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
STANDARD TERMS AND CONDITIONS
1. PAYMENT
Payments hereunder shall be made through a confirmed, irrevocable
letters of credit in U.S. dollars, opened by DISTRIBUTOR and advised through
First Union National Bank of Florida, in the full amount of the Purchase Price
for all Equipment, including an amount estimated for freight and insurance.
DISTRIBUTOR shall open the letter of credit upon issuance of any purchase order.
COMPANY shall receive disbursement under the letter of credit upon presentment
to the issuing/confirming bank of (i) an airway bill, bill of lading or similar
certificate issued by the transportation company, and (ii) a copy of COMPANY's
invoice for goods shipped (including freight and insurance). No other documents
shall be required. All interest, banking, collection, or other charges shall be
at the sole expense of DISTRIBUTOR. Payment shall be made without regard to
whether DISTRIBUTOR has made or may make any inspection or use of the Equipment.
Each shipment shall be treated as a separate transaction, but in the
event of any default of DISTRIBUTOR, COMPANY may decline to make further
shipments without in any way affecting its rights hereunder. If, despite any
default by DISTRIBUTOR, COMPANY elects to continue to make shipments, COMPANY's
action shall not constitute a waiver of any default by DISTRIBUTOR or in any way
effect COMPANY's legal remedies for any such default.
2. TAXES
The purchase price is exclusive of any sales, use or privilege tax,
customs or import duty, excise tax based on gross revenue or any similar tax or
charge which might be levied as a result of the production, sale or shipment of
any Equipment or the use of any Equipment by DISTRIBUTOR. DISTRIBUTOR agrees to
pay and otherwise be fully responsible for any such taxes (except for taxes
based on the net income of COMPANY). Any personal property taxes assessable on
the Equipment after delivery shall be borne by DISTRIBUTOR. COMPANY shall have
the right, but shall not be obligated, to pay any such taxes directly, in which
event DISTRIBUTOR shall promptly reimburse COMPANY in the amount thereof upon
presentation by COMPANY of evidence of payment.
3. DELIVERY
The Equipment shall be delivered to DISTRIBUTOR F.O.B. COMPANY's plant
in Sunrise, Florida. Delivery of the Equipment to a common carrier shall be
deemed a satisfactory delivery by COMPANY to DISTRIBUTOR. DISTRIBUTOR agrees to
pay all freight, insurance, packing and other transportation charges related to
said delivery. COMPANY shall have the right, but shall not be obligated, to
prepay such charges, in which event DISTRIBUTOR shall promptly reimburse COMPANY
in the amount thereof upon presentation by COMPANY of evidence of payment. In
connection with the delivery of the Equipment, DISTRIBUTOR may designate in
writing, not less than ten (10) business days prior to the shipment date, the
carrier for shipment and the amount of insurance and nature of coverage. If
DISTRIBUTOR fails to so designate any or all such items, COMPANY, at its
discretion, may specify any item not so designated. COMPANY shall select, at its
discretion, the types, amount of crating, and the carrier of any insurance. The
purchase price does not include any maintenance, installation, or training.
4. RISK OF LOSS; SECURITY INTEREST
Title and risk of loss or damage to the Equipment shall pass to
DISTRIBUTOR upon delivery by COMPANY to a common carrier for shipment.
COMPANY retains a security interest in the Equipment, any replacements
of the Equipment, and all proceeds of the Equipment or its replacements,
including, but not limited to, insurance proceeds, to secure performance of all
Distributor's payment obligations under this Agreement. If DISTRIBUTOR shall
fail to pay any portion of the purchase price or any related charges when due,
COMPANY shall have the right, without liability, to repossess the Equipment and
to avail itself of any legal remedy. DISTRIBUTOR agrees to execute and deliver
such financing statements and other documentation as COMPANY may reasonably
request to perfect and protect COMPANY's interests in the Equipment.
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5. PROGRAMS
As used herein, the word "Programs" shall include COMPANY's Firmware
and Software, each of which is defined as follows:
(a) "Firmware" shall mean all fixed electrical circuits (including
printed circuit boards and chips embodying such circuits) placed in the
Equipment by COMPANY that performs predetermined programs and routines in the
Equipment in response to specific inputs.
(b) "Software" shall mean all alterable programs and routines for the
internal operation of the Equipment placed in the Equipment by COMPANY, or
furnished with or for the Equipment by COMPANY.
6. PROGRAMS LICENSE
COMPANY hereby grants to DISTRIBUTOR a nonexclusive license to use and
sublicense to customers the Programs solely in connection with the sale and use
of the Equipment as contemplated under this Agreement. Any grant of a sublicense
of Programs to a Customer shall be by written sublicense agreement which
provides for all terms, conditions, restrictions and requirements as to the
ownership, use and confidentiality of such Programs as set forth in, and imposed
upon DISTRIBUTOR by, this Agreement. DISTRIBUTOR shall obtain COMPANY'S prior
approval of the form of sublicense agreement with Customers. COMPANY shall not
assign, transfer, or sublicense any Programs to any third party other than as
contemplated in this Agreement, without the express written consent of COMPANY.
Notwithstanding any contrary provision in this or in any other agreement between
COMPANY and DISTRIBUTOR, COMPANY shall retain all right, title and interest in
and to any Programs provided licensed to DISTRIBUTOR or sublicensed to customers
in connection with the sale and use of the Equipment being acquired by
DISTRIBUTOR or customers hereunder. DISTRIBUTOR agrees to maintain the
confidentiality of the Programs and to instruct and obligate its employees and
agents to do the same.
Without limiting the generality of the foregoing, DISTRIBUTOR shall not
reproduce or modify all or any portion of the Programs, nor shall DISTRIBUTOR
disclose, sell, sublicense or otherwise transfer or make available all or any
portion of the Programs to any third party, without the prior express written
consent of COMPANY.
In addition to any other remedy COMPANY may have, COMPANY reserves the
right to terminate Distributor's license or customers sublicense, if DISTRIBUTOR
or customer fails to comply with any term or condition hereof. Distributor's
license or customer's sublicense, as the case may be, granted pursuant to this
paragraph 6 shall also terminate at such time as DISTRIBUTOR shall permanently
cease to use the Equipment. DISTRIBUTOR agrees, upon notice from COMPANY of any
termination of the license granted pursuant to this paragraph 6 and, in
accordance with any more specific directions from COMPANY, to deliver
immediately to COMPANY all Software and copies thereof, and all Firmware chips
and printed circuit boards and other tangible items and materials in the
possession or custody of DISTRIBUTOR embodying the Programs.
7. PROPRIETARY TECHNICAL MATERIALS
Documentation, maintenance manuals and drawings relating to the
Equipment or the Programs (collectively, "Proprietary Technical Material") that
COMPANY may furnish shall be in DISTRIBUTOR's or customer's possession pursuant
only to a restrictive, nonexclusive license under which DISTRIBUTOR or customer
may use such Proprietary Technical Materials solely for the purpose of
operating, servicing and repairing the Equipment and the Programs and for no
other purpose. One installation, maintenance and operation manual will be
provided with each system purchased hereunder. DISTRIBUTOR agrees to maintain
the confidentially of all Proprietary Technical Materials and to instruct and
obligate its employees and agents to do the same. Without limiting the
generality of the foregoing, DISTRIBUTOR may not reproduce or copy any
Proprietary Technical Material or transfer, assign, sublicense, loan, disclose
or otherwise make available all or any portion of such Proprietary Technical
Materials to any other person or entity, without prior express written consent
of COMPANY. Title to and ownership of the Proprietary Technical Materials shall
at all time remain in COMPANY. In addition to any other remedy COMPANY may have,
COMPANY reserves the right to terminate DISTRIBUTOR's license granted pursuant
to this paragraph 7 if DISTRIBUTOR fails to comply with any term or condition
hereof. DISTRIBUTOR's license granted pursuant to this paragraph 7 shall also
terminate at such time as DISTRIBUTOR shall permanently cease to use the
Equipment. DISTRIBUTOR agrees, upon notice from COMPANY of any termination of
the license granted pursuant to this paragraph 7 and, in accordance with any
more specific directions from COMPANY, to deliver immediately to COMPANY all
Proprietary Technical Material and all copies thereof.
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8. LIMITED WARRANTY
With respect to Equipment for which COMPANY is the original Company,
COMPANY warrants to DISTRIBUTOR that, for a period of twelve (12) months from
installation each item of Equipment will conform in all materials and
workmanship. COMPANY's obligation under this warranty is limited to, at
COMPANY's option, repairing or replacing, at COMPANY's facility or at the
location of the Equipment, any Equipment or parts thereof that do not conform to
this warranty. DISTRIBUTOR shall promptly notify COMPANY in writing of any
alleged defects in the Equipment and specifically describe the problem. COMPANY
shall have no obligations under this warranty with respect to any defect unless
it receives notice and a description of such defect no later than ten (10)
working days following the expiration of the warranty period. Upon receipt of
such notice, COMPANY shall either advise DISTRIBUTOR that warranty service shall
be provided at the location of the Equipment or shall instruct DISTRIBUTOR as to
the part or parts of the Equipment that DISTRIBUTOR shall ship back to COMPANY
for repair or replacement. COMPANY will pay the costs of transporting Equipment
to COMPANY which to have been defective; otherwise, DISTRIBUTOR shall pay all
costs of transportation in both directions.
With respect to Equipment for which COMPANY is the original Company,
COMPANY warrants to DISTRIBUTOR that the Programs provided to DISTRIBUTOR in
connection with such Equipment will conform to and perform in accordance with
the then existing Equipment documentation for a period of one (1) year from
shipment of the last item of Equipment in conjunction with which the Programs
are to be used if properly used on the Equipment. COMPANY's obligation under
this warranty is limited to, at COMPANY's option, correcting, repairing or
replacing, at COMPANY's option, at COMPANY's facility or the location of the
Programs, any Program or parts thereof that do not conform to this warranty.
With respect to Equipment for which COMPANY is not the original Company
and the Programs provided to DISTRIBUTOR in connection with such Equipment, the
sole warranties provided by COMPANY to DISTRIBUTOR shall be equivalent to the
sole warranties provided by the original Company to COMPANY (current original
Company warranties and the identification of Equipment to which they pertain
shall be provided to DISTRIBUTOR upon request).
The foregoing warranties shall not apply to any Equipment or Programs
which have been (i) used or operated in a manner inconsistent with the license
granted by COMPANY, (ii) modified or repaired by anyone other than COMPANY
personnel or COMPANY's authorized service representatives in a manner which
adversely affects their operations or reliability, or (iii) damaged because of
accident, neglect or misuse by anyone other than COMPANY personnel, failure or
surge of electrical power, air conditioning or humidity control, transportation,
or other than ordinary use.
THE FOREGOING WARRANTIES APPLY ONLY TO THE ORIGINAL PURCHASER AND ARE IN LIEU OF
ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT
LIMITATION IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY UPON THE RIGHTFUL CLAIM
OF ANY THIRD PERSON.
9. LIMITATION OF LIABILITY
COMPANY shall in no event have obligations or liabilities to
DISTRIBUTOR or any other person for loss of profits, loss of use or incidental,
special or consequential damages, whether based on contract, tort (including
negligence), strict liability, or any other theory or form of action, even if
COMPANY has been advised of the possibility thereof, arising out of, or in
connection with, the sale, delivery, use, repair or performance of the Equipment
or the Programs, or any failure or delay in connection with any of the
foregoing. Without limiting the generality of the preceding sentence, COMPANY
shall not be liable for personal injury or property damage. In no event shall
the liability of COMPANY arising in connection with any Equipment sold hereunder
exceed the actual amount paid by DISTRIBUTOR to COMPANY for Equipment delivered
hereunder.
10. PATENT AND TRADEMARK INDEMNITY
COMPANY will defend, at its own expense, any suit or proceeding against
DISTRIBUTOR in a court of the United States for the direct infringement of
United States patents and trademarks by Equipment from which COMPANY is the
original Company purchased from COMPANY hereunder. COMPANY shall pay all damages
and costs finally awarded against DISTRIBUTOR because of direct infringement;
provided, however, that COMPANY shall not be obligated to defend or be liable
for costs or damages awarded in any suit or proceeding for infringement of
patents by any other products, or any completed equipment, system, assembly,
combination, method or process, in which, or in the manufacture or testing of
which, any Equipment purchased from COMPANY may be used; and provided further
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that COMPANY's obligations to pay such damages and costs shall not apply to any
alleged infringement occurring after DISTRIBUTOR has received notice of such
alleged infringement unless COMPANY thereafter gives to DISTRIBUTOR written
consent for such continuing alleged infringement. COMPANY's liability hereunder
shall not exceed the purchase price paid by DISTRIBUTOR for the infringing
Equipment, and COMPANY shall not be liable for any collateral, incidental, or
consequential damages awarded against DISTRIBUTOR.
COMPANY's duties under this paragraph 10 are conditioned upon
DISTRIBUTOR giving COMPANY prompt written notice of commencement of any suit or
proceeding or any claim of infringement and furnishing to COMPANY a copy of each
communication relating to the alleged infringement and giving to COMPANY all
authority (including the right to exclusive control of the defense of any such
suit or proceeding), information and assistance (at COMPANY's expense) necessary
to defend or settle such suit or proceeding. COMPANY shall not be bound by any
settlement made without COMPANY's prior written consent.
If in any such suit or proceeding, DISTRIBUTOR's continued use of any
item Equipment is enjoined or, if by reason of any claim of infringement,
COMPANY deems it advisable to do so, COMPANY may, at its option and expense, (i)
procure for DISTRIBUTOR the right to continue using such Equipment, (ii) modify
or replace such Equipment with non-infringing Equipment, provided that such
modification does not materially affect performance, or (iii) remove such
Equipment, grant DISTRIBUTOR a credit thereon as depreciated on a
straight-line-3-year basis and accept its return. If an infringement is alleged
prior to completion of deliveries of the Equipment, COMPANY may decline to make
further shipments without being in breach hereunder.
COMPANY shall not be obligated to defend any suit or proceeding, or be
liable for any costs or damages, if the infringement arises out of compliance
with DISTRIBUTOR's specifications or any marking or branding applied at the
request of DISTRIBUTOR. DISTRIBUTOR agrees, at its own expense, to defend and to
pay costs and damages finally awarded in any suit or proceeding against COMPANY
based on any such infringement, provided that DISTRIBUTOR is promptly notified
by COMPANY in writing of the commencement or threat of such suit or proceeding
or claim of infringement and is given all authority (including the right to
exclusive control of the defense of any such suit or proceeding), information
and assistance (at DISTRIBUTOR's expense) necessary to defend or settle such
suit proceeding.
11. FORCE MAJEURE
If the performance hereof or any obligation hereunder, except the
making of payments hereunder, is prevented, restricted or interfered with by
reason by fire, flood, earthquake, explosion or other casualty or accident;
strikes or labor disputes; inability to procure parts, supplies or power; war or
other violence; any law, order, proclamation, regulation, ordinance, demand or
requirement of any government agency; or any other or condition whatsoever
beyond the reasonable control of the affected party, the party so affected, upon
giving prompt notice to the other party, shall be excused from such performance
to the extent of such prevention, restriction or interference; provided,
however, that the party so affected shall take all reasonable steps to avoid or
remove such causes of nonperformance and shall resume performance hereunder with
dispatch whenever such causes are removed.
12. ASSIGNMENT
The rights of DISTRIBUTOR hereunder may not be assigned in whole or in
part, by operation of law or otherwise, without the express written consent of
COMPANY.
13. APPLICABLE LAW
The validity, construction and effect of this Agreement and the
respective rights and obligations of the parties hereunder, shall be governed by
and determined in accordance with the laws of the state of Florida in the United
States of America as such laws are applied to contracts between Florida
residents entered into and to be performed entirely within the state of Florida,
without reference to principles of conflicts of law. The parties hereby agree to
opt out of coverage of the United Nations Convention on Contracts for the
International Sale of Good. The parties hereby agree that this Agreement shall
be governed by the Uniform Commercial Code ("UCC") as adopted by the state of
Florida.
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14. FORUM AND SERVICE OF PROCESS
All actions and proceedings arising out of or relating to this
Agreement shall be heard and determined in a state or federal court sitting in
the County of Dade, State of Florida. Service of process shall be considered
effective if done pursuant to any of the methods set forth in Rule 4(i), Federal
Rule of Civil Procedure or pursuant to Florida law.
15. ATTORNEY'S FEES AND COSTS OF LITIGATION
If any action or proceeding arising out of or relating to this
Agreement is commenced the prevailing party shall be entitled to its reasonable
attorney's fees, costs, and expenses including the costs, expenses, and fees
associated with the enforcement or collection of any judgment.
5
--------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Maximum Offering: $1,380,000
This offering consists of 138 shares of the Company's Series I, Convertible
Preferred Stock, $10,000 per share convertible into the
Company's Common Stock.
--------------------
SUBSCRIPTION AGREEMENT
-------------------
SUBSCRIPTION PROCEDURES
The Series I, 7% Convertible Preferred Stock of Imaging Diagnostic
Systems, Inc. (the "Company" or "Seller") is being offered for $10,000.00 per
share (the "Shares"). The Shares to purchase Common Stock will be transferable
to the extent that any such transfer is permitted by law. This offering is being
made in accordance with the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Act") and Rule 506 of Regulation D
promulgated under the Act (the "Regulation D Offering").
In order to purchase Shares, each subscriber (the "Investor") must
complete and execute a questionnaire (the "Investor Questionnaire"), a
subscription agreement (the "Subscription Agreement"), and an Internal Revenue
Service Form W-9 or other appropriate form as may be applicable. In addition,
the Investor must make a payment to an escrow fund of $10,000 per share of
Series I Convertible Preferred Stock subscribed for. All subscriptions are
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subject to acceptance by the Company, which shall not occur until the Company
has returned the Company Signature Page and the stock certificate representing
the Shares purchased to the Investor.
The Investor Questionnaire is designed to enable the Investor to
demonstrate the minimum legal requirements under federal and state securities
laws to purchase the Shares. The Signature Page for the Investor Questionnaire
and the Subscription Agreement contain representations relating to the
subscription and should be reviewed carefully by each investor.
Also included is an Internal Revenue Service Form W-9:
"Request for Taxpayer Identification Number and Certification"
for U.S. citizens or residents of the U.S. for U.S. federal
income tax purposes only. (Foreign investors should consult
their tax advisors regarding the need to complete Internal
Revenue Service Form W-9 and any other forms that may be
required).
If you are a foreign person or foreign entity, you may be subject to a
withholding tax equal to 30% of any premiums paid by the Company. In order to
eliminate or reduce such withholding tax you may submit a properly executed
I.R.S. Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States) or
I.R.S. Form 1001 (Ownership Exemption or Reduced Trade Certificate), claiming
exemption from withholding or eligibility for treaty benefits in the form of a
lower rate of withholding tax on interest or premiums.
Consideration for the subscription shall be paid as follows:
(1) Forgiveness of interest regarding the Series B convertible
preferred stock, that would otherwise be payable by the Company;
(2) Settlement of all litigation concerning the Series B convertible
preferred stock litigation;
(3) Cancellation of all Warrants that were issued with the Series B
convertible preferred stock; and
(4) A limitation on the owner(s) of the Series B and Series I
convertible preferred stock to ownership of not more than 4.99% of the Company's
outstanding common stock.
SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
To: IMAGING DIAGNOSTIC SYSTEMS, INC.
This Subscription Agreement is made between IMAGING DIAGNOSTIC SYSTEMS,
INC., a Florida corporation, (the "Company" or "Seller"), and the undersigned
prospective purchaser ("Purchaser") who is subscribing hereby for the Company's
Series I Convertible Preferred Stock, no par value (the "Shares"), at $10,000
per share, together with a 7% premium, to be paid in cash or freely trading
Common Stock (if the Registration Statement covering this offering has been
declared effective at that time) in the Company's sole discretion, at the time
of each conversion. The Shares being offered will be separately transferable to
the extent that any such transfer is permitted by law. The conversion terms of
the Shares are set forth in Section 4 hereof and the form of Notice of
Conversion is attached hereto as Exhibit A. This subscription is submitted to
Purchaser in accordance with and subject to the terms and conditions described
in this Subscription Agreement together with any Exhibits thereto, relating to
an offering (the "Offering") of 138 Shares. The Offering comprises (i) an
offering of the Shares to accredited investors (the "Regulation D Offering") in
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accordance with the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Act"), and Rule 506 of Regulation D
promulgated under the Act ("Regulation D"). 1. SUBSCRIPTION.
(a) The undersigned hereby irrevocably subscribes for and agrees to
purchase 138 SHARES, with consideration being paid as set forth above. The
Company shall pay a 7% premium, to be paid in cash or freely trading Common
Stock (if the Registration Statement covering this Offering has been declared
effective at that time), in the Company's sole discretion, at the time of each
conversion (the "Premium Payment Date"). If the premium is to be paid in cash,
the Company shall make such payment within five business days of the Premium
Payment Date. If the premium is to be paid in Common Stock, said Common Stock
shall be delivered to the Purchaser, or per Purchaser's instructions, within
five business days of the Premium Payment Date. The Shares are subject to
automatic conversion at the end of two years from the date of issuance at which
time all Shares outstanding will be automatically converted based upon the
formula set forth in Section 4(d) hereof. The closing shall be deemed to have
occurred on the date the funds are received by the Company (the "Closing Date").
(b) Upon receipt by the Company of the requisite payment for the Shares
being purchased, the Shares so purchased will be forwarded by the Escrow Agent,
Joseph B. LaRocco, to the Purchaser and the name of such Purchaser will be
registered on the Preferred Stock transfer books of the Company as the record
owner of such Shares. The Escrow Agent shall not be liable for any action taken
or omitted by him in good faith and in no event shall the Escrow Agent be liable
or responsible except for the Escrow Agent's own gross negligence or willful
misconduct. The Escrow Agent has made no representations or warranties in
connection with this transaction and has not been involved in the negotiation of
the terms of this Agreement or any matters relative thereto. Seller and
Purchaser each agree to indemnify and hold harmless the Escrow Agent from and
with respect to any suits, claims, actions or liabilities arising in any way out
of this transaction including the obligation to defend any legal action brought
which in any way arises out of or is related to this Agreement. The Escrow Agent
is not rendering securities advice to anyone with respect to this proposed
transaction; nor is the Escrow Agent opining on the compliance of the proposed
transaction under applicable securities law.
2. REPRESENTATIONS AND WARRANTIES.
The undersigned hereby represents and warrants to, and agrees with, the
Company as follows:
(a) The undersigned has been furnished with, and has carefully
read the applicable form of Registration Rights Agreement annexed hereto as
Exhibit B (the "Registration Rights Agreement"), AND is familiar with and
understands the terms of the Offering. With respect to tax and other economic
considerations involved in his investment, the undersigned is not relying on the
Company. The undersigned has carefully considered and has, to the extent the
undersigned believes such discussion necessary, discussed with the undersigned's
professional legal, tax, accounting and financial advisors the suitability of an
investment in the Company, by purchasing the Shares, for the undersigned's
particular tax and financial situation and has determined that the investment
being made by the undersigned is a suitable investment for the undersigned.
(b) The undersigned acknowledges that all documents, records,
and books pertaining to this investment which the undersigned has requested have
been made available for inspection by the undersigned.
(c) The undersigned has had a reasonable opportunity to ask
questions of and receive answers from a person or persons acting on behalf of
the Company concerning the Offering and all such questions have been answered to
the full satisfaction of the undersigned.
(d) The undersigned will not sell or otherwise transfer the
Shares or the shares issued upon conversion of the Shares without registration
under the Act or applicable state securities laws or an exemption therefrom. The
Shares have not been registered under the Act or under the securities laws of
certain states. The Common Stock underlying the Shares are to be registered by
the Company pursuant to the terms of the Registration Rights Agreement attached
hereto as Exhibit B and incorporated herein and made a part hereof. The
undersigned represents that the undersigned is purchasing the Shares for the
undersigned's own account, for investment and not with a view to resale or
distribution except in compliance with the Act. The undersigned does not now
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<PAGE>
have or, in the future, will not take any short position or hedge position in
the Company's Common Stock that would be in violation of the Act or the
securities laws of certain states, that would have the effect of being
manipulative on the Company's Common Stock price, or that would result in a
short position or hedge position of more than 4.9% of the Company's issued and
outstanding Common Stock. The undersigned has not offered or sold any portion of
the Shares being acquired nor does the undersigned have any present intention of
dividing the Shares with others or of selling, distributing or otherwise
disposing of any portion of the Shares either currently or after the passage of
a fixed or determinable period of time or upon the occurrence or non-occurrence
of any predetermined event or circumstance in violation of the Act. Except as
provided in the Registration Rights Agreement, the Company has no obligation to
register the Shares.
(e) The undersigned recognizes that an investment in the
Shares involves substantial risks, including loss of the entire amount of such
investment. Further, the undersigned has carefully read and considered the
schedule entitled Pending Litigation matters attached hereto as Exhibit C.
(f) Legends (i) The undersigned acknowledges that each
certificate representing the Shares unless registered pursuant to the
Registration Rights Agreement, shall be stamped or otherwise imprinted with a
legend substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED OR
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE
144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT IS AVAILABLE. NOTWITHSTANDING THE FOREGOING, THE COMMON
STOCK INTO WHICH THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE
CONVERTIBLE ARE ALSO SUBJECT TO THE REGISTRATION RIGHTS SET FORTH IN
EACH OF THAT CERTAIN SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS
AGREEMENT BY AND BETWEEN THE HOLDER HEREOF AND THE COMPANY, A COPY OF
EACH IS ON FILE AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE.
(ii) The Common Stock issued upon conversion shall contain the
following legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN INCLUDED IN THE COMPANY'S
REGISTRATION STATEMENT INITIALLY FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON __________, 199_, AND MAY BE SOLD IN ACCORDANCE WITH THE
COMPANY'S PROSPECTUS DATED ___________, 199_, WHICH FORMS A PART OF
SUCH REGISTRATION STATEMENT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE
ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
(g) The undersigned acknowledges and agrees that it shall not
be entitled to seek any remedies with respect to the Offering from any party
other than the Company.
(h) This Subscription Agreement is executed and delivered on
behalf of a corporation, and: (i) such corporation has the full legal right and
power and all authority and approval required (a) to execute and deliver, or
authorize execution and delivery of, this Subscription Agreement and all other
instruments (including, without limitation, the Registration Rights Agreement)
executed and delivered by or on behalf of such corporation in connection with
the purchase of the Shares and (b) to purchase and hold the Shares: (ii) the
signature of the party signing on behalf of such corporation is binding upon
such corporation; and (iii) such corporation has not been formed for the
specific purpose of acquiring the Shares, unless each beneficial owner of such
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<PAGE>
entity is qualified as an accredited investor within the meaning of Rule 501(a)
of Regulation D and has submitted information substantiating such individual
qualification.
(i) The undersigned shall indemnify and hold harmless the
Company and each stockholder, executive, employee, representative, affiliate,
officer, director or control person of the Company, who is or may be a party or
is or may be threatened to be made a party to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of or arising from any actual or alleged
misrepresentation or misstatement of facts or omission to represent or state
facts made or alleged to have been made by the undersigned to the Company or
omitted or alleged to have been omitted by the undersigned, concerning the
undersigned or the undersigned's subscription for and purchase of the Shares or
the undersigned's authority to invest or financial position in connection with
the Offering, including, without limitation, any such misrepresentation,
misstatement or omission contained in this Subscription Agreement, the
Questionnaire or any other document submitted by the undersigned, against
losses, liabilities and expenses for which the Company, or any stockholder,
executive, employee, representative, affiliate, officer, director or control
person of the Company has not otherwise been reimbursed (including attorneys'
fees and disbursements, judgments, fines and amounts paid in settlement)
actually and reasonably incurred by the Company, or such officer, director
stockholder, executive, employee, representative, affiliate or control person in
connection with such action, suit or proceeding.
(j) The undersigned is not subscribing for the Shares as a
result of, or pursuant to, any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or broadcast
over television or radio or presented at any seminar or meeting.
(k) The undersigned or the undersigned's representatives, as
the case may be, has such knowledge and experience in financial, tax and
business matters so as to enable the undersigned to utilize the information made
available to the undersigned in connection with the Offering to evaluate the
merits and risks of an investment in the Shares and to make an informed
investment decision with respect thereto.
(l) The Purchaser is purchasing the Shares for its own account for
investment, and not with a view toward the resale or distribution thereof.
Purchaser is neither an underwriter of, nor a dealer in, the Shares or the
Common Stock issuable upon conversion or exercise thereof and is not
participating in the distribution or resale of the Shares or the Common Stock
issuable upon conversion or exercise thereof.
3. SELLER REPRESENTATIONS.
(a) CONCERNING THE SECURITIES.The issuance, sale and delivery of the
Shares have been duly authorized by all required corporate action on the part of
the Company, and when issued, sold and delivered in accordance with the terms
hereof and thereof for the consideration expressed herein and therein, will be
duly and validly issued and enforceable in accordance with their terms, subject
to the laws of bankruptcy and creditors' rights generally. At least 4,842,`05
shares of Common Stock issuable upon conversion of the Shares have been duly and
validly reserved for issuance and, upon issuance shall be duly and validly
issued, fully paid, and non-assessable (the "Reserved Shares"). The Company
shall use its best efforts to file within 30 days additional Registration
Statements and/or amendments thereto whenever the Reserved Shares only cover 50%
of the Debentures, Series I Convertible Preferred Stock and Series B Convertible
Preferred Stock.
Prior to conversion of all the Shares, if at anytime the conversion of
all the Shares outstanding results in an insufficient number of Reserved Shares
being available to cover all the conversions and exercises, then in such event,
the Company will move to call and hold a shareholders' meeting within 30 days of
such event for the purpose of authorizing additional Shares to facilitate the
conversions. In such an event the Company shall: (1) recommend to its current or
future officers, directors and other control people to vote their shares in
favor of increasing the authorized number of shares of Common Stock and (2)
recommend to all stockholders to vote their shares in favor of increasing the
authorized number of shares of Common Stock . The Company represents and
warrants that under no circumstances other, than the default of Purchaser or as
provided in Section 5 hereof, will it deny or prevent Purchaser's right to
convert the Shares as permitted under the terms of this Subscription Agreement
or the Registration Rights Agreement.
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(b) AUTHORITY TO ENTER AGREEMENT. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company and is a
valid and binding agreement in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally.
(c) NON-CONTRAVENTION. The execution and delivery of this
Agreement and the consummation of the issuance of the Shares, and the
transactions contemplated by this Agreement do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under, the articles of incorporation or by-laws of The
Company, or any indenture, mortgage, deed of trust, or other material agreement
or instrument to which the Company is a party or by which it or any of its
properties or assets are bound, or any existing applicable law, rule, or
regulation of the United States or any State thereof or any applicable decree,
judgment, or order of any Federal or State court, Federal or State regulatory
body, administrative agency or other United States governmental body having
jurisdiction over the Company or any of its properties or assets.
(d) COMPANY COMPLIANCE. The Company represents and warrants that the
Company and its subsidiaries are: (i) in full compliance, to the extent
applicable, with all reporting obligations under either Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; (ii) not in violation of any
term or provision of its article of incorporation or by-laws; (iii) not in
default in the performance or observance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any mortgage, deed of trust, indenture or other instrument or
agreement to which they are a party, either singly or jointly, by which it or
any of their property is bound or subject except at set forth in Exhibit C.
Furthermore, the Company is not aware of any other facts which it has not
disclosed which could have a material adverse effect on the business, condition
(financial or otherwise), operations, earnings, performance, properties or
prospects of the Company and its subsidiaries taken as a whole.
(e) PENDING LITIGATION. Except as otherwise disclosed in Exhibit C,
there is (i) no action, suit or proceeding before or by any court, arbitrator or
governmental body now pending or, to the knowledge of the Company, threatened or
contemplated to which the Company or any of its subsidiaries is or may be a
party or to which the business or property of the Company or any of its
subsidiaries is or may be bound or subject, (ii) no law, statute, rule,
regulation, order or ordinance that has been enacted, adopted or issued by any
governmental body or that, to the knowledge of the Company, has been proposed by
any governmental body materially adversely affecting the Company or any of its
subsidiaries, (iii) no injunction, restraining order or order of any nature by a
federal, state or foreign court or governmental body of competent jurisdiction
to which the Company or any of its subsidiaries is subject issued that, in the
case of clauses (i), (ii) and (iii) above, (x) is reasonably likely to, singly
or in the aggregate, result in a material adverse effect on the business,
condition (financial or otherwise), operations, earnings, performance,
properties or prospects of the Company effect, and its subsidiaries taken as a
whole or (y) would interfere with or adversely affect the issuance of the Shares
reasonably likely to render this Subscription Agreement or the Shares, or any
portion thereof, invalid or unenforceable.
(f) ISSUANCE OF THE SHARES. No action has been taken and no law,
statute, rule, regulation, order or ordinance has been enacted, adopted or
issued by any governmental body that prevents the issuance of the Shares or the
Common Stock issuable upon conversion thereof; no injunction, restraining order
or order of any nature by a federal or state court of competent jurisdiction has
been issued that prevents the issuance of the Shares or the Common Stock
issuable upon thereof or suspends the sale of the Shares or the Common Stock
issuable upon conversion thereof in any jurisdiction; and no action, suit or
proceeding is pending against or, to the best knowledge of the Company,
threatened against or affecting, the Company, any of its subsidiaries or, to the
best knowledge of the Company, before any court or arbitrator or any
Governmental Body that, if adversely determined, would prohibit, interfere with
or adversely affect the issuance or marketability of the Shares or the Common
Stock issuable upon conversion thereof or render the Subscription Agreement or
the Shares , or any portion thereof, invalid or unenforceable.
(g) The Company shall indemnify and hold harmless the Purchaser and
each stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Purchaser, who is or may be a party or is or
may be threatened to be made a party to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of or arising from any actual or alleged
misrepresentation or misstatement of facts or omission to represent or state
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facts made or alleged to have been made by the Company to the Purchaser or
omitted or alleged to have been omitted by the Company, concerning the Purchaser
or the Purchaser's subscription for and purchase of the Shares or the Purchaser
's authority to invest or financial position in connection with the Offering,
including, without limitation, any such misrepresentation, misstatement or
omission contained in this Subscription Agreement, the Questionnaire or any
other document submitted by the Company, against losses, liabilities and
expenses for which the Purchaser, or any stockholder, executive, employee,
representative, affiliate, officer, director or control person of the Purchaser
has not otherwise been reimbursed (including attorneys' fees and disbursements,
judgments, fines and amounts paid in settlement) actually and reasonably
incurred by the Purchaser, or such officer, director stockholder, executive,
employee, representative, affiliate or control person in connection with such
action, suit or proceeding.
(h) NO CHANGE. Other than filings required by the Blue Sky or federal
securities law, no consent, approval or authorization of or designation,
declaration or filing with any governmental or other regulatory authority on the
part of the Company is required in connection with the valid execution, delivery
and performance of this Agreement. Any required qualification or notification
under applicable federal securities laws and state Blue Sky laws of the offer,
sale and issuance of the Shares, has been obtained on or before the date hereof
or will have been obtained within the allowable period thereafter, and a copy
thereof will be forwarded to counsel for the Purchaser.
(i) TRUE STATEMENTS. Neither this Agreement nor any of the "Disclosure
Documents", as hereinafter defined, contains any untrue statement of a material
fact or omits to state any material fact necessary in order to make the
statements contained herein or therein not misleading in the light of the
circumstances under which such statements are made. There exists no fact or
circumstances which, to the knowledge of the Company, materially and adversely
affects the business, properties or assets, or conditions, financial or
otherwise, of the Company, which has not been set forth in this Subscription
Agreement or disclosed in such documents.
(j) The Purchaser has been advised that the Company has not retained
any independent professionals to review or comment on this Offering or otherwise
protect the interests of the Purchaser. Although the Company has retained its
own counsel, neither such counsel nor any other firm, including Joseph B.
LaRocco, Esq., has acted on behalf of the Purchaser, and the Purchaser should
not rely on the Company's legal counsel or Joseph B.
LaRocco, Esq. with respect to any matters herein described.
(k) There has never been represented, guaranteed, or warranted to the
undersigned by any broker, the Company, its officers, directors or agents, or
employees or any other person, expressly or by implication (i) the percentage of
profits and/or amount of or type of consideration, profit or loss to be
realized, if any, as a result of the Company's operations; and (ii) that the
past performance or experience on the part of the management of the Company, or
of any other person, will in any way result in the overall profitable operations
of the Company.
(l) PRIOR PREFERRED SHARES ISSUED UNDER REGULATION S OR REGULATION D.
In the past thirty-six months the Company raised $3,850,000 in Regulation S
offerings of Preferred Stock of which none remains unconverted. The Company has
raised $5,850,000 in Regulation D offerings of Preferred Stock in the past
thirty-six months of which the principal amount of approximately $5,930,000
remains unconverted.
(m) CURRENT AUTHORIZED SHARES. As of March 15, 1999, there were
100,000,000 authorized shares of Common Stock of which approximately 39,381,401
shares of Common Stock were issued and outstanding on a fully diluted basis
(n) DISCLOSURE DOCUMENTS. The Disclosure Documents are all the
documents (other than preliminary materials) that the Company has been required
to file with the Securities and Exchange Commission ("SEC") from June 30, 1998,
to the date hereof including the Company's Definitive Information Statement and
the Registration Statement on Form S-2, as amended. As of their respective
dates, none of the Disclosure Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and except as
disclosed in the Disclosure Documents no material event has occurred since the
Company's filing on Form 10-KSBA for the year ended June 30, 1998 which could
make any of the disclosures contained therein misleading, The financial
statements of the Company included in the Disclosure Documents have been
prepared in accordance with generally accepted accounting principles applied on
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a consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited financial statements, subject
only to normal recurring year-end audit adjustments) and present fairly the
consolidated financial position of the Company and its consolidated subsidiaries
as at the dates thereof and the consolidated results of their operations and
changes in financial position for the periods then ended. Purchaser acknowledges
that the Financial Statements contained in Form 10-KSB and the Form S-2 are
being amended pursuant to SEC comments.
(o) INFORMATION SUPPLIED. The information supplied by the Company to
Purchaser in connection with the offering of the Shares does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements, in the light of the circumstances in which they were
made, not misleading. There exists no fact or circumstances which, to the
knowledge of the Company, materially and adversely affects the business,
properties, assets, or conditions, financial or otherwise, of the Company which
has not been set forth in this Agreement or disclosed in such documents.
(p) DELIVERY INSTRUCTIONS. On the Closing Date the Shares being
purchased hereunder shall be delivered to Joseph B. LaRocco, Esq. as Escrow
Agent, who will simultaneously wire to the Company the funds being held in
escrow, less placement fees and escrow fees, at which time the Escrow Agent
shall then have the Shares delivered to the Purchaser, per the Purchaser's
instructions.
(q) NON-CONTRAVENTION. The execution and delivery of this Agreement by
the Company, the issuance of the Shares, and the consummation by the Company of
the other transactions contemplated by this Agreement, do not and will not
conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under, the (i) certificate of
incorporation or by-laws of the Company, (ii) any indenture, mortgage, deed of
trust, or other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound, (iii) any material
existing applicable law, rule, or regulation or any applicable decree, judgment,
or (iv) order of any court, United States federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over the
Company or any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the transactions
contemplated herein.
(r) NO DEFAULT. Except as set forth in the Company's Disclosure
Documents, the Company is not in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or agreement to
which it is a party or by which it or its property is bound, and neither the
execution of, nor the delivery by the Company of, nor the performance by the
Company of its obligations under, this Agreement or the or the Shares, other
than the conversion provision thereof, will conflict with or result in the
breach or violation of any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any lien or charge on any
assets or properties of the Company under, (i) any material indenture, mortgage,
deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound, (ii) any
statute applicable to the Company or its property, (iii) the Certificate of
Incorporation or By-Laws of the Company, (iv) any decree , judgment, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company regulation of any court or governmental agency or body having
jurisdiction over the Company or its properties, or (v) the Company's listing
agreement for its Common Stock.
(s) USE OF PROCEEDS. The Company represents that the net proceeds of
this offering will be used for working capital.
(t) ARTICLES OF AMENDMENT, BOARD RESOLUTION AND OPINION LETTER. The
Company shall deliver to the Escrow Agent the following: (a) a copy and proof of
filing of the Articles of Amendment to the Articles of Incorporation; (b) a copy
of the Board Resolution authorizing this offering; and (c) a copy of an opinion
letter which shall be attached to this Agreement as Exhibit D.
(u) COLLATERAL. Collateral is being provided by accommodation pledgors,
which collateral shall be in the form of the Company's common stock and subject
to a separate security agreement.
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4. TERMS OF CONVERSION.
(a) SHARES. Upon the Company's receipt of a facsimile or original of
Purchaser's signed Notice of Conversion and delivery of the original Preferred
Stock Certificate the Company shall instruct its transfer agent to issue one or
more certificates representing that number of shares of Common Stock into which
the Shares are convertible in accordance with the provisions regarding
conversion set forth in this Section 4. The Company's transfer agent shall act
as Registrar and shall maintain an appropriate ledger containing the necessary
information with respect to each Share.
(b) CONVERSION DATE. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, the Shares to be converted
together with a facsimile or original of the signed Notice of Conversion, which
evidences Purchaser's intention to convert those Shares, indicated. The date on
which the Notice of Conversion is effective ("Conversion Date") shall be deemed
to be the date on which the Purchaser has delivered to the Company a facsimile
or original of the signed Notice of Conversion, as long as the original Shares
to be converted are received by the Company or its designated attorney within
five business days thereafter. As long as the Shares to be converted are
received by the Company within five business days after it receives a facsimile
or original of the signed Notice of Conversion, the Company shall deliver to the
Purchaser, or per the Purchaser's instructions, the shares of Common Stock, with
restrictive legends as set forth in this Agreement, within five business days of
receipt of the Shares to be converted.
(c) COMMON STOCK TO BE ISSUED WITH RESTRICTIVE LEGEND. Upon the
conversion of any Shares and upon receipt by the Company or its attorney of a
facsimile or original of Purchaser's signed Notice of Conversion (See Exhibit
A), the Company shall instruct the Company's transfer agent to issue Stock
Certificates with restrictive legends as set forth in this Agreement in the name
of Purchaser (or its nominee) and in such denominations to be specified at
conversion representing the number of shares of Common Stock issuable upon such
conversion, as applicable. The Company warrants that no instructions, other than
these instructions, have been given or will be given to the transfer agent and
that the Common Stock shall otherwise be freely transferable on the books and
records of the Company.
(d) CONVERSION RATE. Anytime after the Closing Date, Purchaser is
entitled to convert the entire face amount of the Shares, plus accrued premiums,
at 75% of the five day average closing bid price, as reported by Bloomberg, LP
for the five trading days immediately preceding the applicable Conversion Date
(the "Conversion Price"). No fractional shares or scrip representing fractions
of shares will be issued on conversion, but the number of shares issuable shall
be rounded up or down, as the case may be, to the nearest whole share.
The Shares are subject to a mandatory, 24-month conversion feature at
the end of which all Shares outstanding will be automatically converted, upon
the terms set forth in this section ("Mandatory Conversion Date").
(e) Nothing contained in this Subscription Agreement shall be deemed to
establish or require the payment of interest to the Purchaser at a rate in
excess of the maximum rate permitted by governing law. In the event that the
rate of interest required to be paid exceeds the maximum rate permitted by
governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under the governing law and
such excess shall be returned with reasonable promptness by the Purchaser to the
Company.
(f) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue the certificate of Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
stockholder of record on and after the conversion date. Upon surrender of any
Shares that are to be converted in part, the Company shall issue to the
Purchaser new Shares equal to the unconverted amount, if so requested by
Purchaser.
(g) In the event the Common Stock is not delivered per the written
instructions of the Purchaser, within five business days after the receipt of
the Notice of Conversion and original stock certificate (the Delivery Date"),
then in such event the Company shall pay to Purchaser in cash or Common Stock,
at the Company's option, one percent (1%) of the purchase price of the Shares
being converted per each day after the fifth business day following the
Conversion Date that the Common Stock is not delivered.
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<PAGE>
The Company acknowledges that its failure to deliver the Common Stock
on or before the Delivery Date will cause the Purchaser to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this Section 4 represents the parties' good faith effort to qualify
such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. The payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Agreement.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 4 is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 4(g) shall not
apply, but instead the provisions of Section 4(h) shall apply.
The Company shall make any payments incurred under this Section 4(g) in
immediately available funds within three business days from the date of issuance
of the applicable Common Stock. Nothing herein shall limit a Purchaser's right
to pursue actual damages or cancel the conversion for the Company's failure to
issue and deliver Common Stock to the Purchaser within 10 business days after
the Conversion Date.
(h) The Company shall at all times reserve and have available all
shares of the Common Stock necessary to meet conversion of the Shares by all
Purchasers of the entire amount of Shares then outstanding. If, at any time
Purchaser submits a Notice of Conversion and the Company does not have
sufficient authorized but unissued shares of Common Stock available to effect,
in full, a conversion of the Shares (a "Conversion Default", the date of such
default being referred to herein as the "Conversion Default Date"), the Company
shall issue to the Purchaser all of the shares of Common Stock which are
available, and the Notice of Conversion as to any Shares requested to be
converted but not converted (the "Unconverted Shares"), upon Purchaser's sole
option, may be deemed null and void. The Company shall provide notice of such
Conversion Default ("Notice of Conversion Default") to all existing Purchasers
of outstanding Shares, by facsimile, within two business days of such default
(with the original delivered by overnight or two-day courier), and the Purchaser
shall give notice to the Company by facsimile within five business days of
receipt of the original Notice of Conversion Default (with the original
delivered by overnight or two-day courier) of its election to either nullify or
confirm the Notice of Conversion.
The Company agrees to pay to all Purchasers of outstanding Shares
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Shares held by each Purchaser where N = the number of
days from the Conversion Default Date to the date (the "Authorization Date")
that the Company authorizes a sufficient number of shares of Common Stock to
effect conversion of all remaining Shares. The Company shall send notice
("Authorization Notice") to each Purchaser of outstanding Shares that additional
shares of Common Stock have been authorized, the Authorization Date and the
amount of Purchaser's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Purchaser's option, payable as follows: (i)
in the event Purchaser elects to take such payment in cash, cash payments shall
be made to such Purchaser of outstanding Shares by the fifth day of the
following calendar month, or (ii) in the event Purchaser elects to take such
payment in stock, the Purchaser may convert such payment amount into Common
Stock at the conversion rate set forth in Section 4(d) at anytime after the 5th
day of the calendar month following the month in which the Authorization Notice
was received, until the expiration of the mandatory 24-month conversion period.
The Company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Shares will cause the Purchaser to suffer damages in an amount
that will be difficult to ascertain. Accordingly, the parties agree that it is
appropriate to include in this Agreement a provision for liquidated damages. The
parties acknowledge and agree that the liquidated damages provision set forth in
this Section 4 represents the parties' good faith effort to quantify such
damages and, as such, agree that the form and amount of such liquidated damages
are reasonable and will not constitute a penalty. The payment of liquidated
damages shall not relieve the Company from its obligations to deliver the Common
Stock pursuant to the terms of this Agreement.
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<PAGE>
Nothing herein shall limit the Purchaser's right to pursue actual
damages or cancel the conversion for the Company's failure to maintain a
sufficient number of authorized shares of Common Stock.
(i) The Company shall furnish to Purchaser such number of prospectuses
and other documents incidental to the registration of the Shares of Common Stock
underlying the Shares, including any amendment of or supplements thereto.
5. LIMITS ON AMOUNT OF CONVERSION AND OWNERSHIP.
Other than the Mandatory Conversion provisions contained in this
Agreement which are not limited by the following, in no other event shall the
Purchaser be entitled to convert that amount of Shares in excess of that amount
upon conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Purchaser and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Shares), and (2) the number of shares of Common Stock
issuable upon the conversion of the Shares with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Purchaser and its affiliates of more than 4.9% of the
outstanding shares of Common Stock of the Company. For purposes of this
provision to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13 (d) of the Securities Exchange Act of
1934, as amended, and Regulations 13 D and G thereunder, except as otherwise
provided in clause (1) of such provision. Furthermore, the Company shall not
permit such conversions that would violate the provisions of this Section 5.
6. DELIVERY INSTRUCTIONS.
The Shares being purchased hereunder shall be delivered to Joseph B.
LaRocco, Esq. as Escrow Agent, who will hold them in escrow until such time as
all documents with regard to the purchase of the Series B preferred stock have
been duly executed and delivered, at which time the Escrow Agent shall then have
the Shares delivered to the Purchaser per the Purchaser's instructions.
7. UNDERSTANDINGS.
The undersigned understands, acknowledges and agrees with the Company
as follows:
FOR ALL SUBSCRIBERS:
(a) This Subscription may be rejected, in whole or in part, by the
Company in its sole and absolute discretion at any time before the date set for
closing unless the Company has given notice of acceptance of the undersigned's
subscription by signing this Subscription Agreement.
(b) No U.S. federal or state agency or any agency of any other
jurisdiction has made any finding or determination as to the fairness of the
terms of the Offering for investment nor any recommendation or endorsement of
the Shares.
(c) The representations, warranties and agreements of the undersigned
and the Company contained herein and in any other writing delivered in
connection with the transactions contemplated hereby shall be true and correct
in all material respects on and as of the date of the sale of the Shares, and as
of the date of the conversion and exercise thereof, as if made on and as of such
date and shall survive the execution and delivery of this Subscription Agreement
and the purchase of the Shares.
(d) IN MAKING AN INVESTMENT DECISION, PURCHASERS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THE SHARES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THE
MEMORANDUM OR THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE>
(e) The Regulation D Offering is intended to be exempt from
registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and the provisions of Regulation D thereunder, which is in part
dependent upon the truth, completeness and accuracy of the statements made by
the undersigned herein and in the Questionnaire.
(f) It is understood that in order not to jeopardize the Offering's
exempt status under Section 4(2) of the Securities Act and Regulation D, any
transferee may, at a minimum, be required to fulfill the investor suitability
requirements thereunder.
(g) THE SHARES MAY NOT BE TRANSFERRED, RESOLD OR OTHERWISE DISPOSED OF
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. PURCHASERS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
(h) NASAA UNIFORM LEGEND
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE
OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933 AND THE APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME.
(i) The undersigned acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel, terminate or revoke this subscription, and any agreements made in
connection herewith shall survive my death or disability.
(j) The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
(k) The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and RulE 3E-500.05(a) thereunder, the
undersigned understands that he may have, at the offices of the Company, at any
reasonable hour, after reasonable prior notice, access to the materials set
forth in the Rule which the Company can obtain without unreasonable effort or
expense.
(l) The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
8. SUBMISSION TO JURISDICTION
(a) FORUM SELECTION AND CONSENT TO JURISDICTION. Any litigation based
thereon, or arising out of, under, or in connection with, this Agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Purchaser shall be brought and maintained exclusively
12
<PAGE>
in the federal courts of the State of Florida. The Company and Purchaser hereby
expressly and irrevocably submit to the exclusive jurisdiction of the federal
Courts of the State of Florida for the purpose of any such litigation as set
forth above and irrevocably agrees to be bound by any final judgment rendered
thereby in connection with such litigation. The Company and Purchaser further
irrevocably consent to the service of process by registered mail, postage
prepaid, or by personal service within or without the State of Florida. The
Company and Purchaser hereby expressly and irrevocably waive, to the fullest
extent permitted by law, any objection which it may have or hereafter may have
to the laying of venue of any such litigation brought in any such court referred
to above and any claim that any such litigation has been brought in any
inconvenient forum. To the extent that the Company or Purchaser have or
hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
property the Company and Purchaser hereby irrevocably waive such immunity in
respect of their obligations under this Agreement and the other loan documents.
(b) WAIVER OF JURY TRIAL. The Purchaser and the Company hereby
knowingly, voluntarily and intentionally waive any rights they may have to a
trial by jury in respect of any litigation based hereon, or arising out of,
under, or in connection with, this agreement, or any course of conduct, course
of dealing, statements (whether oral or written) or actions of the Purchaser or
the Company. The Company acknowledges and agrees that it has received full and
sufficient consideration for this provision and that this provision is a
material inducement for the Purchaser entering into this agreement.
(c) SUBMISSION TO JURISDICTION. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought only in
the federal courts located in Florida, and the parties hereby irrevocably submit
to the exclusive jurisdiction of such courts for the purpose of any such action
or proceeding.
9. MISCELLANEOUS.
(a) All pronouns and any variations thereof used herein shall be deemed
to refer to the masculine, feminine, impersonal, singular or plural, as the
identity of the person or persons may require.
(b) Neither this Subscription Agreement nor any provision hereof shall
be waived, modified, changed, discharged, terminated, revoked or canceled,
except by an instrument in writing signed by the party effecting the same
against whom any change, discharge or termination is sought.
(c) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered mail, return receipt requested, addressed: (i) if to the
Company, at its executive offices or (ii) if to the undersigned, at the address
for correspondence set forth in the Questionnaire, or at such other address as
may be specified by written notice given in accordance with this paragraph 9(c).
(d) This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Florida,
as such laws are applied by Florida courts to agreements entered into, and to be
performed in, Florida by and between residents of Florida, and shall be binding
upon the undersigned, the undersigned's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company, its
successors and assigns. If any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statue or rule of law, then such
provisions shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereof that may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
(e) This Subscription Agreement, together with Exhibits A, B, C and D
attached hereto and made a part hereof, constitute the entire agreement between
the parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by both parties hereto.
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<PAGE>
(f) This Agreement may be executed in counterparts, and the facsimile
transmission of an executed counterpart to this Agreement shall be effective as
an original.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION QUESTIONNAIRE
INVESTOR NAME:______________________________________________________
The information contained in this Questionnaire is being furnished in
order to determine whether the undersigned CORPORATION'S Subscription to
purchase the Shares described in the Subscription Agreement may be accepted.
ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED
CONFIDENTIALLY. The undersigned CORPORATION understands, however, that the
Company may present this Questionnaire to such parties as it deems appropriate
if called upon to establish that the proposed offer and sale of the Shares is
exempt from registration under the Securities Act of 1933, as amended. Further,
the undersigned CORPORATION understands that the offering is required to be
reported to the Securities and Exchange Commission and to various state
securities and "blue sky" regulators.
IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED CORPORATION
MUST COMPLETE FORM W-9 ATTACHED HERETO.
I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES TO THE
CORPORATION.
/ / 1. The undersigned CORPORATION: (a) has total assets in excess
of $5,000,000; (b) was not formed for the specific purpose of
acquiring the Shares and (c) has its principal place of
business in ______________________ .
/ / 2. Each of the shareholders of the undersigned CORPORATION is
able to certify that such shareholder meets at least one of
the following three conditions:
(A) the shareholder is a natural person whose
individual net worth* or joint net worth with his or
her spouse exceeds $10,000,000; or
(B) the shareholder is a natural person who had an
individual income* in excess of $200,000 in each of
1997 and 1998 and who reasonably expects an
individual income in excess of $200,000 in 1999; or
(C) Each of the shareholders of the undersigned
CORPORATION is able to certify that such shareholder
is a natural person who, together with his or her
spouse, has had a joint income in excess of $300,000
in each of 1997 and 1998 and who reasonably expects a
joint income in excess of $300,000 during 1999; and
the undersigned CORPORATION has its principal place
of business in ________________.
* For purposes of this Questionnaire, the term "net worth" means the excess of
total assets over total liabilities. In determining income, an investor should
add to his or her adjusted gross income any amounts attributable to tax-exempt
income received, losses claimed as a limited partner in any limited partnership,
deductions claimed for depletion, contributions to IRA or Keogh retirement plan,
alimony payments and any amount by which income from long-term capital gains has
been reduced in arriving at adjusted gross income.
3. The undersigned CORPORATION is:
(A) a bank as defined in Section 3(a)(2) of the
Securities Act; or
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<PAGE>
(B) a savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the
Securities Act whether acting in its individual or
fiduciary capacity; or
(C) a broker or dealer registered pursuant to Section
15 of the Securities Exchange Act of 1934; or
(D) an insurance company as defined in Section 2(13)
of the Securities Act; or
(E) An investment company registered under the
Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940; or
(F) a small business investment company licensed by
the U.S. Small Business Administration under Section
301 (c) or (d) of the Small Business Investment Act
of 1958; or
(G) a private business development company as defined
in Section 202(a) (22) of the Investment Advisors Act
of 1940.
II. OTHER CERTIFICATIONS.
By signing the Signature Page, the undersigned certifies the following:
(A) That the CORPORATION'S purchase of the Shares will be solely for
the CORPORATION'S own account and not for the account of any other
person or entity; and
(B) that the CORPORATION'S name, address of principal place of
business, place of incorporation and taxpayer identification number as
set forth in this Questionnaire are true, correct and complete.
III. GENERAL INFORMATION
(A) PROSPECTIVE PURCHASER (THE CORPORATION)
Name: ________________________________________________________________
Principal Place of Business: _________________________________________
________________________________________________________________________________
Address for Correspondence (if different):_____________________________
(Number and Street)
_______________________________________________________________________
(City) (State) (Zip Code)
Telephone Number:______________________________________________________
(Area Code) (Number)
Jurisdiction of Incorporation:_________________________________________
Date of Formation:_____________________________________________________
Taxpayer Identification Number:________________________________________
Number of Shareholders:________________________________________________
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<PAGE>
(b) INDIVIDUAL WHO IS EXECUTING THIS QUESTIONNAIRE ON BEHALF OF THE
CORPORATION.
Name:________________________________________________________________
Position or Title:___________________________________________________
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION SIGNATURE PAGE
Your signature on this Corporation Signature Page evidences the
agreement by the Purchaser to be bound by the QUESTIONNAIRE and the SUBSCRIPTION
AGREEMENT.
1. The undersigned hereby represents that (a) the information contained
in the Questionnaire is complete and accurate and (b) the Purchaser will notify
Imaging Diagnostic Systems, Inc.. immediately if any material change in any of
the information occurs prior to the acceptance of the undersigned Purchaser's
subscription and will promptly send Imaging Diagnostic Systems, Inc. written
confirmation of such change.
2. The undersigned officer of the Purchaser hereby certifies that he
has read and understands this Subscription Agreement.
3. The undersigned officer of the Purchaser hereby represents and
warrants that he has been duly authorized by all requisite action on the part of
the Corporation to acquire the Shares and sign this Subscription Agreement on
behalf of _______________ and, further, that ____________________ has all
requisite authority to purchase the Shares and enter into this Subscription
Agreement.
4. The undersigned acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel, terminate or revoke this subscription, and any agreements made in
connection herewith shall survive my death or disability.
5. The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
6. The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and RulE 3E-500.05(a) thereunder, the
undersigned understands that he may have, at the offices of the Company, at any
reasonable hour, after reasonable prior notice, access to the materials set
forth in the Rule which the Company can obtain without unreasonable effort or
expense.
7. The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
________________________________ ____________________________
Number of Shares subscribed for Date
____________________________
(Purchaser)
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<PAGE>
By: ________________________
(Signature)
Name: _____________________ Title: ________________________
(Please Type or Print) (Please Type or Print)
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS SUCH SECURITIES ARE INCLUDED IN AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT.
COMPANY ACCEPTANCE PAGE
THIS SUBSCRIPTION AGREEMENT ACCEPTED AND AGREED
TO THIS ____ DAY OF APRIL, 1999
IMAGING DIAGNOSTIC SYSTEMS, INC.
BY__________________________________
LINDA B. GRABLE, PRESIDENT
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EXHIBIT A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED OWNER IN ORDER TO CONVERT
SERIES I CONVERTIBLE PREFERRED SHARES
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS, AS OF ______________, 199_
TO CONVERT $__________ SHARES OF SERIES I CONVERTIBLE PREFERRED STOCK (THE
"SHARES") INTO COMMON STOCK OF IMAGING DIAGNOSTIC SYSTEMS, INC. (THE "COMPANY")
ACCORDING TO THE CONDITIONS SET FORTH IN THE SUBSCRIPTION AGREEMENT DATED MARCH
____, 1999.
DATE OF CONVERSION__________________________________________
APPLICABLE CONVERSION PRICE_________________________________
NUMBER OF SHARES ISSUABLE UPON THIS CONVERSION______________
SIGNATURE___________________________________________________
[NAME]
ADDRESS_____________________________________________________
____________________________________________________________
PHONE______________________ FAX___________________________
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EXHIBIT D
Form of Pre-Closing Opinion Letter
_______________, 1999
Purchasers of (Company) (Describe Securities)
Re: (Company)
Ladies and Gentlemen:
I have acted as counsel to Imaging Diagnostic Systems, Inc., a corporation
incorporated under the laws of the State of Florida (the "Company"), in
connection with its offering, pursuant to Regulation D, for the proposed
issuance and sale of an aggregate of 138 shares of Series I Convertible
Preferred Stock (the "Securities") pursuant to the Subscription Agreement and
the Registration Rights Agreement (including all Exhibits and Appendices
thereto) (collectively the "Agreements") with _______________________. and
___________________("Purchasers"), dated March______, 1999 between the Company
and the Purchasers. This Opinion is furnished pursuant to Section ______________
of the Agreement and is given with consent of the Company. Capitalized terms
that are not otherwise defined in this opinion shall have the definitions set
forth in the Agreements.
I do not express any opinion concerning any law other than the laws of Florida
and the federal securities law of the United States.
This opinion has been prepared and is to be construed in accordance with the
Report on Standards for Florida Opinions dated April 8, 1991 issued by the
Business Law Section of the Florida Bar (the "Standards") The Standards are
incorporated by reference into this opinion.
In connection with rendering the opinion set forth herein, I have relied, with
your approval, as to factual matters that affect our opinion, solely on my
examination of the following documents or certificates (the "Documents") and
have made no independent verification of the facts asserted to be true and
correct in those documents, including the factual representations and warranties
contained in the Agreements.
A. Drafts of the Agreements
B. The Company's Certificate of Incorporation, and its Bylaws, as
amended to date.
C. The Company's annual report under Form 10-KSB issued for the year
ending June 30, 1998, the Company's Reports on Forms 10-KSB, 10-QSB
and 8-K filed with the Securities and Exchange Commission,
Registration Statements on Form S-1 and S-2 and the Company's most
recent Proxy Statement and Information Statement (collectively the
"Reports")
D. Minutes of the Board of Directors Meeting of December 21, 1998, 1998
approving the subject transaction
E. Certificate of Officers and Directors.
In conducting my examination, I have assumed the following: (i) that each of the
Agreements has been executed by each of the parties thereto in the same form as
the forms which I have examined, (ii) the genuineness of all signatures, the
legal capacity of natural persons, the authenticity and accuracy of all
documents submitted to me as copies, (iii) that each of the Agreements has been
duly and validly authorized, executed, and delivered by the party or parties
thereto other than the Company, and (iv) that each of the Agreements constitutes
the valid and binding agreement of the party or parties thereto other than the
Company, enforceable against such party or parties in accordance with the
Agreements' terms.
Based upon the foregoing, and subject to the qualifications and limitations
stated in this opinion and the Standards, we are of the opinion that:
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Based upon and subject to the foregoing, I am of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Florida, is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions where the Company owns or leases properties, maintains employees
or conducts business, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company, and has all
requisite corporate power and authority to own its properties and conduct its
business;
2. The authorized capital stock of the Company consists of 100,000,000 shares of
Common Stock, no par value per share ("Common Stock") and 2,000,000 shares of
Preferred Stock, no pare par value, 450 of which have been designated as Series
B, 75 of which have been designated as Series G, 108 of which have been
designated as Series H and 455 of which have been designated as Series I.
3. The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of
the Securities Exchange Act of 1934, as amended and the Company has timely filed
all the material required to be filed pursuant to Sections 13(a) or 15(d) of
such Act for a period of at least twelve months preceding the date hereof;
4. When duly countersigned by the Company's transfer agent and registrar, and
delivered to you or upon your order against payment of the agreed consideration
therefor in accordance with the provisions of the Agreements, the Securities
(and any Common Stock to be issued upon the conversion of the Securities) as
described in the Agreements represented thereby will be duly authorized and
validly issued, fully paid and nonassessable;
5. The company has the requisite corporate power and authority to enter into the
Agreements and to sell and deliver the Securities and the Common Stock to be
issued upon the conversion of the Securities as described in the Agreements;
each of the Agreements has been duly and validly authorized by all necessary
corporate action by the Company to our knowledge, no approval of any
governmental or other body is required for the execution and delivery of each of
the Agreements by the Company or the consummation of the transactions
contemplated thereby; each of the Agreements has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and binding
agreement of the Company, enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other laws
affecting creditors rights generally, and except as to compliance with federal,
state, and foreign securities laws, as to which no opinion is expressed;
6. To the best of our knowledge, the execution, delivery and performance of the
Agreements by the company and the performance of its obligations thereunder do
not and will not constitute a breach or violation of any of the terms and
provisions of, or constitute a default under or conflict with or violate any
provisions of (i) the Company's Certificate of Incorporation or By-Laws, (ii)
any indenture, mortgage, deed of trust, agreement or other instrument to which
the Company is a party or by which it or any of its property is bound, (iii) any
applicable statue or regulation or as other, (iv) or any judgment, decree or
order of any court of governmental body having jurisdiction over the Company or
any of its property.
7. The issuance of Common Stock upon conversion of the Series I Preferred Stock
in accordance with the terms and conditions of the Certificate of Designation
and the Agreements, will not violate the applicable listing agreement between
the Company and any securities exchange or market on which the Company's
securities are listed.
8. To our knowledge, after due inquiry, there is no pending or threatened
litigation investigation or other proceedings against the Company (except as
described in Exhibit A hereto).
This opinion is rendered only with regard to the matters set out in the numbered
paragraphs above. No other opinions are intended nor should they be inferred.
This opinion is based solely upon the laws of the State of Florida, as currently
in effect, and the Florida Business Corporation Act and does not include an
interpretation or statement concerning the laws of any other state or
jurisdiction. Insofar as the enforceability of the Agreements may be governed by
the laws of other states, we have assumed that such laws are identical in all
respects to the laws of the State of Florida.
20
<PAGE>
The opinions expressed herein are given to you solely for your use in connection
with the transaction contemplated by the Agreements and may not be relied upon
by any other person or entity or for any other purpose without our prior
consent.
Very truly yours,
Rebecca J. Del Medico, General Counsel
21
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EXHIBIT C
LITIGATION
A. ON OCTOBER 7, 1998 A LAWSUIT WAS FILED AGAINST THE COMPANY IN THE
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK, BY THE
SERIES B HOLDERS (CASE NO. 98 CIV. 086). THE COMPANY WAS SERVED ON
OCTOBER 19, 1998. THE LAWSUIT ALLEGES THAT THE COMPANY BREACHED ITS
CONTRACT OF SALE TO THE SERIES B HOLDERS BY, AMONG OTHER THIS
FAILING TO CONVERT THE SERIES B PREFERRED STOCK AND FAILURE TO
REGISTER THE COMMON STOCK UNDERLYING THE PREFERRED. THE SERIES B
HOLDERS HAVE DEMANDED DAMAGES IN EXCESS OF $75,000, TO BE DETERMINED
AT TRIAL, TOGETHER WITH INTEREST COSTS AND LEGAL FEES.
DEFAULTS
In December 1996, the Company sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas
Limited ("Weyburn") and Goodland International Investment Ltd. ("Goodland")
pursuant to Regulation D. The Company filed a Registration Statement of Form S-1
registering the share underlying the Series B Preferred. The shares were never
converted and the registration statement is no longer current. On September 4,
1998, the Company received a notice of conversion from the Weyburn and Goodland
requesting the issuance of 4,559,846 and 10,639,642 shares of common stock,
respectively. The conversion rate of the Shares is 82% of the average market
price over a five-day period prior to conversion or approximately $.35014 per
share. The Company contends that when and if the Company converts the Preferred
Shares, the Series B Holders may be entitle to an aggregate of 12,852,002 common
shares pursuant to the conversion and 1,542,877 shares pursuant to the dividend
provision of the Preferred Shares, not the 15,199,488 shares set forth in their
notice. The Series B Holders have demanded damages in excess of $75,000, to be
determined at trial, together with interest, costs, and legal fees.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. The Note bears interest at the rate of
12% per annum. The Note is personally guaranteed by Linda B. Grable, the
Company's President. The repayment of the Note, which was originally due on
October 2, 1998 was extended twice, was due on January 15, 1999, and remains
unpaid to date.
The Company has not received a notice of default in connection with this Note.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. The Note bears interest at the rate of 12% per annum. The Note, which
was originally due on November 2, 1998, was extended twice, became due on
January 15, 1999, and remains unpaid to date. The Company has not received a
notice of default in connection with the Note.
On June 2, 1998, the Company finalized a private placement to Austost Anstalt
Schaan and Balmore Funds S.A. of 100 shares of its Series H Convertible
Preferred Stock (the "Preferred Shares") at a purchase price of $10,000 per
share and 75,000A Warrant and 50,000 B Warrants. The A and B Warrants are
exercisable at $1.00 and $1.50 per share, respectively. The offering was
conducted pursuant to Regulation D as promulgated under the Securities Act of
1933, as amended (the "Regulation D Sale"). Pursuant to the terms of the
Registration Rights Agreement, as amended, between the Company and the Series H
holder, the Company is required to register 100% of the number of shares that
would be required to be issued if the Preferred Stock were converted on the day
before the filing of the Registration Statement (2,661,698 shares). The Company
filed Amendment 1 to the Registration Statement on November 16 1998. The Company
is in technical default of the Registration Rights Agreement, which required the
Registration Statement to be declared effective by October 2, 1998. Pursuant to
the Registration Rights Agreement, the Company is required to pay the Series H
Holders, as liquidated damages for failure to have the Registration Statement
declared effective, and not as a penalty, two (2%) percent of the principal
amount of the Securities for the first thirty (30) days, and three (3%) percent
22
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of the principal amount of the Securities for each thirty (30) day period
thereafter until the Company procures registration of the Securities. To date,
the liquid damages were paid by the issuance of common stock.
23
--------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Maximum Offering: $2,750,000
This offering consists of 2,750,000 of the Company's Convertible
Debentures convertible into the
Company's Common Stock.
--------------------
SUBSCRIPTION AGREEMENT
-------------------
SUBSCRIPTION PROCEDURES
The Convertible Debentures of Imaging Diagnostic Systems, Inc. (the
"Company" or "Seller") is being offered (the "Debentures"). The Debentures to
purchase Common Stock will be transferable to the extent that any such transfer
is permitted by law. This offering is being made in accordance with the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Rule 506 of Regulation D promulgated under the Act (the
"Regulation D Offering").
In order to purchase Debentures, each subscriber (the "Investor") must
complete and execute a questionnaire (the "Investor Questionnaire"), a
subscription agreement (the "Subscription Agreement"), and an Internal Revenue
Service Form W-9 or other appropriate form as may be applicable. In addition,
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<PAGE>
the Investor must make a payment to an escrow fund for the purchase of the
Debentures. All subscriptions are subject to acceptance by the Company, which
shall not occur until the Company has returned the Company Signature Page and
the Debentures representing the Debentures purchased to the Investor.
The Investor Questionnaire is designed to enable the Investor to
demonstrate the minimum legal requirements under federal and state securities
laws to purchase the Debentures. The Signature Page for the Investor
Questionnaire and the Subscription Agreement contain representations relating to
the subscription and should be reviewed carefully by each investor.
Also included is an Internal Revenue Service Form W-9: "Request
for Taxpayer Identification Number and Certification" for U.S.
citizens or residents of the U.S. for U.S. federal income tax
purposes only. (Foreign investors should consult their tax
advisors regarding the need to complete Internal Revenue Service
Form W-9 and any other forms that may be required).
If you are a foreign person or foreign entity, you may be subject to a
withholding tax equal to 30% of any premiums paid by the Company. In order to
eliminate or reduce such withholding tax you may submit a properly executed
I.R.S. Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States) or
I.R.S. Form 1001 (Ownership Exemption or Reduced Trade Certificate), claiming
exemption from withholding or eligibility for treaty benefits in the form of a
lower rate of withholding tax on interest or premiums.
Payment must be made by wire transfer as provided below:
Immediately available funds should be sent via wire transfer to the escrow
account stated below and the completed subscription documents should be
forwarded to the Escrow Agent. Your subscription funds will be deposited into a
non-interest bearing escrow account of Joseph B. LaRocco, Esq., Escrow Agent, at
First Union Bank of Connecticut, Stamford, Connecticut. In the event of a
termination of the Offering or the rejection of this subscription, all
subscription funds will be returned without interest. The wire instructions are
as follows:
First Union Bank of Connecticut
Executive Office
300 Main Street, P. O. Box 700
Stamford, CT 06904-0700
ABA #: 021101108
Swift #: FUNBUS33INT
Account #: 20000-2072298-4
Acct. Name: Joseph B. LaRocco, Esq. Trustee Account
SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
2
<PAGE>
To: IMAGING DIAGNOSTIC SYSTEMS, INC.
This Subscription Agreement is made between IMAGING DIAGNOSTIC SYSTEMS,
INC., a Florida corporation, (the "Company" or "Seller"), and the undersigned
prospective purchaser ("Purchaser") who is subscribing hereby for the Company's
Convertible Debentures, no par value (the "Debentures"), together with a 7%
dividend , to be paid in cash or freely trading Common Stock (if the
Registration Statement covering this offering has been declared effective at
that time) in the Company's sole discretion, at the time of each conversion. The
Debentures being offered will be separately transferable to the extent that any
such transfer is permitted by law. The conversion terms of the Debentures are
set forth in Section 4 hereof and the form of Notice of Conversion is attached
hereto as Exhibit A. This subscription is submitted to Purchaser in accordance
with and subject to the terms and conditions described in this Subscription
Agreement together with any Exhibits thereto, relating to an offering (the
"Offering") of the Debentures. The Offering comprises (i) an offering of the
Debentures to accredited investors (the "Regulation D Offering") in accordance
with the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Act"), and Rule 506 of Regulation D promulgated under the
Act ("Regulation D").
1. SUBSCRIPTION.
(a) The undersigned hereby irrevocably subscribes for and agrees to
purchase $1,100,000 of the Company's Debentures. The Company shall pay a 7%
premium, to be paid in cash or freely trading Common Stock (if the Registration
Statement covering this Offering has been declared effective at that time), in
the Company's sole discretion, at the time of each conversion (the "Dividend
Payment Date"). If the premium is to be paid in cash, the Company shall make
such payment within five business days of the Dividend Payment Date. If the
premium is to be paid in Common Stock, said Common Stock shall be delivered to
the Purchaser, or per Purchaser's instructions, within five business days of the
Dividend Payment Date. The Debentures are subject to automatic conversion at the
end of two years from the date of issuance at which time all Debentures
outstanding will be automatically converted based upon the formula set forth in
Section 4(d) hereof. The closing shall be deemed to have occurred on the date
the funds are received by the Company (the "Closing Date"). The Company may draw
down 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. The Debentures shall be secured by a mortgage on the company's
land and building. The mortgage shall only be released after the Registration
Statement covering the Common Stock underlying the Debentures, the Series I
Convertible Preferred Stock and the Series B Convertible Preferred Stock has
been declared effective AND upon the earlier of (a) the day the Company
qualifies for listing on AMEX or NASDAQ, as long as said listing requirements
are not being met through a reverse split of the Company's Common Stock or (b)
180 days from the date the Company receives the third tranche, as described
above.
(b) Upon receipt by the Company of the requisite payment for the
Debentures being purchased, the Debentures so purchased will be forwarded by the
Escrow Agent, Joseph B. LaRocco, to the Purchaser and the name of such Purchaser
will be registered on the Preferred Stock transfer books of the Company as the
record owner of such Debentures. The Escrow Agent shall not be liable for any
action taken or omitted by him in good faith and in no event shall the Escrow
Agent be liable or responsible except for the Escrow Agent's own gross
negligence or willful misconduct. The Escrow Agent has made no representations
or warranties in connection with this transaction and has not been involved in
the negotiation of the terms of this Agreement or any matters relative thereto.
Seller and Purchaser each agree to indemnify and hold harmless the Escrow Agent
from and with respect to any suits, claims, actions or liabilities arising in
any way out of this transaction including the obligation to defend any legal
action brought which in any way arises out of or is related to this Agreement.
The Escrow Agent is not rendering securities advice to anyone with respect to
this proposed transaction; nor is the Escrow Agent opining on the compliance of
the proposed transaction under applicable securities law.
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2. REPRESENTATIONS AND WARRANTIES.
The undersigned hereby represents and warrants to, and agrees with, the
Company as follows:
(a) The undersigned has been furnished with, and has carefully
read the applicable form of Registration Rights Agreement annexed
hereto as Exhibit B (the "Registration Rights Agreement"), AND is
familiar with and understands the terms of the Offering. With respect
to tax and other economic considerations involved in his investment,
the undersigned is not relying on the Company. The undersigned has
carefully considered and has, to the extent the undersigned believes
such discussion necessary, discussed with the undersigned's
professional legal, tax, accounting and financial advisors the
suitability of an investment in the Company, by purchasing the
Debentures, for the undersigned's particular tax and financial
situation and has determined that the investment being made by the
undersigned is a suitable investment for the undersigned.
(b) The undersigned acknowledges that all documents, records,
and books pertaining to this investment which the undersigned has
requested have been made available for inspection by the undersigned.
(c) The undersigned has had a reasonable opportunity to ask
questions of and receive answers from a person or persons acting on
behalf of the Company concerning the Offering and all such questions
have been answered to the full satisfaction of the undersigned.
(d) The undersigned will not sell or otherwise transfer the
Debentures or the Debentures issued upon conversion of the Debentures
without registration under the Act or applicable state securities laws
or an exemption therefrom. The Debentures have not been registered
under the Act or under the securities laws of certain states. The
Common Stock underlying the Debentures are to be registered by the
Company pursuant to the terms of the Registration Rights Agreement
attached hereto as Exhibit B and incorporated herein and made a part
hereof. The undersigned represents that the undersigned is purchasing
the Debentures for the undersigned's own account, for investment and
not with a view to resale or distribution except in compliance with the
Act. The undersigned does not now have or, in the future, will not take
any short position or hedge position in the Company's Common Stock
until the total number of Debentures are converted, nor will the
undersigned make any promissory notes and/or pledges to that effect of
the Company's Common Stock. The undersigned has not offered or sold any
portion of the Debentures being acquired nor does the undersigned have
any present intention of dividing the Debentures with others or of
selling, distributing or otherwise disposing of any portion of the
Debentures either currently or after the passage of a fixed or
determinable period of time or upon the occurrence or non-occurrence of
any predetermined event or circumstance in violation of the Act. Except
as provided in the Registration Rights Agreement, the Company has no
obligation to register the Debentures.
(e) The undersigned recognizes that an investment in the
Debentures involves substantial risks, including loss of the entire
amount of such investment. Further, the undersigned has carefully read
and considered the schedule entitled Pending Litigation matters
attached hereto as Exhibit C.
(f) Legends (i) The undersigned acknowledges that each
certificate representing the Debentures unless registered pursuant to
the Registration Rights Agreement, shall be stamped or otherwise
imprinted with a legend substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT
(OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
4
<PAGE>
NOTWITHSTANDING THE FOREGOING, THE COMMON STOCK INTO WHICH THE
SECURITIES EVIDENCED BY THIS CERTIFICATE ARE CONVERTIBLE ARE
ALSO SUBJECT TO THE REGISTRATION RIGHTS SET FORTH IN EACH OF
THAT CERTAIN SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS
AGREEMENT BY AND BETWEEN THE HOLDER HEREOF AND THE COMPANY, A
COPY OF EACH IS ON FILE AT THE COMPANY'S PRINCIPAL EXECUTIVE
OFFICE.
(ii) The Common Stock issued upon conversion shall contain the
following legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN INCLUDED IN THE
COMPANY'S REGISTRATION STATEMENT INITIALLY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON __________, 199_, AND
MAY BE SOLD IN ACCORDANCE WITH THE COMPANY'S PROSPECTUS DATED
___________, 199_, WHICH FORMS A PART OF SUCH REGISTRATION
STATEMENT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE
ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
(g) The undersigned acknowledges and agrees that it shall not
be entitled to seek any remedies with respect to the Offering from any
party other than the Company.
(h) This Subscription Agreement is executed and delivered on
behalf of a corporation, and: (i) such corporation has the full legal
right and power and all authority and approval required (a) to execute
and deliver, or authorize execution and delivery of, this Subscription
Agreement and all other instruments (including, without limitation, the
Registration Rights Agreement) executed and delivered by or on behalf
of such corporation in connection with the purchase of the Debentures
and (b) to purchase and hold the Debentures: (ii) the signature of the
party signing on behalf of such corporation is binding upon such
corporation; and (iii) such corporation has not been formed for the
specific purpose of acquiring the Debentures, unless each beneficial
owner of such entity is qualified as an accredited investor within the
meaning of Rule 501(a) of Regulation D and has submitted information
substantiating such individual qualification.
(i) The undersigned shall indemnify and hold harmless the
Company and each stockholder, executive, employee, representative,
affiliate, officer, director or control person of the Company, who is
or may be a party or is or may be threatened to be made a party to any
threatened, pending or contemplated action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of or
arising from any actual or alleged misrepresentation or misstatement of
facts or omission to represent or state facts made or alleged to have
been made by the undersigned to the Company or omitted or alleged to
have been omitted by the undersigned, concerning the undersigned or the
undersigned's subscription for and purchase of the Debentures or the
undersigned's authority to invest or financial position in connection
with the Offering, including, without limitation, any such
misrepresentation, misstatement or omission contained in this
Subscription Agreement, the Questionnaire or any other document
submitted by the undersigned, against losses, liabilities and expenses
for which the Company, or any stockholder, executive, employee,
representative, affiliate, officer, director or control person of the
Company has not otherwise been reimbursed (including attorneys' fees
and disbursements, judgments, fines and amounts paid in settlement)
actually and reasonably incurred by the Company, or such officer,
director stockholder, executive, employee, representative, affiliate or
control person in connection with such action, suit or proceeding.
(j) The undersigned is not subscribing for the Debentures as a
result of, or pursuant to, any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar or
meeting.
(k) The undersigned or the undersigned's representatives, as
the case may be, has such knowledge and experience in financial, tax
and business matters so as to enable the undersigned to utilize the
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information made available to the undersigned in connection with the
Offering to evaluate the merits and risks of an investment in the
Debentures and to make an informed investment decision with respect
thereto.
(l) The Purchaser is purchasing the Debentures for its own
account for investment, and not with a view toward the resale or
distribution thereof. Purchaser is neither an underwriter of, nor a
dealer in, the Debentures or the Common Stock issuable upon conversion
thereof and is not participating in the distribution or resale of the
Debentures or the Common Stock issuable upon conversion thereof.
3. SELLER REPRESENTATIONS.
(a) CONCERNING THE SECURITIES.The issuance, sale and delivery of the
Debentures have been duly authorized by all required corporate action on the
part of the Company, and when issued, sold and delivered in accordance with the
terms hereof and thereof for the consideration expressed herein and therein,
will be duly and validly issued and enforceable in accordance with their terms,
subject to the laws of bankruptcy and creditors' rights generally. At least
9,649,123 Shares of Common Stock issuable upon conversion of the Debentures have
been duly and validly reserved for issuance and, upon issuance shall be duly and
validly issued, fully paid, and non-assessable (the "Reserved Shares"). The
Company shall use its best efforts to file within 30 days additional
Registration Statements and/or amendments thereto whenever the Reserved Shares
only cover 50% of the Debentures, Series I Convertible Preferred Stock and
Series B Convertible Preferred Stock.
Prior to conversion of all the Debentures, if at anytime the conversion
of all the Debentures outstanding results in an insufficient number of Reserved
Shares being available to cover all the conversions and exercises, then in such
event, the Company will move to call and hold a shareholders' meeting within 45
days of such event for the purpose of authorizing additional shares to
facilitate the conversions. In such an event the Company shall: (1) recommend to
its current or future officers, directors and other control people to vote their
Shares in favor of increasing the authorized number of Shares of Common Stock
and (2) recommend to all stockholders to vote their Shares in favor of
increasing the authorized number of Shares of Common Stock . The Company
represents and warrants that under no circumstances other, than the default of
Purchaser or as provided in Section 5 hereof, will it deny or prevent
Purchaser's right to convert the Debentures as permitted under the terms of this
Subscription Agreement or the Registration Rights Agreement.
(b) AUTHORITY TO ENTER AGREEMENT. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company and is a
valid and binding agreement in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally.
(c) NON-CONTRAVENTION. The execution and delivery of this
Agreement and the consummation of the issuance of the Debentures, and the
transactions contemplated by this Agreement do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under, the articles of incorporation or by-laws of the
Company, or any indenture, mortgage, deed of trust, or other material agreement
or instrument to which the Company is a party or by which it or any of its
properties or assets are bound, or any existing applicable law, rule, or
regulation of the United States or any State thereof or any applicable decree,
judgment, or order of any Federal or State court, Federal or State regulatory
body, administrative agency or other United States governmental body having
jurisdiction over the Company or any of its properties or assets.
(d) COMPANY COMPLIANCE. The Company represents and warrants that the
Company and its subsidiaries are: (i) in full compliance, to the extent
applicable, with all reporting obligations under either Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; (ii) not in violation of any
term or provision of its article of incorporation or by-laws; (iii) not in
default in the performance or observance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any mortgage, deed of trust, indenture or other instrument or
agreement to which they are a party, either singly or jointly, by which it or
any of their property is bound or subject except at set forth in Exhibit C.
Furthermore, the Company is not aware of any other facts which it has not
disclosed which could have a material adverse effect on the business, condition
(financial or otherwise), operations, earnings, performance, properties or
prospects of the Company and its subsidiaries taken as a whole.
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(e) PENDING LITIGATION. Except as otherwise disclosed in Exhibit C,
there is (i) no action, suit or proceeding before or by any court, arbitrator or
governmental body now pending or, to the knowledge of the Company, threatened or
contemplated to which the Company or any of its subsidiaries is or may be a
party or to which the business or property of the Company or any of its
subsidiaries is or may be bound or subject, (ii) no law, statute, rule,
regulation, order or ordinance that has been enacted, adopted or issued by any
governmental body or that, to the knowledge of the Company, has been proposed by
any governmental body materially adversely affecting the Company or any of its
subsidiaries, (iii) no injunction, restraining order or order of any nature by a
federal, state or foreign court or governmental body of competent jurisdiction
to which the Company or any of its subsidiaries is subject issued that, in the
case of clauses (i), (ii) and (iii) above, (x) is reasonably likely to, singly
or in the aggregate, result in a material adverse effect on the business,
condition (financial or otherwise), operations, earnings, performance,
properties or prospects of the Company effect, and its subsidiaries taken as a
whole or (y) would interfere with or adversely affect the issuance of the
Debentures reasonably likely to render this Subscription Agreement or the
Debentures, or any portion thereof, invalid or unenforceable.
(f) ISSUANCE OF THE DEBENTURES. No action has been taken and no law,
statute, rule, regulation, order or ordinance has been enacted, adopted or
issued by any governmental body that prevents the issuance of the Debentures or
the Common Stock issuable upon conversion thereof; no injunction, restraining
order or order of any nature by a federal or state court of competent
jurisdiction has been issued that prevents the issuance of the Debentures or the
Common Stock issuable upon thereof or suspends the sale of the Debentures or the
Common Stock issuable upon conversion thereof in any jurisdiction; and no
action, suit or proceeding is pending against or, to the best knowledge of the
Company, threatened against or affecting, the Company, any of its subsidiaries
or, to the best knowledge of the Company, before any court or arbitrator or any
Governmental Body that, if adversely determined, would prohibit, interfere with
or adversely affect the issuance or marketability of the Debentures or the
Common Stock issuable upon conversion thereof or render the Subscription
Agreement or the Debentures , or any portion thereof, invalid or unenforceable.
(g) The Company shall indemnify and hold harmless the Purchaser and
each stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Purchaser, who is or may be a party or is or
may be threatened to be made a party to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of or arising from any actual or alleged
misrepresentation or misstatement of facts or omission to represent or state
facts made or alleged to have been made by the Company to the Purchaser or
omitted or alleged to have been omitted by the Company, concerning the Purchaser
or the Purchaser's subscription for and purchase of the Debentures or the
Purchaser 's authority to invest or financial position in connection with the
Offering, including, without limitation, any such misrepresentation,
misstatement or omission contained in this Subscription Agreement, the
Questionnaire or any other document submitted by the Company, against losses,
liabilities and expenses for which the Purchaser, or any stockholder, executive,
employee, representative, affiliate, officer, director or control person of the
Purchaser has not otherwise been reimbursed (including attorneys' fees and
disbursements, judgments, fines and amounts paid in settlement) actually and
reasonably incurred by the Purchaser, or such officer, director stockholder,
executive, employee, representative, affiliate or control person in connection
with such action, suit or proceeding.
(h) NO CHANGE. Other than filings required by the Blue Sky or federal
securities law, no consent, approval or authorization of or designation,
declaration or filing with any governmental or other regulatory authority on the
part of the Company is required in connection with the valid execution, delivery
and performance of this Agreement. Any required qualification or notification
under applicable federal securities laws and state Blue Sky laws of the offer,
sale and issuance of the Debentures, has been obtained on or before the date
hereof or will have been obtained within the allowable period thereafter, and a
copy thereof will be forwarded to counsel for the Purchaser.
(i) TRUE STATEMENTS. Neither this Agreement nor any of the "Disclosure
Documents", as hereinafter defined, contains any untrue statement of a material
fact or omits to state any material fact necessary in order to make the
statements contained herein or therein not misleading in the light of the
circumstances under which such statements are made. There exists no fact or
circumstances which, to the knowledge of the Company, materially and adversely
affects the business, properties or assets, or conditions, financial or
otherwise, of the Company, which has not been set forth in this Subscription
Agreement or disclosed in such documents.
(j) The Purchaser has been advised that the Company has not retained
any independent professionals to review or comment on this Offering or otherwise
protect the interests of the Purchaser. Although the Company has retained its
own counsel, neither such counsel nor any other firm, including Joseph B.
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LaRocco, Esq., has acted on behalf of the Purchaser, and the Purchaser should
not rely on the Company's legal counsel or Joseph B.
LaRocco, Esq. with respect to any matters herein described.
(k) There has never been represented, guaranteed, or warranted to the
undersigned by any broker, the Company, its officers, directors or agents, or
employees or any other person, expressly or by implication (i) the percentage of
profits and/or amount of or type of consideration, profit or loss to be
realized, if any, as a result of the Company's operations; and (ii) that the
past performance or experience on the part of the management of the Company, or
of any other person, will in any way result in the overall profitable operations
of the Company.
(l) PRIOR PREFERRED SHARES ISSUED UNDER REGULATION S OR REGULATION D.
In the past thirty-six months the Company raised $3,850,000 in Regulation S
offerings of Preferred Stock of which none remains unconverted. The Company has
raised $5,850,000 in Regulation D offerings of Preferred Stock in the past
thirty six months of which the principal amount of approximately $5,930,000
remains unconverted.
(m) CURRENT AUTHORIZED DEBENTURES. As of March 15, 1999, there were
100,000,000 authorized Debentures of Common Stock of which approximately
39,381,401 shares of Common Stock were issued and outstanding on a fully diluted
basis
(n) DISCLOSURE DOCUMENTS. The Disclosure Documents are all the
documents (other than preliminary materials) that the Company has been required
to file with the Securities and Exchange Commission (the "SEC") from June 30,
1998, to the date hereof including the Company's Definitive Information
Statement and the Registration Statement on Form S-2, as amended. As of their
respective dates, none of the Disclosure Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, and except as
disclosed in the Disclosure Documents no material event has occurred since the
Company's filing on Form 10-KSBA for the year ended June 30, 1998 which could
make any of the disclosures contained therein misleading. The financial
statements of the Company included in the Disclosure Documents have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited financial statements, subject
only to normal recurring year-end audit adjustments) and present fairly the
consolidated financial position of the Company and its consolidated subsidiaries
as at the dates thereof and the consolidated results of their operations and
changes in financial position for the periods then ended. Purchaser acknowledges
that the Financial Statements contained in Form 10-KSB and the Form S-2 are
being amended pursuant to SEC comments.
(o) INFORMATION SUPPLIED. The information supplied by the Company to
Purchaser in connection with the offering of the Debentures does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements, in the light of the circumstances in which they were
made, not misleading. There exists no fact or circumstances which, to the
knowledge of the Company, materially and adversely affects the business,
properties, assets, or conditions, financial or otherwise, of the Company which
has not been set forth in this Agreement or disclosed in such documents.
(p) DELIVERY INSTRUCTIONS. On the Closing Date the Debentures being
purchased hereunder shall be delivered to Joseph B. LaRocco, Esq. as Escrow
Agent, who will simultaneously wire to the Company the funds being held in
escrow, less placement fees and escrow fees, at which time the Escrow Agent
shall then have the Debentures delivered to the Purchaser, per the Purchaser's
instructions.
(q) NON-CONTRAVENTION. The execution and delivery of this Agreement by
the Company, the issuance of the Debentures, and the consummation by the Company
of the other transactions contemplated by this Agreement, do not and will not
conflict with or result in a breach by the Company of any of the terms or
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provisions of, or constitute a default under, the (i) certificate of
incorporation or by-laws of the Company, (ii) any indenture, mortgage, deed of
trust, or other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound, (iii) any material
existing applicable law, rule, or regulation or any applicable decree, judgment,
or (iv) order of any court, United States federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over the
Company or any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the transactions
contemplated herein.
(r) NO DEFAULT. Except as set forth in the Company's Disclosure
Documents, the Company is not in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or agreement to
which it is a party or by which it or its property is bound, and neither the
execution of, nor the delivery by the Company of, nor the performance by the
Company of its obligations under, this Agreement or the or the Debentures, other
than the conversion provision thereof, will conflict with or result in the
breach or violation of any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any lien or charge on any
assets or properties of the Company under, (i) any material indenture, mortgage,
deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound, (ii) any
statute applicable to the Company or its property, (iii) the Certificate of
Incorporation or By-Laws of the Company, (iv) any decree , judgment, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company regulation of any court or governmental agency or body having
jurisdiction over the Company or its properties, or (v) the Company's listing
agreement for its Common Stock.
(s) USE OF PROCEEDS. The Company represents that the net proceeds of
this offering will be used for working capital.
(t) ARTICLES OF AMENDMENT, BOARD RESOLUTION AND OPINION LETTER. The
Company shall deliver to the Escrow Agent the following: (a) a copy and proof of
filing of the Articles of Amendment to the Articles of Incorporation; (b) a copy
of the Board Resolution authorizing this offering; and (c) a copy of an opinion
letter which shall be attached to this Agreement as Exhibit D.
(u) COLLATERAL. The Company has agreed to provide collateral in the
form of its office facility in Plantation, Florida, which the Company
represents, is currently unencumbered. It is understood that the Purchaser shall
release its collateral interest in the land and building to the extent that it
does not fulfill its obligation to provide the full amount of the new capital
indicated in this offering. The Company further agrees to place in escrow a
sufficient number of free-trading Founder's shares to cover the conversion of
the Debentures. The free-trading Debentures are to be made available to
Purchaser to satisfy conversions until the registration does go effective, but
may not be used unless the registration statement has not been deemed effective
by 120 days from the Closing Date.
(v) CONSULTING FEE. The Company shall pay a consulting fee of $100,000
upon closing of the first funding tranche in the amount of $1,100,000. The
Company shall pay a consulting fee of $75,000 upon closing of the second funding
tranche in the amount of $825,000. The Company shall pay a consulting fee of
$75,000 upon closing of the third funding tranche in the amount of $825,000.
4. TERMS OF CONVERSION.
(a) DEBENTURES. Upon the Company's receipt of a facsimile or original
of Purchaser's signed Notice of Conversion and delivery of the Debenture the
Company shall instruct its transfer agent to issue one or more certificates
representing that number of shares of Common Stock into which the Debentures are
convertible in accordance with the provisions regarding conversion set forth in
this Section 4. The Company's transfer agent shall act as Registrar and shall
maintain an appropriate ledger containing the necessary information with respect
to each share.
(b) CONVERSION DATE. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, the Debentures to be converted
together with a facsimile or original of the signed Notice of Conversion, which
evidences Purchaser's intention to convert those Debentures, indicated. The date
on which the Notice of Conversion is effective ("Conversion Date") shall be
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deemed to be the date on which the Purchaser has delivered to the Company a
facsimile or original of the signed Notice of Conversion, as long as the
original Debentures to be converted are received by the Company or its
designated attorney within five business days thereafter. As long as the
Debentures to be converted are received by the Company within five business days
after it receives a facsimile or original of the signed Notice of Conversion,
the Company shall deliver to the Purchaser, or per the Purchaser's instructions,
the shares of Common Stock, with restrictive legends as set forth in this
Agreement, within five business days of receipt of the Debentures to be
converted.
(c) COMMON STOCK TO BE ISSUED WITH RESTRICTIVE LEGEND. Upon the
conversion of any Debentures and upon receipt by the Company or its attorney of
a facsimile or original of Purchaser's signed Notice of Conversion (See Exhibit
A), the Company shall instruct the Company's transfer agent to issue Stock
Certificates with restrictive legends as set forth in this Agreement in the name
of Purchaser (or its nominee) and in such denominations to be specified at
conversion representing the number of Debentures of Common Stock issuable upon
such conversion, as applicable. The Company warrants that no instructions, other
than these instructions, have been given or will be given to the transfer agent
and that the Common Stock shall otherwise be freely transferable on the books
and records of the Company.
(d) CONVERSION RATE. Anytime after the Closing Date, Purchaser is
entitled to convert the entire face amount of the Debentures, plus accrued
premiums, at 75% of the five day average closing bid price, as reported by
Bloomberg, LP for the five trading days immediately preceding the applicable
Conversion Date (the "Conversion Price"). No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded up or down, as the case may be, to the nearest
whole share.
The Debentures are subject to a mandatory, 24-month conversion feature
at the end of which all Debentures outstanding will be automatically converted,
upon the terms set forth in this section ("Mandatory Conversion Date").
(e) Nothing contained in this Subscription Agreement shall be deemed to
establish or require the payment of interest to the Purchaser at a rate in
excess of the maximum rate permitted by governing law. In the event that the
rate of interest required to be paid exceeds the maximum rate permitted by
governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under the governing law and
such excess shall be returned with reasonable promptness by the Purchaser to the
Company.
(f) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue the certificate of Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
stockholder of record on and after the conversion date. Upon surrender of any
Debentures that are to be converted in part, the Company shall issue to the
Purchaser new Debentures equal to the unconverted amount, if so requested by
Purchaser.
(g) In the event the Common Stock is not delivered per the written
instructions of the Purchaser, within five business days after the receipt of
the Notice of Conversion and original stock certificate (the "Delivery Date"),
then in such event the Company shall pay to Purchaser in cash or Common Stock,
at the Company's option, one percent (1%) of the purchase price of the
Debentures being converted per each day after the fifth business day following
the Conversion Date that the Common Stock is not delivered.
The Company acknowledges that its failure to deliver the Common Stock
on or before the Delivery Date will cause the Purchaser to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this Section 4 represents the parties' good faith effort to
quantify such damages and, as such, agree that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The payment
of liquidated damages shall not relieve the Company from its obligations to
deliver the Common Stock pursuant to the terms of this Agreement.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 4 is due to the unavailability of authorized but
unissued Debentures of Common Stock, the provisions of this Section 4(g) shall
not apply, but instead the provisions of Section 4(h) shall apply.
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The Company shall make any payments incurred under this Section 4(g) in
immediately available funds within three business days from the date of issuance
of the applicable Common Stock. Nothing herein shall limit a Purchaser's right
to pursue actual damages or cancel the conversion for the Company's failure to
issue and deliver Common Stock to the Purchaser within 10 business days after
the Conversion Date.
(h) The Company shall at all times reserve and have available all
shares of the Common Stock necessary to meet conversion of the Debentures by all
Purchasers of the entire amount of Debentures then outstanding. If, at any time
Purchaser submits a Notice of Conversion and the Company does not have
sufficient authorized but unissued shares of Common Stock available to effect,
in full, a conversion of the Debentures (a "Conversion Default", the date of
such default being referred to herein as the "Conversion Default Date"), the
Company shall issue to the Purchaser all of the shares of Common Stock which are
available, and the Notice of Conversion as to any Debentures requested to be
converted but not converted (the "Unconverted Debentures"), upon Purchaser's
sole option, may be deemed null and void. The Company shall provide notice of
such Conversion Default ("Notice of Conversion Default") to all existing
Purchasers of outstanding Debentures, by facsimile, within two business days of
such default (with the original delivered by overnight or two-day courier), and
the Purchaser shall give notice to the Company by facsimile within five business
days of receipt of the original Notice of Conversion Default (with the original
delivered by overnight or two-day courier) of its election to either nullify or
confirm the Notice of Conversion.
The Company agrees to pay to all Purchasers of outstanding Debentures
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Debentures held by each Purchaser where N = the
number of days from the Conversion Default Date to the date (the "Authorization
Date") that the Company authorizes a sufficient number of shares of Common Stock
to effect conversion of all remaining Debentures. The Company shall send notice
("Authorization Notice") to each Purchaser of outstanding Debentures that
additional shares of Common Stock have been authorized, the Authorization Date
and the amount of Purchaser's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Purchaser's option, payable as follows: (i)
in the event Purchaser elects to take such payment in cash, cash payments shall
be made to such Purchaser of outstanding Debentures by the fifth day of the
following calendar month, or (ii) in the event Purchaser elects to take such
payment in stock, the Purchaser may convert such payment amount into Common
Stock at the conversion rate set forth in Section 4(d) at anytime after the 5th
day of the calendar month following the month in which the Authorization Notice
was received, until the expiration of the mandatory 24-month conversion period.
The Company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Debentures will cause the Purchaser to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this Section 4 represents the parties' good faith effort to
quantify such damages and, as such, agree that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The payment
of liquidated damages shall not relieve the Company from its obligations to
deliver the Common Stock pursuant to the terms of this Agreement.
Nothing herein shall limit the Purchaser's right to pursue actual
damages or cancel the conversion for the Company's failure to maintain a
sufficient number of authorized shares of Common Stock.
(i) The Company shall furnish to Purchaser such number of prospectuses
and other documents incidental to the registration of the shares of Common Stock
underlying the Debentures, including any amendment of or supplements thereto.
5. LIMITS ON AMOUNT OF CONVERSION AND OWNERSHIP.
Other than the Mandatory Conversion provisions contained in this
Agreement which are not limited by the following, in no other event shall the
Purchaser be entitled to convert that amount of Debentures in excess of that
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amount upon conversion of which the sum of (1) the number of shares of Common
Stock beneficially owned by the Purchaser and its affiliates (other than shares
of Common Stock which may be deemed beneficially owned through the ownership of
the unconverted portion of the Debentures), and (2) the number of shares of
Common Stock issuable upon the conversion of the Debentures with respect to
which the determination of this proviso is being made, would result in
beneficial ownership by the Purchaser and its affiliates of more than 4.9% of
the outstanding shares of Common Stock of the Company. For purposes of this
provision to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13 (d) of the Securities Exchange Act of
1934, as amended, and Regulations 13 D and G thereunder, except as otherwise
provided in clause (1) of such provision. Furthermore, the Company shall not
permit such conversions that would violate the provisions of this Section 5. .
6. DELIVERY INSTRUCTIONS.
The Debentures being purchased hereunder shall be delivered to Joseph
B. LaRocco, Esq. as Escrow Agent, who will hold them in escrow until funds have
been wired to the Company at which time the Escrow Agent shall then have the
Debentures delivered to the Purchaser, per the Purchaser's instructions.
7. UNDERSTANDINGS.
The undersigned understands, acknowledges and agrees with the Company
as follows:
FOR ALL SUBSCRIBERS:
(a) This Subscription may be rejected, in whole or in part, by the
Company in its sole and absolute discretion at any time before the date set for
closing unless the Company has given notice of acceptance of the undersigned's
subscription by signing this Subscription Agreement.
(b) No U.S. federal or state agency or any agency of any other
jurisdiction has made any finding or determination as to the fairness of the
terms of the Offering for investment nor any recommendation or endorsement of
the Debentures.
(c) The representations, warranties and agreements of the undersigned
and the Company contained herein and in any other writing delivered in
connection with the transactions contemplated hereby shall be true and correct
in all material respects on and as of the date of the sale of the Debentures,
and as of the date of the conversion and exercise thereof, as if made on and as
of such date and shall survive the execution and delivery of this Subscription
Agreement and the purchase of the Debentures.
(d) IN MAKING AN INVESTMENT DECISION, PURCHASERS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THE DEBENTURES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THE
MEMORANDUM OR THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
(e) The Regulation D Offering is intended to be exempt from
registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and the provisions of Regulation D thereunder, which is in part
dependent upon the truth, completeness and accuracy of the statements made by
the undersigned herein and in the Questionnaire.
(f) It is understood that in order not to jeopardize the Offering's
exempt status under Section 4(2) of the Securities Act and Regulation D, any
transferee may, at a minimum, be required to fulfill the investor suitability
requirements thereunder.
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(g) THE DEBENTURES MAY NOT BE TRANSFERRED, RESOLD OR OTHERWISE DISPOSED
OF EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. PURCHASERS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
(h) NASAA UNIFORM LEGEND
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE
OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933 AND THE APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME.
(i) The undersigned acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel, terminate or revoke this subscription, and any agreements made in
connection herewith shall survive my death or disability.
(j) The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
(k) The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and RulE 3E-500.05(a) thereunder, the
undersigned understands that he may have, at the offices of the Company, at any
reasonable hour, after reasonable prior notice, access to the materials set
forth in the Rule which the Company can obtain without unreasonable effort or
expense.
(l) The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
8. SUBMISSION TO JURISDICTION
(a) FORUM SELECTION AND CONSENT TO JURISDICTION. Any litigation based
thereon, or arising out of, under, or in connection with, this Agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Purchaser shall be brought and maintained exclusively
in the federal courts of the State of Florida. The Company and Purchaser hereby
expressly and irrevocably submit to the exclusive jurisdiction of the federal
Courts of the State of Florida for the purpose of any such litigation as set
forth above and irrevocably agrees to be bound by any final judgment rendered
thereby in connection with such litigation. The Company and Purchaser further
irrevocably consent to the service of process by registered mail, postage
prepaid, or by personal service within or without the State of Florida. The
Company and Purchaser hereby expressly and irrevocably waive, to the fullest
extent permitted by law, any objection which it may have or hereafter may have
to the laying of venue of any such litigation brought in any such court referred
to above and any claim that any such litigation has been brought in any
inconvenient forum. To the extent that the Company or Purchaser have or
hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
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property the Company and Purchaser hereby irrevocably waive such immunity in
respect of their obligations under this Agreement and the other loan documents.
(b) WAIVER OF JURY TRIAL. The Purchaser and the Company hereby
knowingly, voluntarily and intentionally waive any rights they may have to a
trial by jury in respect of any litigation based hereon, or arising out of,
under, or in connection with, this agreement, or any course of conduct, course
of dealing, statements (whether oral or written) or actions of the Purchaser or
the Company. The Company acknowledges and agrees that it has received full and
sufficient consideration for this provision and that this provision is a
material inducement for the Purchaser entering into this agreement.
(c) SUBMISSION TO JURISDICTION. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought only in
the federal courts located in Florida, and the parties hereby irrevocably submit
to the exclusive jurisdiction of such courts for the purpose of any such action
or proceeding.
9. MISCELLANEOUS.
(a) All pronouns and any variations thereof used herein shall be deemed
to refer to the masculine, feminine, impersonal, singular or plural, as the
identity of the person or persons may require.
(b) Neither this Subscription Agreement nor any provision hereof shall
be waived, modified, changed, discharged, terminated, revoked or canceled,
except by an instrument in writing signed by the party effecting the same
against whom any change, discharge or termination is sought.
(c) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered mail, return receipt requested, addressed: (i) if to the
Company, at its executive offices or (ii) if to the undersigned, at the address
for correspondence set forth in the Questionnaire, or at such other address as
may be specified by written notice given in accordance with this paragraph 9(c).
(d) This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Florida,
as such laws are applied by Florida courts to agreements entered into, and to be
performed in, Florida by and between residents of Florida, and shall be binding
upon the undersigned, the undersigned's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company, its
successors and assigns. If any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statue or rule of law, then such
provisions shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereof that may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
(e) This Subscription Agreement, together with Exhibits A, B, C and D
attached hereto and made a part hereof, constitute the entire agreement between
the parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by both parties hereto.
(f) This Agreement may be executed in counterparts, and the facsimile
transmission of an executed counterpart to this Agreement shall be effective as
an original.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION QUESTIONNAIRE
INVESTOR NAME: ___________________________________________________
The information contained in this Questionnaire is being furnished in
order to determine whether the undersigned CORPORATION'S Subscription to
purchase the Debentures described in the Subscription Agreement may be accepted.
ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED
CONFIDENTIALLY. The undersigned CORPORATION understands, however, that the
Company may present this Questionnaire to such parties as it deems appropriate
if called upon to establish that the proposed offer and sale of the Debentures
is exempt from registration under the Securities Act of 1933, as amended.
Further, the undersigned CORPORATION understands that the offering is required
to be reported to the Securities and Exchange Commission and to various state
securities and "blue sky" regulators.
IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED CORPORATION
MUST COMPLETE FORM W-9 ATTACHED HERETO.
I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES TO THE
CORPORATION.
/ / 1. The undersigned CORPORATION: (a) has total assets in excess
of $5,000,000; (b) was not formed for the specific purpose of
acquiring the Debentures and (c) has its principal place of
business in ______________________ .
/ / 2. Each of the shareholders of the undersigned CORPORATION is
able to certify that such shareholder meets at least one of
the following three conditions:
(A) the shareholder is a natural person whose
individual net worth* or joint net worth with his or
her spouse exceeds $10,000,000; or
(B) the shareholder is a natural person who had an
individual income* in excess of $200,000 in each of
1997 and 1998 and who reasonably expects an
individual income in excess of $200,000 in 1999; or
(C) Each of the shareholders of the undersigned
CORPORATION is able to certify that such shareholder
is a natural person who, together with his or her
spouse, has had a joint income in excess of $300,000
in each of 1997 and 1998 and who reasonably expects a
joint income in excess of $300,000 during 1999; and
the undersigned CORPORATION has its principal place
of business in ________________.
* For purposes of this Questionnaire, the term "net worth" means the excess of
total assets over total liabilities. In determining income, an investor should
add to his or her adjusted gross income any amounts attributable to tax-exempt
income received, losses claimed as a limited partner in any limited partnership,
deductions claimed for depletion, contributions to IRA or Keogh retirement plan,
alimony payments and any amount by which income from long-term capital gains has
been reduced in arriving at adjusted gross income.
3. The undersigned CORPORATION is:
(A) a bank as defined in Section 3(a)(2) of the
Securities Act; or
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<PAGE>
(B) a savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the
Securities Act whether acting in its individual or
fiduciary capacity; or
(C) a broker or dealer registered pursuant to Section
15 of the Securities Exchange Act of 1934; or
(D) an insurance company as defined in Section 2(13)
of the Securities Act; or
(E) An investment company registered under the
Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940; or
(F) a small business investment company licensed by
the U.S. Small Business Administration under Section
301 (c) or (d) of the Small Business Investment Act
of 1958; or
(G) a private business development company as defined
in Section 202(a) (22) of the Investment Advisors Act
of 1940.
II. OTHER CERTIFICATIONS.
By signing the Signature Page, the undersigned certifies the following:
(A) That the CORPORATION'S purchase of the Debentures will be solely
for the CORPORATION'S own account and not for the account of any other
person or entity; and
(B) that the CORPORATION'S name, address of principal place of
business, place of incorporation and taxpayer identification number as
set forth in this Questionnaire are true, correct and complete.
III. GENERAL INFORMATION
(A) PROSPECTIVE PURCHASER (THE CORPORATION)
Name: ________________________________________________________________
Principal Place of Business: _________________________________________
________________________________________________________________________________
Address for Correspondence (if different):_____________________________
(Number and Street)
_______________________________________________________________________
(City) (State) (Zip Code)
Telephone Number:______________________________________________________
(Area Code) (Number)
Jurisdiction of Incorporation:_________________________________________
Date of Formation:_____________________________________________________
Taxpayer Identification Number:________________________________________
Number of Shareholders:________________________________________________
16
(b) INDIVIDUAL WHO IS EXECUTING THIS QUESTIONNAIRE ON BEHALF OF THE
CORPORATION.
Name:________________________________________________________________
Position or Title:___________________________________________________
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION SIGNATURE PAGE
Your signature on this Corporation Signature Page evidences the
agreement by the Purchaser to be bound by the QUESTIONNAIRE and the SUBSCRIPTION
AGREEMENT.
1. The undersigned hereby represents that (a) the information contained
in the Questionnaire is complete and accurate and (b) the Purchaser will notify
Imaging Diagnostic Systems, Inc. immediately if any material change in any of
the information occurs prior to the acceptance of the undersigned Purchaser's
subscription and will promptly send Imaging Diagnostic Systems, Inc. written
confirmation of such change.
2. The undersigned officer of the Purchaser hereby certifies that he
has read and understands this Subscription Agreement.
3. The undersigned officer of the Purchaser hereby represents and
warrants that he has been duly authorized by all requisite action on the part of
the Corporation to acquire the Debentures and sign this Subscription Agreement
on behalf of _______________ and, further, that ____________________ has all
requisite authority to purchase the Debentures and enter into this Subscription
Agreement.
4. The undersigned acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel, terminate or revoke this subscription, and any agreements made in
connection herewith shall survive my death or disability.
5. The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
6. The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and RulE 3E-500.05(a) thereunder, the
undersigned understands that he may have, at the offices of the Company, at any
reasonable hour, after reasonable prior notice, access to the materials set
forth in the Rule which the Company can obtain without unreasonable effort or
expense.
7. The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
___________________________________ ____________________________
Number of Debentures subscribed for Date
____________________________
(Purchaser)
17
<PAGE>
By: ________________________
(Signature)
Name: _____________________ Title: ________________________
(Please Type or Print) (Please Type or Print)
THE DEBENTURES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED UNLESS SUCH SECURITIES ARE INCLUDED IN AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT.
COMPANY ACCEPTANCE PAGE
THIS SUBSCRIPTION AGREEMENT ACCEPTED AND AGREED
TO THIS ____ DAY OF MARCH, 1999
IMAGING DIAGNOSTIC SYSTEMS, INC.
BY__________________________________
LINDA B. GRABLE, PRESIDENT
18
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED OWNER IN ORDER TO CONVERT
THE CONVERTIBLE DEBENTURES)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS, AS OF ______________, 199_
TO CONVERT $__________ OF DEBENTURES INTO COMMON STOCK OF IMAGING DIAGNOSTIC
SYSTEMS, INC. (THE "COMPANY") ACCORDING TO THE CONDITIONS SET FORTH IN THE
SUBSCRIPTION AGREEMENT DATED MARCH ____, 1999.
DATE OF CONVERSION______________________________________________
APPLICABLE CONVERSION PRICE_____________________________________
NUMBER OF DEBENTURES ISSUABLE UPON THIS CONVERSION______________
SIGNATURE_______________________________________________________
[NAME]
ADDRESS_________________________________________________________
________________________________________________________________
PHONE______________________ FAX___________________________
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EXHIBIT D
Form of Pre-Closing Opinion Letter
_______________, 1999
Purchasers of (Company) (Describe Securities)
Re: (Company)
Ladies and Gentlemen:
I have acted as counsel to Imaging Diagnostic Systems, Inc., a corporation
incorporated under the laws of the State of Florida (the "Company"), in
connection with its offering, pursuant to Regulation D, for the proposed
issuance and sale of an aggregate of $1,100,000 of Convertible Debentures (the
"Securities") pursuant to the Subscription Agreement and the Registration Rights
Agreement (including all Exhibits and Appendices thereto) (collectively the
"Agreements") with _______________________. and
___________________("Purchasers"), dated March ______, 1999 between the Company
and the Purchasers. This Opinion is furnished pursuant to Section ______________
of the Agreement and is given with consent of the Company. Capitalized terms
that are not otherwise defined in this opinion shall have the definitions set
forth in the Agreements.
I do not express any opinion concerning any law other than the laws of Florida
and the federal securities law of the United States.
This opinion has been prepared and is to be construed in accordance with the
Report on Standards for Florida Opinions dated April 8, 1991 issued by the
Business Law Section of the Florida Bar (the "Standards") The Standards are
incorporated by reference into this opinion.
In connection with rendering the opinion set forth herein, I have relied, with
your approval, as to factual matters that affect our opinion, solely on my
examination of the following documents or certificates (the "Documents") and
have made no independent verification of the facts asserted to be true and
correct in those documents, including the factual representations and warranties
contained in the Agreements.
F. Drafts of the Agreements
G. The Company's Certificate of Incorporation, and its Bylaws, as
amended to date.
H. The Company's annual report under Form 10-KSB issued for the year
ending June 30, 1998, the Company's Reports on Forms 10-KSB, 10-QSB
and 8-K filed with the Securities and Exchange Commission,
Registration Statements on Form S-1 and S-2 and the Company's most
recent Proxy Statement and Information Statement (collectively the
"Reports")
I. Minutes of the Board of Directors Meeting of December 21, 1998, 1998
approving the subject transaction
J. Certificate of Officers and Directors.
20
<PAGE>
In conducting my examination, I have assumed the following: (i) that each of the
Agreements has been executed by each of the parties thereto in the same form as
the forms which I have examined, (ii) the genuineness of all signatures, the
legal capacity of natural persons, the authenticity and accuracy of all
documents submitted to me as copies, (iii) that each of the Agreements has been
duly and validly authorized, executed, and delivered by the party or parties
thereto other than the Company, and (iv) that each of the Agreements constitutes
the valid and binding agreement of the party or parties thereto other than the
Company, enforceable against such party or parties in accordance with the
Agreements' terms.
Based upon the foregoing, and subject to the qualifications and limitations
stated in this opinion and the Standards, we are of the opinion that:
Based upon and subject to the foregoing, I am of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Florida, is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions where the Company owns or leases properties, maintains employees
or conducts business, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company, and has all
requisite corporate power and authority to own its properties and conduct its
business;
2. The authorized capital stock of the Company consists of 100,000,000
Debentures of Common Stock, no par value per share ("Common Stock") and
2,000,000 Debentures of Preferred Stock, no pare par value, 450 of which have
been designated as Series B, 75 of which have been designated as Series G, 108
of which have been designated as Series H and 455 of which have been designated
as Series I..
3. The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of
the Securities Exchange Act of 1934, as amended and the Company has timely filed
all the material required to be filed pursuant to Sections 13(a) or 15(d) of
such Act for a period of at least twelve months preceding the date hereof;
4. When duly countersigned by the Company's transfer agent and registrar, and
delivered to you or upon your order against payment of the agreed consideration
therefor in accordance with the provisions of the Agreements, the Securities
(and any Common Stock to be issued upon the conversion of the Securities) as
described in the Agreements represented thereby will be duly authorized and
validly issued, fully paid and nonassessable;
5. The company has the requisite corporate power and authority to enter into the
Agreements and to sell and deliver the Securities and the Common Stock to be
issued upon the conversion of the Securities as described in the Agreements;
each of the Agreements has been duly and validly authorized by all necessary
corporate action by the Company to our knowledge, no approval of any
governmental or other body is required for the execution and delivery of each of
the Agreements by the Company or the consummation of the transactions
contemplated thereby; each of the Agreements has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and binding
agreement of the Company, enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other laws
affecting creditors rights generally, and except as to compliance with federal,
state, and foreign securities laws, as to which no opinion is expressed;
6. To the best of our knowledge, the execution, delivery and performance of the
Agreements by the company and the performance of its obligations thereunder do
not and will not constitute a breach or violation of any of the terms and
provisions of, or constitute a default under or conflict with or violate any
provisions of (i) the Company's Certificate of Incorporation or By-Laws, (ii)
any indenture, mortgage, deed of trust, agreement or other instrument to which
the Company is a party or by which it or any of its property is bound, (iii) any
applicable statue or regulation or as other, (iv) or any judgment, decree or
order of any court of governmental body having jurisdiction over the Company or
any of its property.
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<PAGE>
7. The issuance of Common Stock upon conversion of the Securities in accordance
with the terms and conditions of the Certificate of Designation and the
Agreements, will not violate the applicable listing agreement between the
Company and any securities exchange or market on which the Company's securities
are listed.
8. To our knowledge, after due inquiry, there is no pending or threatened
litigation investigation or other proceedings against the Company (except as
described in Exhibit A hereto).
This opinion is rendered only with regard to the matters set out in the numbered
paragraphs above. No other opinions are intended nor should they be inferred.
This opinion is based solely upon the laws of the State of Florida, as currently
in effect, and the Florida Business l) Corporation Act and does not include an
interpretation or statement concerning the laws of any other state or
jurisdiction. Insofar as the enforceability of the Agreements may be governed by
the laws of other states, we have assumed that such laws are identical in all
respects to the laws of the State of Florida.
The opinions expressed herein are given to you solely for your use in connection
with the transaction contemplated by the Agreements and may not be relied upon
by any other person or entity or for any other purpose without our prior
consent.
Very truly yours,
Rebecca J. Del Medico, General Counsel
22
<PAGE>
EXHIBIT C
LITIGATION
B. ON OCTOBER 7, 1998 A LAWSUIT WAS FILED AGAINST THE COMPANY IN THE
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK, BY THE
SERIES B HOLDERS (CASE NO. 98 CIV. 086). THE COMPANY WAS SERVED ON
OCTOBER 19, 1998. THE LAWSUIT ALLEGES THAT THE COMPANY BREACHED ITS
CONTRACT OF SALE TO THE SERIES B HOLDERS BY, AMONG OTHER THIS
FAILING TO CONVERT THE SERIES B PREFERRED STOCK AND FAILURE TO
REGISTER THE COMMON STOCK UNDERLYING THE PREFERRED. THE SERIES B
HOLDERS HAVE DEMANDED DAMAGES IN EXCESS OF $75,000, TO BE DETERMINED
AT TRIAL, TOGETHER WITH INTEREST COSTS AND LEGAL FEES.
DEFAULTS
In December 1996, the Company sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas
Limited ("Weyburn") and Goodland International Investment Ltd. ("Goodland")
pursuant to Regulation D. The Company filed a Registration Statement of Form S-1
registering the share underlying the Series B Preferred. The shares were never
converted and the registration statement is no longer current. On September 4,
1998, the Company received a notice of conversion from the Weyburn and Goodland
requesting the issuance of 4,559,846 and 10,639,642 shares of common stock,
respectively. The conversion rate of the Shares is 82% of the average market
price over a five-day period prior to conversion or approximately $.35014 per
share. The Company contends that when and if the Company converts the Preferred
Shares, the Series B Holders may be entitle to an aggregate of 12,852,002 common
shares pursuant to the conversion and 1,542,877 shares pursuant to the dividend
provision of the Preferred Shares, not the 15,199,488 shares set forth in their
notice. The Series B Holders have demanded damages in excess of $75,000, to be
determined at trial, together with interest, costs, and legal fees.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. The Note bears interest at the rate of
12% per annum. The Note is personally guaranteed by Linda B. Grable, the
Company's President. The repayment of the Note, which was originally due on
October 2, 1998 was extended twice, was due on January 15, 1999, and remains
unpaid to date.
The Company has not received a notice of default in connection with this Note.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. The Note bears interest at the rate of 12% per annum. The Note, which
was originally due on November 2, 1998, was extended twice, became due on
January 15, 1999, and remains unpaid to date. The Company has not received a
notice of default in connection with the Note.
On June 2, 1998, the Company finalized a private placement to Austost Anstalt
Schaan and Balmore Funds S.A. of 100 shares of its Series H Convertible
Preferred Stock (the "Preferred Shares") at a purchase price of $10,000 per
share and 75,000A Warrant and 50,000 B Warrants. The A and B Warrants are
exercisable at $1.00 and $1.50 per share, respectively. The offering was
conducted pursuant to Regulation D as promulgated under the Securities Act of
1933, as amended (the "Regulation D Sale"). Pursuant to the terms of the
Registration Rights Agreement, as amended, between the Company and the Series H
holder, the Company is required to register 100% of the number of shares that
would be required to be issued if the Preferred Stock were converted on the day
before the filing of the Registration Statement (2,661,698 shares). The Company
filed Amendment 1 to the Registration Statement on November 16 1998. The Company
is in technical default of the Registration Rights Agreement, which required the
Registration Statement to be declared effective by October 2, 1998. Pursuant to
the Registration Rights Agreement, the Company is required to pay the Series H
Holders, as liquidated damages for failure to have the Registration Statement
declared effective, and not as a penalty, two (2%) percent of the principal
23
<PAGE>
amount of the Securities for the first thirty (30) days, and three (3%) percent
of the principal amount of the Securities for each thirty (30) day period
thereafter until the Company procures registration of the Securities. To date,
the liquid damages were paid by the issuance of common stock.
24
MORTGAGE
THIS MORTGAGE ("Security Instrument") is given as of this ___ day of April,
1999. The mortgagor is Imaging Diagnostic Systems, Inc., a Florida Corporation,
whose address is 6331 NW18th Court, Plantation, Florida 33313 ("Borrower"). This
Security Instrument is given to Charlton Avenue, LLC, a Cayman LLC, whose
address is P. O. Box 31106 SMB, Grand Cayman, Cayman Islands, British West
Indies ("Lender"). Borrower owes Lender the principal sum secured by this
Mortgage of Two Million Dollars (U.S.) ($2,000,000).
This debt is evidenced by that certain Convertible Debenture, by Borrower,
payable to Lender, dated the same date as this Mortgage ("Debenture"), which, if
not paid earlier, must be converted in full on April 7, 2001 pursuant to the
terms of the Debenture. This Security Instrument secures to Lender: (a) the
repayment of the debt evidenced by The Debenture, with interest penalties and
all renewals, extensions and modifications of the Debenture; (b) the payment of
all other sums, with interest advanced under paragraph 7 to protect the security
of this Security Instrument and (c) the performance of Borrower's covenants and
agreements under this Security Instrument and the Debenture. For this purpose,
Borrower does hereby mortgage, grant and convey to Lender the following
described property located in Broward County, Florida:
The Borrower hereby grants to the Lender a secured interest in the Property, as
hereinafter defined, in the amount of $2,000,000 which has the address of 6531
NW18th Court Plantation, Florida 33313 ("Property Address");
TOGETHER WITH all the improvements now or hereafter erected on the property, and
all easements, appurtenances, and fixtures now or hereafter a part of the
property. All replacements and additions shall also be covered by this Security
Instrument. All of the foregoing is referred to in this Security Instrument as
the "Property."
BORROWER COVENANTS that Borrower is lawfully seized of the estate hereby
conveyed and has the rights to mortgage, grant and convey the Property and that
the Property is unencumbered, except for encumbrances of record. Borrower
warrants and will defend generally the title to Property against all claims and
demands, subject to any encumbrances of record.
THIS SECURITY INSTRUMENT combines uniform covenants for national use and
non-uniform covenants with limited variations by jurisdiction to constitute a
uniform security instrument covering real property.
UNIFORM COVENANTS Borrower and Lender covenant and agree as follows:
1. PAYMENT OF PRINCIPAL INTEREST AND LIQUIDATED DAMAGES. Borrower shall promptly
pay when due (by making cash payments or delivering shares of Common Stock, as
required by the Debenture, upon its receipt of conversion notices or making
otherwise) the principal of and interest on the debt evidenced by the Debenture
and any liquidated damages due under the Debenture.
2. TAXES AND INSURANCE. Subject to applicable law, Borrower shall timely pay,
until the Debenture ispaid in full: (a) yearly taxes and assessments which may
attain priority over this Security Instrument as a lien on the Property; (b)
yearly leasehold payments or ground rents on the Property, if any, (c) yearly
hazard or property insurance premiums; and (d) yearly flood insurance premiums,
if any.
3. APPLICATION OF PAYMENTS. Unless applicable law provides otherwise. all
payments received by Lender under paragraph I shall be applied as set forth in
the Debenture.
4. CHANGES; LIENS. Borrower shall pay all taxes, assessments, charges, fines and
impositions attributable to the Property, which may attain priority over this
Security Instrument. and leasehold payments or ground rents, if any. Borrower
shall pay them on time directly to the person owed payment. Borrower shall
promptly furnish to Lender all notices of amounts to be paid under this
paragraph. Borrower shall promptly furnish to Lender receipts evidencing the
payments.
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Borrower shall promptly discharge any lien which has priority over this Security
Instrument unless Borrower: (a) agrees in writing to the payment of the
obligation secured by the lien in a manner acceptable to Lender, (b) contests in
good faith the lien by, or defends against enforcement of the lien in, legal
proceedings which in the Lender's opinion operate to prevent the enforcement of
the lien; or (c) secures from the holder of the lien an agreement satisfactory
to Lender subordinating the lien to this Security Instrument. If Lender
determines that any part of the Property is subject to a lien, which may attain
priority over this Security Instrument, Lender may give Borrower a notice
identifying The lien. Borrower shall satisfy the lien or take one or more of the
actions set forth above within 10 days of the giving of notice.
5. HAZARD OR PROPERTY INSURANCE. Borrower shall keep the improvements now
existing or hereafter erected on the Property insured against loss by fire,
hazards included within the term coverage and any other hazards, including
floods or flooding, for which Lender requires insurance. This insurance shall be
maintained in the amounts and for the periods that Lender requires. The
insurance carrier providing the insurance shall be chosen by Borrower subject to
Lender's approval which shall not be unreasonably withheld. If Borrower fails to
maintain coverage described above, Lender may, at Lender's option, obtain
coverage to protect Lender's rights in the Property in accordance with paragraph
7.
All insurance policies and renewals shall be acceptable to Lender and
shall include a standard mortgage clause. Lender shall have the right to hold
the policies and renewals. If Lender requires, Borrower shall promptly give to
Lender all receipts of paid premiums and renewal notices. In the event of loss,
Borrower shall give prompt notice to the insurance carrier and Lender. Lender
may make proof of loss if not made promptly by Borrower.
Unless Lender and Borrower otherwise agree in writing, insurance
proceeds shall be applied to restoration or repair of the Property damaged, if
the restoration or repair is economically feasible and Lender's security is not
lessened. If the restoration or repair is not economically feasible or Lender's
security would be lessened, The insurance proceeds shall be applied to the sums
secured by this Security Instrument, whether or cot then due, with any excess
paid to Borrower. If Borrower abandons the Property. or does not answer within
30 days a notice from Lender that the insurance carrier has offered to settle a
claim, then Lender may collect the insurance proceeds. Lender may use the
proceeds to repair or restore the Property or to pay sums secured by this
Security Instrument, whether or not then due. The 30-day period will begin when
the notice is given.
Unless Lender and Borrower otherwise agree in writing, any application
of proceeds to principal shall not extend or postpone the due date of the
payments referred to in paragraph 1 or change the amount of the payments. If
under paragraph 21 the Property is acquired by Lender, Borrower's right to any
insurance policies and proceeds resulting from damage to the Property prior to
the acquisition shall pass to Lender to the extent of the sums secured by this
Security Instrument immediately prior to the acquisition.
6. PRESERVATION, MAINTENANCE AND PROTECTION OF THE PROPERTY; LEASEHOLD. Borrower
shall not destroy, damage, or impair the Property, allow the Property to
deteriorate, or commit waste on the Property, Borrower shall be in default if
any forfeiture action or proceeding, whether civil or criminal, is begun that in
Lender's good faith judgment could result in forfeiture of the Property or
otherwise materially impair the lien created by this Security Instrument or
Lender's security interest. Borrower may cure such a default and reinstate, as
provided in paragraph 18, by causing the action or proceeding to be dismissed
with a ruling that, in Leader's good faith determination, precludes forfeiture
of the Borrower's interest in the Property or other material impairment of the
lien created by this Security Instrument or Lender's security interest.
7. PROTECTION OF LENDER'S RIGHTS IN THE PROPERTY. If Borrower fails to perform
the covenants and agreements contained in this Security Instrument or there is a
legal proceeding that may significantly affect Lender's rights in the Property
(such as a proceeding in bankruptcy, probate, for condemnation or forfeiture or
to enforce laws or regulations), then Lender may do and pay for whatever is
necessary to protect the value of the Property and Lender's rights in the
Property. Lender's actions may include paying any sums secured by a lien which
has priority over this Security Instrument, appearing in court, paying
reasonable attorney's fees and entering on the Property to make repairs.
Although Lender may take action under this paragraph 7, Lender does not have to
do so.
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Any amounts disbursed by Lender under this paragraph 7 shall become
additional debt of Borrower secured by this Security Instrument. Unless Borrower
and Lender agree to other terms of payment, these amounts shall bear interest
from the date of disbursement at the Debenture rate and shall be payable with
interest upon notice from Lender to Borrower requesting payment.
8. MORTGAGE INSURANCE. Intentionally Deleted.
9. INSPECTION. Lender or its agent may make reasonable entries upon and
inspections of the property. Lender shall give Borrower notice at the time of or
prior to an inspection specifying reasonable cause for the inspection.
10, CONDEMNATION. 'The proceeds of any award or claim for damages, direct or
consequential, in connection with any condemnation or other taking of any part
of the Property, or for conveyance in lieu of condemnation, am hereby assigned
and shall be paid to Lender.
In the event of a total taking of the Property, the proceeds shall be
applied to the sums secured by this Security Instrument whether or not then due,
with any excess paid to Borrower, In the event of a partial taking of the
Property in WHICH the fair market value of the Property immediately before the
taking is equal to or greater than the amount of the sums secured by this
Security Instrument immediately before the taking, unless Borrower and Lender
otherwise agree in writing. the sums secured by this Security Instrument shall
be reduced by the amount of the proceeds multiplied by the following fraction:
(a) the total amount of the sums secures immediately before the taking, divided
by (b) the fair market value of the Property immediately before the taking. Any
balance shall be paid to Borrower. In the event of a partial taking of the
Property in which the fair market value of the Property immediately before the
taking is less than the amount of sums secured immediately before the taking,
unless Borrower and Lender otherwise agree in writing or unless applicable law
otherwise provides, the proceeds shall be applied to the sums secured by this
security Instrument whether or not the sums are then due.
If the Property is abandoned by Borrower, or it after notice by Lender
to Borrower that the condemnor offers to make an award or settle a claim for
damages, Borrower fails to respond to Lender within 36 days after the date the
notice is given, Lender is authorized to collect and apply the proceeds, at its
option. either to restoration or repair of the Property or to the sums secured
by this Security Instrument; whether or not then due.
Unless Lender and Borrower otherwise agree in writing, any application
of proceeds to principal shall not extend or postpone the due date of the
payments referred to in paragraph 1 or change the amount of such payments.
11. BORROWER NOT RELEASED; FORBEARANCE BY LENDER NOT A WAIVER. Extension of the
time for payment or modification of amortization of the sums secured by this
Security Instrument granted by Lender to any successor in interest of Borrower
shall not operate to release the liability of the original Borrower or
Borrower's successors in interest. Lender shall not be required to commence
proceedings against any successor in interest or refuse to extend time for
payment or otherwise modify amortization of the sums secured by this Security
Instrument by reason of any demand made by the original Borrower or Borrower's
successors in interest. Any forbearance by Lender in exercising any right or
remedy shall not be a waiver of or preclude the exercise of any right or remedy.
12. SUCCESSORS AND ASSIGNS BOUND; JOINT AND SEVERAL LIABILITY; CO-SIGNERS. The
covenants and agreements of this Security Instrument shall bind and benefit the
successors and assignsof Lender and Borrower, subject to the provisions of
paragraph 17. Borrower's covenants and agreements shall be joint and several.
Any Borrower who co-signs this Security Instrument but does not execute the
Debenture: (a) is co-signing this Security Instrument only to mortgage, grant
and convey that Borrower's interest in the Property under the terms of this
security Instrument, (b) is not personally obligated to pay the sums secured by
this Security Instrument, and (c) agrees that Lender and any other Borrower may
agree to extend, modify, forbear or make any accommodations with regard to the
terms of this Security Instrument or the Debenture without that Borrower's
consent.
13. LOAN CHARGES. Intentionally Deleted.
14. NOTICES. Any notice to Borrower provided for in this Security Instrument
shall be given by delivering it or by mailing it by first class mail unless
applicable law requires use of another method. The notice shall be directed to
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the Property Address or any other address Borrower designates by notice to
Lender. Any notice to Lender shall be given by first class mail to Lender's
address state herein or any other address Lender designates by notice to
Borrower. Any notice provided for in this Security Instrument shall be deemed to
have been given to Borrower or Lender when given as provided in this paragraph.
15. GOVERNING LAW; SEVERABILITY. This Security Instrument "I he governed by
federal law and thelaw of the jurisdiction in which the Property is located. In
the event that any provision or clause of the Security Instrument or the
Debenture conflicts with applicable law, such conflict shall not affect other
provisions of this Security Instrument or the Debenture, which can be given
effect without the conflicting provision. To this end the provisions of this
Security Instrument and the Debenture are declared to be severable.
16. BORROWER'S COPY. Borrower shall be given one conformed copy of the Debenture
and of this Security Instrument.
17. TRANSFER OF THE PROPERTY OR A BENEFICIAL INTEREST IN BORROWER. If all or any
part of the property or any interest in it is sold or transferred (or if a
beneficial interest in Borrower is sold or transferred and
Borrower is not a natural person) without Lender's prior written consent Lender
may, at its option, require immediate payment in full of all sums secured by
this Security Instrument. However, this option shall not be exercised by Lender
if exercise is prohibited by federal law as of the date of this Security
Instrument.
If Lender exercises its option, Lender shall give Borrower notice of
acceleration. The notice shall provide a period of not less than 30 days from
the date the notice is delivered or mailed within which Borrower must pay all
sums secured by this Security Instrument, If Borrower fails to pay these sums
prior to the expiration of this period, Lender may invoke any remedies permitted
by this Security Instrument without further notice or demand on Borrower.
18. BORROWER'S RIGHT TO REINSTATE. If Borrower meets certain conditions,
Borrower Shall have the right to have enforcement of this Security Instrument
discontinued at any time prior to the earlierof (a) 5 days (or such other period
as applicable law may specify for reinstatement) before sale of the Property
pursuant to any power of sale contained in this Security Instrument or (b) entry
of a judgment enforcing this Security Instrument. Those conditions are that
Borrower: (a) pays Lender all sums which then would be due under this Security
Instrument and the Debenture as if no acceleration had occurred; (b) cures any
default of any other covenants or agreements; (c) pays all expenses incurred in
enforcing this Security Instrument, including, but not limited to, reasonable
attorneys' fees; and (d) takes such action as Lender may reasonably require to
assure that the lien of ibis Security Instrument, Lender's rights in the
Property and Borrower's obligation to paythe sums seemed by this Security
Instrument shall continue unchanged. Upon reinstatement by Borrower, this
Security Instrument and the obligations secured hereby shall remain fully
effective as if no acceleration had occurred- However, this right to reinstate
shall not apply in the case of acceleration under paragraph 17.
19. SALE OF DEBENTURE. Intentionally Deleted.
20. HAZARDOUS SUBSTANCES. Borrower shall not cause or permit the presence, use,
disposal, storage, or release of any Hazardous Substances on or in the Property.
Borrower shall not do, nor allowanyone else to do, anything affecting the
Property that is in violation of any Environmental Law. The preceding two
sentences shall not apply to the presence, use. or storage on the Property of
small quantities of Hazardous Substances that are generally recognized to be
appropriate to normal residential uses and to maintenance of the Property.
Borrower shall promptly give Lender written notice of any investigation,
claim, demand, lawsuit or other action by any governmental or regulatory agency
or private party involving tile Property and any Hazardous Substance or
Environmental Law of which Borrower has actual knowledge. If Borrower learns, or
is notified by any governmental or regulatory authority, That any removal or
other remediation of any Hazardous Substance affecting the Property is
necessary, Borrower shall promptly take all necessary remedial actions in
accordance with Environmental Law.
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As used in this paragraph 20, "Hazardous Substances" are those
substances defined as toxic or hazardous substances by Environmental Law and the
following substances: gasoline, kerosene, other flammable or toxic petroleum
products, toxic pesticides and herbicides, volatile solvents, materials
containing asbestos or formaldehyde, and radioactive materials. As used in this
paragraph 20, "Environmental Law" means federal laws and laws of the
jurisdiction where the Properly is located that relate to health, safety, or
environmental protection.
NON-UNIFORM COVENANTS. Borrower and Lender further covenant and agree
as follows.
21. ACCELERATION; REMEDIES. Lender shall give notice to Borrower prior to
acceleration following Borrower's breach of any covenant or agreement in this
Security Instrument (but not prior toacceleration under paragraph 17 unless
applicable law provides otherwise). 'Me notice shall specify: (a) the default,
(b) the action required to cure the default, (c) a date, not less than 30 days
from the date the notice is given to Borrower, by which the default must be
cured; and (d) that failure to cure the default on or before the date specified
in the notice may result in acceleration of the sums secured by this Instrument,
foreclosure by judicial proceeding and sale of the Property. The notice shall
further inform Borrower of the right to reinstate after acceleration and the
right to assert in the foreclosure proceeding the non-existence of a default or
any other defense of Borrower to acceleration and foreclosure. If the default is
not cured on or before the date specified in the notice, Lender, at its option.
may require immediate payment in full of all sums secured by this Security
instrument without further demand and may foreclose this Security Instrument by
judicial proceeding. Lender shall be entitled to collect all expenses incurred
in pursuing the remedies provided in this paragraph 2 1, including, but not
limited to, reasonable attorneys' fees and costs of title evidence.
22. RELEASE. This mortgage shall only be released after the Registration
Statement covering the Company's Common Stock underlying the Debentures, the
Series I Convertible Preferred Stock and the Series B Convertible Preferred
Stock has been declared effective AND upon the earlier of (a) the day the
Company qualifies for listing on AMEX or NASDAQ, and the Company has submitted
its application to be listed thereon 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, of funding pursuant
to the Subscription Agreement concerning the Debenture financing.
23. ATTORNEYS' FEES. As used in this Security Instrument and the Debenture,
"attorneys' fees" shall include any attorneys! fees awarded by an appellate
court.
BY SIGNING BELOW, Borrower accepts and agrees to the terms and
covenants contained in this Security Instrument and in any rider(s) executed by
Borrower and recorded with it.
Signed, sealed and delivered in the presence of:
WITNESSES: IMAGING DIAGNOSTIC
SYSTEMS, INC.
________________________ By: _____________________________
Witness Linda B. Grable, Its President
Duly authorized
________________________
Witness
The foregoing instrument was acknowledged before me this ___ day of April 1999,
by ______________ personally known to me or who has produced _______________ as
identification.
Print Name:
Notary Public
My Commission Expires:
PREPARED BY: of
5
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
CONVERTIBLE PREFERRED
SUBSCRIPTION AGREEMENT
----------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "ACT").
This Agreement has been executed by the undersigned in
connection with the private placement of the Series G Convertible Preferred
Stock (hereinafter referred to as the "PREFERRED STOCK") of IMAGING DIAGNOSTIC
SYSTEMS, INC. (NASDAQ symbol "IMDS"), located at 6531 NW 18th Court, Plantation,
FL 33313, a corporation organized under the laws of Florida, USA (hereinafter
referred to as the "COMPANY"). The terms on which the Preferred Stock may be
converted into Common Stock and the other terms of the Preferred Stock are set
forth in the Certificate of Designation annexed hereto as Exhibit A. In
addition, the Company will sell to the Subscribers an aggregate of Sixty Five
Thousand Six Hundred Twenty Five (65,625) Warrant's to purchase Common Stock
commencing on the Closing Date (as defined below) for a period of two (2) years
thereafter, as per the terms of Warrant annexed hereto as Exhibit B. The Company
shall issue to Settondown Capital International, Ltd. and Libra Finance SA
(collectively the "PLACEMENT AGENT"), in return for services rendered (in
addition to fees set forth in the Escrow Agreement), the number of shares of
Preferred Stock equal to seven and one half (7.5%) percent of the number of
shares of Preferred Stock issued to the Purchasers pursuant to the terms of the
Subscription Agreement. This Subscription and, if accepted by the Company, the
offer and sale of the Preferred Stock (the "SHARES"), the issuance of the
Warrants, and the shares Common Stock underlying both the Preferred Stock and
Warrants (collectively the "SECURITIES"), are being made in reliance upon the
provisions of Regulation D under the Act.
The undersigned entities listed on Schedule A annexed hereto
(hereinafter collectively referred to as "SUBSCRIBERS" or the "PURCHASERS"),
hereby represents and warrants to, and agrees with the Company as follows:
1. AGREEMENT TO SELL, ISSUE, AND PURCHASE THE SECURITIES.
(a) The Company will sell and the Purchasers will buy
Preferred Stock and Warrants, and the Company will issue to the Placement Agent
the number of shares of Preferred Stock equal to seven and one half (7.5%)
percent of the number of shares of Preferred Stock issued to the Purchasers
pursuant to the terms of the Subscription Agreement and Warrants to Purchase
sixty five thousand six hundred twenty five (65,625) shares of Common Stock, in
reliance upon the representations and warranties of the Company, Placement
Agent, and Purchasers contained in this Agreement, upon the terms and conditions
hereinafter set forth in this Agreement and all Exhibits annexed hereto an
aggregate of thirty eight (38) shares of Preferred Stock and Warrant's to
purchase sixty five thousand six hundred twenty five (65,625) shares of Common
Stock, for an aggregate purchase price of Three Hundred Fifty Thousand
($350,000) U.S. Dollars based on U.S. $10,000 per share (the "PURCHASE PRICE").
(b) FORM OF PAYMENT. Subscribers shall pay the Purchase Price
by delivering good funds in United States Dollars by wire transfer to The
Goldstein Law Group, P.C., the "ESCROW AGENT", against delivery of the original
Preferred Stock and Warrants as per the separate Escrow Agreement annexed hereto
as Exhibit C, as payment in full for the Securities.
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2.REPRESENTATION AND WARRANTIES OF THE SUBSCRIBERS AND THE
PLACEMENT AGENT. Each of Subscribers, and the Placement Agent, acknowledges,
represents, warrants and agrees as follows:
(a) ORGANIZATIONS AND AUTHORIZATION. Each of the Subscribers,
and the Placement Agent, are duly incorporated or organized and validly existing
in the country of their incorporation or organization and has all requisite
power and authority to purchase and hold the Securities. The decision to invest
and the execution and delivery of this Agreement by each of the Subscribers and
the Placement Agent, the performance by each of the Subscribers, and the
Placement Agent, of their obligations hereunder and the consummation by each of
the Subscribers and the Placement Agent of the transactions contemplated hereby
have been duly authorized and requires no other proceedings on the part of the
Subscribers or the Placement Agent. The Undersigned's signatory has all right,
power and authority to execute and deliver this Agreement on behalf of the
Subscribers and the Placement Agent. This Agreement has been duly executed and
delivered by the Subscribers and the Placement Agent, and, assuming the
execution and delivery hereof and acceptance thereof by the Company, will
constitute the legal, valid and binding obligations of the Subscribers and the
Placement Agent, enforceable against the Subscribers and the Placement Agent in
accordance with its terms.
(b) EVALUATION OF RISKS. The Subscribers and the Placement
Agent have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of, and bearing the economic risks
entailed by, an investment in the Company and of protecting its interests in
connection with this transaction. It recognizes that its investment in the
Company involves a high degree of risk.
(c) INDEPENDENT COUNSEL. Each of the Subscribers and the
Placement Agent acknowledges that it has been advised to consult with its own
attorney regarding legal matters concerning the Company and to consult with its
tax advisor regarding the tax consequences of acquiring the Securities.
(d) NO REGISTRATION. Each of the Subscribers and the Placement
Agent acknowledge and understand that the limited private offering and sale and
issuance of Securities pursuant to this Agreement has not been reviewed or
approved by the SEC or by any state securities commission, authority or agency,
and is not registered under the Act or under the securities or "blue sky" laws,
rules or regulations of any state. Each of the Subscribers and the Placement
Agent acknowledge, understand and agree that the Securities are being offered
and sold hereunder pursuant to (i) a private placement exemption to the
registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of
such Act and Regulation D promulgated under such Act, and (ii) a similar
exemption to the registration provisions of applicable state securities laws.
(e) SUBSCRIBERS AND THE PLACEMENT AGENT ARE ACCREDITED
INVESTORS. The Subscribers and the Placement Agent are each an "Accredited
Investor" as defined below who represents and warrants it is included within one
or more of the following categories of "Accredited Investors."
(i) Any bank as defined in Section 3(a)(2) of the
Act, or any savings and loan associated or other institution as defined
in Section 3(a)(5)A of the Act whether acting in it individual or
fiduciary capacity; any broker or dealer registered pursuant to Section
15 of the 1934 Act; any insurance company as defined in Section 2(13)
of the Act; any investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivision, for the
benefits of its employees if such plan has total assets in excess of
$5,000,000; and employee benefit plan within the meaning of Title I of
the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons
that are accredited investors;
(ii) Any private business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
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(iii) Any organization described in Section 501(c)(3)
of the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess of
$5,000,000;
(iv) Any director, executive officer, or general
partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of
that issuer;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his purchase
exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Section 230.506(b)(2)(ii) of Regulation D under
the Act;
(viii) Any entity in which all of the equity owners
are accredited investors; and
(ix) Any self-directed employee benefit plan with
investment decisions made solely by persons that are accredited
investors within the meaning of Rule 501 of Regulation D promulgated
under the Act.
(f) INVESTMENT INTENT. Without limiting its ability to resell
the Securities pursuant to an effective registration statement, Subscribers are
acquiring the Securities solely for their own account and not with a view to the
distribution, assignment or resale to others. Subscribers understand and agree
that they may bear the economic risk of their investment in the Securities for
an indefinite period of time. Subscribers do not now have or, in the future,
will not take any short position or hedge position in the Company's Common Stock
for so long as any portion of that Subscriber's Preferred Stock remains
outstanding. Notwithstanding the foregoing, the Subscribers and Placement Agent
may enter into a short or hedge position provided that such short or hedge
position is limited to the number of shares of Common Stock the Subscribers or
Placement Agent would receive upon any particular conversion of Preferred Stock
by the Subscribers or Placement Agent and (b) such short or hedge position would
be limited to the number of shares of Common Stock received upon any exercise of
the Warrants associated with this transaction.
(g) TRANSFER RESTRICTIONS. See Certificate of Designation
annexed hereto as Exhibit A.
(h) REGISTRATION RIGHTS. The parties have entered into a
Registration Rights Agreement (Exhibit D).
(i) NO ADVERTISEMENTS. The Subscribers and the Placement Agent
are not subscribing for the Securities as a result of, or subsequent to, any
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio, or
presented at any seminar or meeting.
(j) As required by Florida Law, the Subscribers and the
Placement Agent also acknowledge and agree that:
(i) The Subscribers have been furnished with, and
understand the terms of this Agreement. With respect to tax and other
economic considerations involved in his investment, the Subscribers are
not relying on the Company. The Subscribers have carefully considered
and has, to the extent the undersigned believes such discussion
necessary, discussed with the Subscriber's professional legal, tax,
accounting and financial advisors the suitability of an investment in
the Company, by purchasing the Securities, for the Subscriber's
particular tax and financial situation and has determined that the
investment being made by the undersigned is a suitable investment for
each Subscriber.
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(ii) The Subscribers acknowledge that all documents,
records, and books pertaining to this investment which the Subscribers
have requested have been made available for inspection by the
Subscribers.
(iii) The Subscribers have had a reasonable
opportunity to ask questions of and receive answers from a person or
persons acting on behalf of the Company concerning this Agreement and
all such questions have been answered to the full satisfaction of the
Subscribers.
(iv) The Subscribers will not sell or otherwise
transfer the Securities without registration under the Act or
applicable state securities laws or an exemption therefrom. The
Securities have not been registered under the Act or under the
securities laws of certain states.
(v) Without limiting their ability to transfer the
Securities, the Subscribers represent that they are purchasing the
Securities for the undersigned's own account, for investment and not
with a view to resale or distribution except in compliance with the
Act. The Subscribers have not offered or sold any portion of the
Securities being acquired nor does the undersigned have any present
intention of dividing the Securities with others or of selling,
distributing or otherwise disposing of any portion of the Securities
either currently or after the passage of a fixed or determinable period
of time or upon the occurrence or non-occurrence of any predetermined
event or circumstance in violation of the Act. Except as provided
herein and in the Registration Rights Agreement, the Company has no
obligation to register the Securities.
(vi) The Subscribers recognize that an investment in
the Securities involves substantial risks, including loss of the entire
amount of such investment.
(vii) Legends (i) The Subscribers acknowledge that
each certificate representing the Securities unless registered (or an
exemption from registration exists), shall be stamped or otherwise
imprinted with a legend substantially in the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT
(OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
NOTWITHSTANDING THE FOREGOING, THE COMMON STOCK IS ALSO
SUBJECT TO THE REGISTRATION RIGHTS SET FORTH IN THAT CERTAIN
SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS AGREEMENT BY
AND BETWEEN THE HOLDER HEREOF AND THE COMPANY, A COPY OF EACH
IS ON FILE AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE.
(viii) The Subscribers acknowledge and agree that it
shall not be entitled to seek any remedies with respect to this
transaction from any party other than the Company.
(ix) The Subscribers are purchasing the Securities
for their own account for investment, and not with a view toward the
resale or distribution thereof. Subscribers are neither an underwriter
of, nor a dealer in, the Securities and are not participating in the
distribution or resale of the Securities.
(x) In making an investment decision, Subscribers
must rely on their own examination of the Company and the terms of this
offering, including the merits and risks involved. The Securities have
not been recommended by any Federal or State Securities Commission or
Regulatory Authority. Furthermore, the foregoing authorities have not
confirmed the accuracy or determined the adequacy of this document. Any
representation to the contrary is a criminal offense.
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(xi) The Regulation D Offering is intended to be
exempt from registration under the Act by virtue of Section 4(2) of the
Act and the provisions of Regulation D thereunder, which is in part
dependent upon the truth, completeness and accuracy of the statements
made by the undersigned herein.
(xii) The Subscribers acknowledge and are aware that
except for the three day rescission rights provided under Florida law,
the Subscribers are entitled to cancel, terminate or revoke this
subscription, and any agreements made in connection herewith shall
survive my death or disability.
(xiii) The Subscribers have had the opportunity to
ask questions of, and receive answers from management of the Company
regarding the terms and conditions of this Subscription Agreement, and
the transactions contemplated thereby, as well as the affairs of the
Company and related matters.
(xiv) The Subscribers understand that they may have
access to whatever additional information concerning the Company, its
financial condition, its business, its prospects, its management, its
capitalization, and other similar matters that they may desire,
provided that the Company can acquire such information without
unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a)
thereunder, the Subscribers understand that they may have, at the
offices of the Company, at any reasonable hour, after reasonable prior
notice, access to the materials set forth in the aforementioned Rule
which the Company can obtain without unreasonable effort or expense.
(xv) The Subscribers have had the opportunity to
obtain additional information necessary to verify the accuracy of the
information referred to above.
3. GENERAL REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to, and covenants with, the Subscribers and the
Placement Agent that the following are true and correct as of the date hereof
and as of the Closing Date.
(a) ORGANIZATION; QUALIFICATION. The Company is a corporation
duly organized and validly existing under the laws of the State of Florida and
is in good standing under such laws. The Company has all requisite corporate
power and authority to own, lease, and operate its properties and assets, and to
carry on its business as presently conducted. The Company is qualified to do
business as a foreign corporation in each jurisdiction in which the ownership of
its property or the nature of its business requires such qualification, except
where failure to so qualify would not have a material adverse effect on the
Company.
(b) CAPITALIZATION. As of February 28, 1999 the authorized
capital stock of the Company consists of 100,000,000 shares of Common Stock, no
par value per share, of which 39,381,401 are outstanding, 20,000,000 shares of
non-voting Preferred Stock, no par value, of which the only shares of non-voting
Preferred Stock outstanding as of February 28, 1999 are as follows: 450 shares
of Series B Convertible Preferred Stock, 103 shares of Series H Convertible
Preferred Stock and 43 shares of non-voting Preferred Stock which are designated
as Series G Convertible Preferred Stock. All issued and outstanding shares of
Common Stock have been duly authorized and validly issued and are fully paid and
nonassessable.
(c) AUTHORIZATION. The Company has all requisite corporate
right, power, and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, sale, issuance and delivery of the Shares and the
performance of the Company's obligations hereunder has been taken. This
Agreement (including all Exhibits annexed hereto) has been duly executed and
delivered by the Company and constitutes a legal, valid and binding obligation
of the Company enforceable in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies, and to limitations of public policy as they may apply to the
indemnification provisions set forth in Section 4(d) of this Agreement. Upon
their issuance and delivery pursuant to this Agreement, the Shares will be
validly issued, fully paid and nonassessable and will be free of any liens or
encumbrances; provided, however, that the Shares are subject to restrictions on
transfer under state and/or federal securities laws. The issuance and sale of
the Shares will not give rise to any preemptive right or right of first refusal
or right of participation on behalf of any person.
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(d) NO CONFLICT. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a material adverse
effect on the Company's business and financial condition.
(e) NO UNDISCLOSED LIABILITIES OR EVENTS. The Company has no
liabilities or obligations other than those disclosed in the Form 10-KSB, Form
10-QSBs, Form 8-K, Proxy Statement and registration statements filed by the
Company for a period of at least twelve (12) months immediately preceding this
offer (the "REPORTS"), this Agreement or those incurred in the ordinary course
of the Company's business since January 1, 1998, and which individually or in
the aggregate, do not or would not have a material adverse effect on the
properties, business, condition (financial or otherwise), results of operations
or prospects of the Company. No event or circumstance has occurred or exists
with respect to the Company or its properties, business, condition (financial or
otherwise), results of operations or prospects, which, under applicable law,
rule or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or disclosed.
(f) NO DEFAULT. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement or the
transaction documents, including the conversion provision of the Preferred
Stock, will conflict with or result in the breach or violation of any of the
terms or provisions of, or constitute a default or result in the creation or
imposition of any lien or charge on any assets or properties of the Company
under, any material indenture, mortgage, deed of trust or other material
agreement applicable to the Company or instrument to which the Company is a
party or by which it is bound or any statute or the Memorandum or Articles of
the Company, or any decree, judgment, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or its
properties, or the Company's listing agreement for its Common Stock.
(g) ABSENCE OF EVENTS OF DEFAULT. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreement to which the Company is a party, and no event which, with the giving
of notice or the passage of time or both, would become an Event of Default (as
so defined), has occurred and is continuing, which would have a material adverse
effect on the Company's business, properties, prospects, condition (financial or
otherwise) or results of operations.
(h) GOVERNMENTAL CONSENT, ETC. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Shares, or the consummation of any other transaction contemplated hereby.
(i) INTELLECTUAL PROPERTY RIGHTS. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and there is no claim being made against the Company regarding any trademark,
trade name, patent, copyright, license, trade secret or other intellectual
property right which could have a material adverse effect on the business or
financial condition of the Company.
(j) MATERIAL CONTRACTS. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect the Company is not in material breach
or material default under any of such agreements.
(k) LITIGATION. Except as disclosed in the Reports, there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
conditions, affairs or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
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(l) TITLE TO ASSETS. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
(m) SUBSIDIARIES. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
(n) REQUIRED GOVERNMENTAL PERMITS. The Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect.
(o) LISTING. The Company will maintain the listing of its
Common Stock on the OTC Bulletin Board or other organized United States market
or Quotation system. The Company has not received any notice, oral or written,
regarding continued listing and, as long as the Debentures are outstanding, the
Company will take no action, which would impact their continued listing or
eligibility of the Company for such listing.
(p) OTHER OUTSTANDING SECURITIES/FINANCING RESTRICTIONS. Other
than warrants and options to acquire shares of Common Stock as disclosed in the
Reports, options issued to certain employees in January, 1998 pursuant to the
Company's stock option plan, and an aggregate of 750,000 options recently issued
to the Company's officers and directors, and except as disclosed in the reports
there are no other outstanding securities, debt or equity presently convertible
into Common Stock. Except as disclosed in the Reports, the Company has no
outstanding restricted shares, or shares of Common Stock sold under Regulation
S, Regulation D or outstanding under any other exemption from registration,
which are available for sale as unrestricted ("free trading") stock.
(q) USE OF PROCEEDS. The Company represents that the net
proceeds from this offering will be used for working capital.
(r) ACCURACY OF REPORTS AND INFORMATION. The Company is in
full compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12(g) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), and shall maintain such status on a timely basis.
The Company has registered its Common Stock pursuant to Section 12 of the
Exchange Act and the Common Stock trades on the OTC Bulletin Board.
(s) FURTHER REPRESENTATIONS AND WARRANTIES OF THE COMPANY. For
so long as any Securities held by any of the Subscribers and the Placement Agent
remain outstanding, the Company acknowledges, represents, warrants and agrees as
follows:
(i) It will use its best efforts to maintain the
listing of its Common Stock on the OTC Bulletin Board or other
organized United States market or quotron systems.
(ii) It will permit the Subscribers to exercise its
right to convert the Preferred Stock by telecopying an executed and
completed Notice of Conversion to the Company and delivering the
original Notice of Conversion and the certificate representing the
Preferred Stock to the Company by express courier. Each business date
on which a Notice of Conversion is telecopied to and received by the
Company in accordance with the provisions hereof shall be deemed a
conversion date. The Company will transmit the certificates
representing shares of Common Stock issuable upon conversion of any
Preferred Stock (together with the certificates representing the
Preferred Stock not so converted) to the Subscriber via express
courier, by electronic transfer or otherwise within five business days
after the conversion date if the Company has received the original
Notice of Conversion and Preferred Stock certificate being so converted
by such date. In addition to any other remedies which may be available
to the Subscriber, in the event that the Company fails for any reason
to effect delivery of such shares of Common Stock within five business
days from the date of delivery of the Preferred Stock and original
Notice of Conversion, the Subscriber will be entitled to revoke the
relevant Notice of conversion by delivering a notice to such effect to
the Company whereupon the Company and the Subscriber shall each be
restored to their respective positions immediately prior to delivery of
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<PAGE>
such Notice of Conversion. Liquidated damages under this Section 3(ii)
shall continue to run from the sixth (6th) business day from the
original Conversion Date up until the time that the Notice of
Conversion is revoked or the Common Stock has been delivered, at which
time liquidated damages shall cease. The Notice of Conversion and
Preferred Stock representing the portion of the Shares converted shall
be delivered as follows:
To the Company:
Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, FL 33313
Fax: (954) 581-0555
In the event that the Common Stock issuable upon conversion of
the Preferred Stock is not delivered within seven (7) business days of receipt
by the Company of a valid Conversion Notice and the Preferred Stock to be
converted (such date of receipt referred to as the "CONVERSION DATE"), the
Company shall pay to the Purchaser, in immediately available funds, upon demand,
as liquidated damages for such failure and not as a penalty, for each $100,000
of Preferred Stock sought to be converted, $500 for each of the first ten (10)
days and $1,000 per day thereafter that the Conversion Shares are not delivered,
which liquidated damages shall run from the eighth (8th) business day after the
Conversion Date. Any and all payments required pursuant to this paragraph shall
be payable only in shares of Common Stock and not in cash. The number of such
shares shall be determined by dividing the total sum payable by the Conversion
Price.
(u) SEC FILINGS/FULL DISCLOSURE. For a period of at least
twelve (12) months immediately preceding this offer and sale, none of the
Company's filings with the Securities and Exchange Commission contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading. The Company has timely
filed all requisite forms, reports and exhibits thereto with the Securities and
Exchange Commission.
(v) FULL DISCLOSURE. There is no fact known to the Company
(other than general economic conditions known to the public generally) that has
not been disclosed in writing to the Subscriber or the Placement Agent that (i)
could reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or in the earnings, business affairs, business
prospects, properties or assets of the Company, or (ii) could reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement.
(w) OPINION OF COUNSEL. Purchaser shall, upon purchase of the
Shares, receive an opinion letter from counsel to the Company, and the Company
represents that it will immediately obtain such an opinion from counsel to the
satisfaction of the Transfer Agent, to the effect that:
(i) The Company is incorporated and validly existing
in the jurisdiction of its incorporation. The Company and/or its
subsidiaries are duly qualified to do business as a foreign corporation
and is in good standing in all jurisdictions where the Company and/or
its subsidiaries owns or leases properties, maintains employees or
conducts business, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company, and
has all requisite corporate power and authority to own its properties
and conducts its business.
(ii) There is no action, proceeding, or investigation
pending, or to such counsel's knowledge, threatened against the
Company, which might result, either individually or in the aggregate,
in any material adverse change in the business or financial condition
of the Company.
(iii) To counsel's knowledge, the Company is not a
party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or
instrumentality.
(iv) To counsel's knowledge, there is no action,
suit, proceeding or investigation by the Company currently pending.
8
<PAGE>
(v) The Preferred Stock, which shall be issued at the
closing, will be duly authorized and validly issued under the laws of
the Company's State of Incorporation.
(vi) The Subscription Agreement (including all
Exhibits annexed thereto), the issuance of the Shares and the issuance
of Common Stock, upon conversion of the Shares, have been duly approved
by all required corporate action and that all such securities, upon
delivery, shall be validly issued and outstanding, fully paid and
nonassessable
(vii) The issuance of the Shares will not violate the
applicable listing agreement between the Company and any securities
exchange or market on which the Company's securities are listed.
(viii) Assuming the accuracy of the representation
and warranties of the Company and the Purchaser set forth in this
Subscription Agreement, the offer, issuance and sale of the Convertible
Preferred Stock and Conversion Shares to be issued upon exercise to the
Purchaser pursuant to this Purchase Agreement are exempt from the
registration requirements of the Securities Act.
(ix) As of February 28, 1999 the authorized capital stock of
the Company consists of 100,000,000 shares of Common Stock, no par
value per share, of which 39,381,401 are outstanding, 20,000,000 shares
of non-voting Preferred Stock, no par value, of which the only shares
of non-voting Preferred Stock outstanding as of February 28, 1999 are
as follows: 450 shares of Series B Convertible Preferred Stock, 103
shares of Series H Convertible Preferred Stock and 43 shares of
non-voting Preferred Stock which are designated as Series G Convertible
Preferred Stock. All issued and outstanding shares of Common Stock have
been duly authorized and validly issued and are fully paid and
nonassessable.
(x) The Common Stock is registered pursuant to
Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934,
as amended, and the Company has timely filed all the material required
to be filed pursuant to Sections 13(a) or 15(d) of such Act for a
period of at least twelve months preceding the date hereof.
(xi) The Company has the requisite corporate power
and authority to enter into the Agreements and to sell and deliver the
Securities and the Common Stock to be issued upon the conversion of the
Securities as described in the Agreements; each of the Agreements has
been duly and validly authorized by all necessary corporate action by
the Company to our knowledge, no approval of any governmental or other
body is required for the execution and delivery of each of the
Agreements by the Company or the consummation of the transactions
contemplated thereby; each of the Agreements has been duly and validly
executed and delivered by and on behalf of the Company, and is a valid
and binding agreement of the Company, enforceable in accordance with
its terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights
generally, and except as to compliance with federal, state and foreign
securities laws, as to which no opinion is expressed.
(xii) To the best of our knowledge, after due
inquiry, the execution, delivery and performance of the Agreements by
the Company and the performance of its obligations thereunder do not
and will not constitute a breach or violation of any of the terms and
provisions of, or constitute a default under or conflict with or
violate any provision of (i) the Company's Certificate of Incorporation
or By-Laws, (ii) any indenture, mortgage, deed of trust, agreement or
other instrument to which the Company is a party or by which it or any
of its property is bound, (iii) any applicable statute or regulation,
(iv) or any judgment, decree or other of any court or governmental body
having jurisdiction over the Company or any of its property.
(x) OPINION OF COUNSEL. The Company will obtain for each of
the Subscribers, and the Placement Agent, at the Company's expense, any and all
opinions of counsel which may be required in order to convert, exercise or sell
the Securities, including, but not limited to, obtaining for each of the
Subscribers, at the Company's expense an opinion of counsel, subject only to
receipt of a Notice of Conversion in the Form of Exhibit E, duly executed by the
particular Subscriber which shall be satisfactory to the Transfer Agent,
directing the Transfer Agent to remove the legend.
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(y) MANDATORY CONVERSION. In the event the Shares have not
been converted two (2) years from the Closing Date, the Shares shall
automatically be converted as if the Purchaser voluntarily elected such
conversion in accordance with the procedure, terms and conditions set forth in
this Agreement.
(z) Acknowledgment of DILUTION. The Company is aware and
acknowledges that conversion of the Preferred Stock and/or exercise of the
Warrants could cause dilution to existing shareholders and could significantly
increase the outstanding number of shares of Common Stock, and which dilution
may be substantial under certain market conditions. The Company further
acknowledges that its obligation to shares of Common Stock in accordance with
the Certificate of Designation and Warrants is unconditional and absolute
regardless of the effect of any such dilution.
(aa) INSURANCE. The Company is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company is engaged. The Company has no notice to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires, or obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operation, of the Company.
(bb) In the event a holder shall elect to convert any share or
shares of Preferred Stock as provided herein, the Company cannot refuse
conversion based on any claim that such holder or any one associated or
affiliated with such holder has been engaged in any violation of law, unless an
injunction form a court, on notice, restraining and or enjoining conversion of
all or part of said shares of Preferred stock shall have been issued.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE
PLACEMENT AGENT, AND SUBSCRIBERS. Each of Subscribers, Placement Agent, and the
Company, represent to the other the following with respect to itself:
(a) SUBSCRIPTION AGREEMENT. This Subscription Agreement has
been duly authorized, validly executed and delivered on behalf of the Company,
the Placement Agent, and each Subscriber, and is a valid and binding agreement
in accordance with its terms, subject to general principles of equity and to
bankruptcy or other laws affecting the enforcement of creditors' rights
generally.
(b) NON-CONTRAVENTION. The execution and delivery of the
Subscription Agreement (including all Exhibits annexed hereto) and the
consummation of the issuance of the Securities and the transaction contemplated
by the Subscription Agreement do not and will not conflict with or result in a
breach by the Company, the Placement Agent, or any Subscriber of any of the
terms or provisions of, or constitute a default under, the articles of
incorporation or by-laws of the Company, the Placement Agent, or any of the
Subscribers, or any indenture, mortgage, deed of trust of other material
agreement or instrument to which the Company, the Placement Agent, or any of the
Subscribers is a party or by which it or any of its properties or assets are
bound, or any existing applicable law, rule or regulation or any applicable
decree, judgment or order of any court, Federal or State regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company, and the Placement Agent, or any of the Subscribers or any of its
properties or assets.
(c) APPROVALS. Neither the Company, the Placement Agent, nor
any of the Subscribers is aware of any authorization, approval, or consent of
any governmental body, which is legally required for the issuance, and sale of
the Securities.
(d) INDEMNIFICATION. Each of the Company, the Placement Agent,
and the Subscribers agrees to indemnify the other and to hold the other harmless
from and against any and all losses, damages, liabilities, costs and expenses
(including reasonable attorneys' fees) which the other may sustain or incur in
connection with the breach by the indemnifying party of any representation,
warranty or covenant made by it in this Agreement.
5. RESTRICTIONS ON CONVERSION OF PREFERRED STOCK. The
Subscribers or any subsequent holder of the Preferred Stock (the "HOLDER") shall
be prohibited from converting any portion of the Preferred Stock which would
result in any Holder owning 4.99% or more of the then issued and outstanding
Common Stock of the Company.
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6. REDEMPTION. In the event the Registration Statement (as
defined in the Registration Rights Agreement) is not declared effective on or
before the 120th calendar day after the Closing Date (if such date is not a
business day then the next business day immediately thereafter), and for so long
as the Company has not received a Notice of Conversion for such shares, the
Company must, repay, in whole, all shares of Preferred Stock then outstanding at
the Redemption Price (as defined below). The Preferred Stock is redeemable as a
series, in whole or in part, by the Company by providing written notice (the
"REDEMPTION NOTICE") to the holder of the Preferred Stock via facsimile at his
or her address as the same shall appear on the books of the Company (the
Business Day between the hours of 9:00 a.m. and 5:00 Eastern Time, and date the
Redemption Notice is received by the Holders via facsimile is defined to be the
"REDEMPTION NOTICE DATE"). Within three business days after the Redemption
Notice Date the Company shall make payment of the Redemption Price (as defined
below) in immediately available funds to the Holder for the shares of Preferred
Stock which are the subject of the Redemption Notice (such date of payment
referred to as the "REDEMPTION DATE"). The "Redemption Price" shall be equal to
125% of the Stated Value of the shares of Preferred Stock which are subject to
such Redemption Notice, plus all accrued but unpaid dividends on such shares.
The Notice of Redemption shall set forth (i) the Redemption Date and the place
fixed for redemption, (ii) the Redemption Price, and (iii) a statement that
dividends on the shares of Preferred Stock to be redeemed will cease to accrue
on such Redemption Date, and (iv) a statement of or reference to the conversion
right set forth herein. Within three business days after the Notice of
Redemption Date, the Company shall wire transfer the appropriate amount of funds
to the holders of the Preferred Stock. The Holders shall send the shares of
Preferred Stock being redeemed to the Company within three Business Days after
they have received good funds for the Redemption Price of such shares.
Subject to the receipt by the Holders of the Preferred Stock
being redeemed of the wire transfer of the Redemption Price as described in
above, each share of Preferred Stock to be redeemed shall be automatically
canceled and converted into a right to receive the Redemption Price, and all
rights of the Preferred Stock, including the right to conversion shall cease
without further action.
7. STOCK DELIVERY INSTRUCTIONS/LEGEND. The Preferred Stock
Certificates shall be delivered to Escrow Agent on a delivery versus payment
basis as set forth in the Escrow Agreement.
The Certificate or Certificates representing the Shares shall
be subject to a legend restricting transfer under the Securities Act of 1933,
such legend to be substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION UNDER SAID ACT."
8. CLOSING DATE. The date of the issuance and receipt of
Securities and Purchase Price, as well as the satisfaction of the conditions set
forth in Sections 9 and 10 herein (the "CLOSING DATE"), shall be mutually agreed
upon as to time and place. Both parties agree and acknowledge that time is of
the essence concerning the closing of the deal.
9. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Each of the
Subscribers understands that the Company's obligation to sell the Preferred
Stock are conditioned upon:
(a) The receipt and acceptance by the Company of this
Subscription Agreement and all Exhibits thereto by an authorized officer; and
(b) Delivery into escrow by Subscribers of good funds as
payment in full for the purchase of the Securities, as well as copies of
executed stock powers which originals shall be forwarded immediately to Escrow
Agent; and
(c) All representations and warranties of the Subscribers
shall remain true and correct as of the Closing Date.
11
<PAGE>
10. CONDITIONS TO SUBSCRIBER'S OBLIGATION TO PURCHASE. The
Company understands that Subscriber's obligation to purchase the Preferred Stock
is conditioned upon:
(a) Acceptance by Subscribers of a satisfactory Subscription
Agreement and all Exhibits hereto for the sale of the Securities;
(b) Delivery of the original Preferred Stock and Warrants as
described herein;
(c) All representations and warranties of the Company shall
remain true and correct as of the Closing Date;
(d) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and the Warrants, or shall have the availability of
exemptions therefrom;
(e) the sale and issuance of the Preferred Stock and Warrants,
and the proposed issuance of the shares of Common Stock underlying the
Preferred Stock and Warrants shall be legally permitted by all laws and
regulations to which the Investors and the Company are subject; and all
duly executed Exhibits hereto for the sale of the Securities;
(f) Receipt of opinion of counsel; and
(g) Written proof that the Certificate of Designation for the
Preferred Stock has been filed with the Secretary of State for the
State of Florida.
(h) the Company shall not be in default of any material
covenant, representation, and/or warranty contained in this Agreement
or any Exhibit annexed hereto; and
(i) payment of all fees as set forth in below and the Escrow
Agreement.
11. MISCELLANEOUS.
(a) This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of Florida, except for
matters arising under the Act, without reference to principles of conflicts of
law. The party who initiates legal action shall choose the jurisdiction of the
federal courts or the state courts in connection with any dispute arising under
this Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on FORUM NON CONVENIENS, to the
bringing of any such proceeding in such jurisdictions. Each party waives its
right to a trial by jury. Each party hereby agrees that if another party to this
Agreement obtains a judgment against it in such a proceeding, the party which
obtained such judgment may enforce same by summary judgment in the courts of any
country having jurisdiction over the party against whom such judgment was
obtained, and each party hereby waives any defenses available to it under local
law and agrees to the enforcement of such a judgment. Each party to this
Agreement irrevocably consents to the service of process in any such proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to such party at its address set forth herein. Nothing herein shall
affect the right of any party to serve process in any other manner permitted by
law.
(b) If for any reason the transactions contemplated by this
Agreement are not consummated, each of the parties hereto shall keep
confidential any information obtained from any other party (except information
publicly available or in such party's domain prior to the date hereof, and
except as required by court order) and shall promptly return to the other
parties all schedules, documents, instruments, work papers or other written
information, without retaining copies thereof, previously furnished by it as a
result of this Agreement or in connection herewith.
(c) In lieu of the original, a facsimile transmission or copy
of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document.
12
<PAGE>
(d) This Agreement and Exhibits hereto constitute the entire
agreement between the Subscriber and the Company with respect to the subject
matter hereof. This Agreement may be amended only by a writing executed by both
of them.
(e) Each of the Subscribers, and the Placement Agent,
represents to the Company that the representations and warranties of each of the
Subscribers and the Placement Agent, contained herein are complete and accurate
and may be relied upon by the Company in determining the availability of an
exemption from registration under federal and state securities laws in
connection with a private offering of securities.
(f) In the event that any provision of this Agreement becomes
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without said
provision; provided that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
(g) Each of the Company and the Subscribers agrees to keep
confidential and not to disclose to or use for the benefit of any third party
the terms of this Agreement or any other information which at any time is
communicated by the other party as being confidential without the prior written
approval of the other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already part of the
public domain (except by breach of this Agreement) and information which is
required to be disclosed by law.
(h) Each of the parties shall pay its own fees and expenses
(including the fees of any attorneys, accountants, appraisers or others engaged
by such party) in connection with this Agreement and the transactions
contemplated hereby, except that the Company shall pay $5,000 administrative,
legal and escrow fees pursuant to the Escrow Agent and, the number of shares of
Preferred Stock equal to seven and one half (7.5%) percent of the total number
of shares of Preferred Stock issued to the Subscribers, and a Warrant to
purchase 65,625 shares of Common Stock as Placement Agent Fees.
(i) Deleted
IN WITNESS WHEREOF, this Subscription Agreement was duly
executed on the date first written below.
Agreed to and Accepted as of the
16th day of March, 1999
IMAGING DIAGNOSTIC SYSTEMS, INC.
By:____________________________
Linda B. Grable, President AMRO INTERNATIONAL, S.A.,
Purchaser
By:___________________________
NESHER INC., Purchaser
By:___________________________
HEWLETT FUND, Purchaser
By:___________________________
GUARANTY & FINANCE LTD.,
Purchaser
By:___________________________
LIBRA FINANCE SA,
Placement Agent
By:___________________________
SETTONDOWN CAPITAL INTER-
NATIONAL, LTD.
Placement Agent
By:___________________________
Anthony L.M. Inder Riden
13
<PAGE>
SCHEDULE A
1. AMRO INTERNATIONAL, S.A.
c/o Ultra Finanz
Grossmunsterplatz 6
Zurich CH 8022, SwitzerlandFacsimile: 011-411-262-5515
Attention: H.U. Bachofen, Director
Investment Amount: $150,000
No. of Shares of Preferred Stock: 15
No. of shares of Common Stock
underlying Warrant: 32,175
2. NESHER INC.
Telephone:
Facsimile: 011-441-71-201-4800
Attention:
Investment Amount: $75,000
No. of Shares of Preferred Stock: 7.5
No. of shares of Common Stock
underlying Warrant: 16,050
3. HEWLETT FUND
20 Adele Road
Cedarhurst, New York 11516
Telephone: (516) 371-0199
Facsimile: (516) 371-0125
Attention: Jennifer Spinner
Investment Amount: $50,000
No. of Shares of Preferred Stock: 5
No. of shares of Common Stock
underlying Warrant: 10,725
4. GUARANTY & FINANCE LTD.
Telephone:
Facsimile:
Attention:
Investment Amount: $75,000
No. of Shares of Preferred Stock: 7.5
No. of shares of Common Stock
underlying Warrant: 16,050
14
<PAGE>
EXHIBIT B
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN OFFER
TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE
"RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE
Act PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT
To Purchase ______ Shares of Common Stock of
IMAGING DIAGNOSTIC SYSTEMS, INC.
THIS CERTIFIES that, for value received, _________ (the
"INVESTOR"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after March 16, 1999, and on or prior
to March 16, 2001 (the "TERMINATION DATE") but not thereafter, to subscribe for
and purchase from IMAGING DIAGNOSTIC SYSTEMS, INC., a Florida corporation (the
"COMPANY"), _________ (______) shares of Common Stock (the "WARRANT SHARES").
The purchase price of one share of Common Stock (the "EXERCISE PRICE") under
this Warrant shall be equal to $.50. The Exercise Price and the number of shares
for which the Warrant is exercisable shall be subject to adjustment as provided
herein. This Warrant is being issued in connection with the Convertible
Preferred Subscription Agreement dated as of March 16, 1999, in the aggregate
amount of Three Hundred Fifty Thousand ($350,000) Dollars (the "AGREEMENT")
between the Company and Investor and is subject to its terms. In the event of
any conflict between the terms of this Warrant and the Agreement, the Agreement
shall control.
1. TITLE OF WARRANT. Prior to the expiration hereof and
subject to compliance with applicable laws, this Warrant and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
2. AUTHORIZATION OF SHARES. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue).
3. EXERCISE OF WARRANT. Exercise of the purchase rights
represented by this Warrant may be made at any time or times, in whole, before
the close of business on the Termination Date, or such earlier date on which
this Warrant may terminate as provided in paragraph 11 below, by the surrender
of this Warrant and the Subscription Form annexed hereto duly executed, at the
office of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company) and upon payment of the
Exercise Price of the shares thereby purchased; whereupon the holder of this
Warrant shall be entitled to receive a certificate for the number of shares of
Common Stock so purchased. Certificates for shares purchased hereunder shall be
delivered to the holder hereof within five business days after the date on which
this Warrant shall have been exercised as aforesaid. Payment of the Exercise
Price of the shares may be by certified check or cashier's check or by wire
transfer to an account designated by the Company in an amount equal to the
Exercise Price multiplied by the number of shares being purchased.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.
5. CHARGES, TAXES AND EXPENSES. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
1
<PAGE>
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; PROVIDED, HOWEVER, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and PROVIDED FURTHER, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. CLOSING OF BOOKS. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
7. NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. If, however, at the
time of the surrender of this Warrant and purchase the holder hereof shall be
entitled to exercise this Warrant, the shares so purchased shall be and be
deemed to be issued to such holder as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been exercised.
8. ASSIGNMENT AND TRANSFER OF WARRANT. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company);
provided, however, that this Warrant may not be resold or otherwise transferred
except (i) in a transaction registered under the Securities Act, or (ii) in a
transaction pursuant to an exemption, if available, from such registration
9. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Warrant or stock certificate, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of this Warrant or stock certificate.
10. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
11. EFFECT OF CERTAIN EVENTS.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "SALE OR MERGER TRANSACTION"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, the Company shall give the holder of this Warrant
thirty (30) days' notice of the proposed effective date of the transaction
specifying that the Warrant shall terminate if the Warrant has not been
exercised by the effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or
Merger Transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) REGISTRATION. The Company agrees to register the shares of
Common Stock underlying this Warrant pursuant to the terms of the Agreement and
the Registration Rights Agreement dated March 16, 1999. In addition to the
foregoing, the Holder of this Warrant shall have the right to include all of the
shares of Common Stock underlying this Warrant (the "REGISTRABLE SECURITIES") as
part of any registration of securities filed by the Company (other than in
connection with a transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-8) and must be notified in writing of such filing.
2
<PAGE>
Holder shall have five (5) business days to notify the Company in writing as to
whether the Company is to include Holder or not include Holder as part of the
registration; PROVIDED, HOWEVER, that if any registration pursuant to this
Section shall be underwritten, in whole or in part, the Company may require that
the Registrable Securities requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. If in the good faith judgment of
the underwriter evidenced in writing of such offering only a limited number of
Registrable Securities should be included in such offering, or no such shares
should be included, the Holder, and all other selling stockholders, shall be
limited to registering such proportion of their respective shares as shall equal
the proportion that the number of shares of selling stockholders permitted to be
registered by the underwriter in such offering bears to the total number of all
shares then held by all selling stockholders desiring to participate in such
offering. Those Registrable Securities which are excluded from an underwritten
offering pursuant to the foregoing provisions of this Section (and all other
Registrable Securities held by the selling stockholders) shall be withheld from
the market by the Holders thereof for a period, not to exceed one hundred eighty
(180) days, which the underwriter may reasonably determine is necessary in order
to effect such underwritten offering.
12. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT
SHARES. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
13. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at
its warrant, at any time during the term of this Warrant, reduce the then
current Exchange Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
14. NOTICE OF ADJUSTMENT. Whenever the number of Warrant
shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
15. AUTHORIZED SHARES. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange upon which the Common Stock
may be listed.
16. INTENTIONALLY OMITTED.
17. MISCELLANEOUS.
3
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(a) ISSUE DATE; JURISDICTION. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws of Florida and for all purposes shall be
construed in accordance with and governed by the laws of said state without
regard to its conflict of law, principles or rules. The party who initiates
legal action shall choose the jurisdiction of the federal courts or the state
courts in connection with any dispute arising under this Agreement and hereby
waives, to the maximum permitted by law, any objection, including any objection
based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such
jurisdictions. Each party waives its right to a trial by jury.
(b) RESTRICTIONS. The holder hereof acknowledges that the
Common Stock acquired upon the exercise of this Warrant, if not registered, may
have restrictions upon its resale imposed by state and federal securities laws.
(c) MODIFICATION AND WAIVER. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: March 16, 1999
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: __________________________________
Linda B. Grable, President
4
<PAGE>
NOTICE OF EXERCISE
------------------
To: IMAGING DIAGNOSTIC SYSTEMS, INC.
(1) The undersigned hereby elects to purchase ________ shares
of Common Stock of IMAGING DIAGNOSTIC SYSTEMS, INC. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price in full,
together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
Dated:________________________
------------------------------
Signature
5
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ASSIGNMENT FORM
---------------
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights
evidenced thereby are hereby assigned to
_______________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ________________________
Holder's Signature: ___________________________
Holder's Address:____________________________________
---------------------------
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
6
<PAGE>
EXHIBIT C
ESCROW AGREEMENT
THIS AGREEMENT is made as of the 16th day of March, 1999 by
and between IMAGING DIAGNOSTIC SYSTEMS, INC., with its principal office at 6531
NW 18th Court, Plantation, Florida 33313 (hereinafter the "COMPANY"), SETTONDOWN
CAPITAL INTERNATIONAL LTD. and LIBRA FINANCE SA (collectively the "PLACEMENT
AGENT"), and the entities listed on Schedule A (hereinafter referred to
collectively as the "PURCHASER" or "PURCHASERS") and GOLDSTEIN, GOLDSTEIN &
REIS, LLP, 65 Broadway, 10th Fl., New York, NY 10006 (hereinafter the "ESCROW
AGENT").
W I T N E S S E T H:
WHEREAS, pursuant to the Convertible Preferred Subscription
Agreement dated March 16, 1999 (the "AGREEMENT"), Purchasers will be purchasing
Preferred Stock and Warrants (referred to as the "SECURITIES") of the Company at
a purchase price as set forth in the Securities Subscription Agreement, signed
by the Company and Purchasers; and
WHEREAS, the Company shall issue to the Placement Agent, in
return for services rendered (in addition to fees set forth in the below), the
number of shares of Preferred Stock equal to seven and one half (7.5%) percent
of the number of shares of Preferred Stock issued to the Purchaser pursuant to
the terms of the Subscription Agreement, and a Warrant to purchase sixty five
thousand six hundred twenty five (65,625) shares of Common Stock; and
WHEREAS, the Company has requested that the Escrow Agent hold
the funds of Purchasers in escrow until the Escrow Agent has received the
Securities and had the opportunity to speak with the Company to confirm their
issuance. The Escrow Agent will then immediately wire transfer or otherwise
deliver at the Company's direction immediately available funds to the Company
(less the fees provided for below) or the Company's account and arrange for
delivery of the Securities to Purchasers and Placement Agent, per their written
instructions.
NOW, THEREFORE, in consideration of the covenants and mutual
promises contained herein and other good and valuable consideration, the receipt
and legal sufficiency of which are hereby acknowledged and intending to be
legally bound hereby, the parties agree as follows:
ARTICLE 1
---------
TERMS OF THE CASH ESCROW
------------------------
1.1 The parties hereby agree to establish an escrow account
with the Escrow Agent whereby the Escrow Agent shall hold the funds for the
purchase of the Securities.
1.2 Upon Escrow Agent's receipt of funds into his attorney
trustee account, he shall notify the Company, or the Company's designated
attorney or agent, of the amount of funds he has received into his account.
1.3 The Company, upon receipt of said notice and acceptance of
Purchasers' and Placement Agent's Subscription Agreement, as evidenced by the
Company's execution thereof, shall deliver to Escrow Agent the Securities being
purchased.
1.4 The Company will furnish Escrow Agent with a "net letter"
directing payment of $5,000 to be paid to the Escrow Agent. The net balance
shall be payable to the Company. Once the funds have been received per the
Company's instructions, the Escrow Agent shall then arrange to have the
Securities delivered as per instructions from each of the Purchasers, and the
Placement Agent.
1.5 This Agreement may be altered or amended only with the
consent of all of the parties hereto. Should the Company attempt to change this
Agreement in a manner, which, in the Escrow Agent's discretion, shall be
undesirable, the Escrow Agent may resign as Escrow Agent by notifying the
Company and the Purchasers in writing. In the case of the Escrow Agent's
resignation or removal, his only duty, until receipt of notice from the Company
1
<PAGE>
and the Purchasers or its agent that a successor escrow agent shall have been
appointed, shall be to hold and preserve the Securities and/or funds. Upon
receipt by the Escrow Agent of said notice from the Company and the Purchasers
of the appointment of a successor escrow agent, the name of a successor escrow
account and a direction to transfer the Securities and/or funds, the Escrow
Agent shall promptly thereafter transfer all of the Securities and/or funds held
in escrow to said successor escrow agent. Immediately after said transfer of
Securities, the Escrow Agent shall furnish the Company and the Purchasers with
proof of such transfer. The Escrow Agent is authorized to disregard any notices,
requests, instructions or demands received by it from the Company or the
Purchasers after notice of resignation or removal shall have been given, unless
the same shall be the aforementioned notice from the Company and the Purchaser
to transfer the Securities and funds to a successor escrow agent or to return
same to the respective parties.
1.6 The Escrow Agent shall be reimbursed by the Company and
the Purchasers for any reasonable expenses incurred in the event there is a
conflict between the parties and the Escrow Agent shall deem it necessary to
retain counsel.
1.7 The Escrow Agent shall not be liable for any action taken
or omitted by him in good faith in accordance with the advice of the Escrow
Agent's counsel; and in no event shall the Escrow Agent be liable or responsible
except for the Escrow Agent's own gross negligence or willful misconduct.
1.8 The Company and the Purchasers warrant to and agree with
the Escrow Agent that, unless otherwise expressly set forth in this Agreement:
(i) there is no security interest in the Securities or
any part thereof;
(ii) no financing statement under the Uniform Commercial
Code is on file in any jurisdiction claiming a
security interest or in describing (whether
specifically or generally) the Securities or any part
thereof; and
(iii) the Escrow Agent shall have no responsibility at any
time to ascertain whether or not any security
interest exists in the Securities or any part thereof
or to file any financing statement under the Uniform
Commercial Code with respect to the Securities or any
part thereof.
1.9 The Escrow Agent has no liability hereunder to either
party other than to hold the Securities and funds and to deliver them under the
terms hereof. Each party hereto agrees to indemnify and hold harmless the Escrow
Agent from and with respect to any suits, claims, actions or liabilities arising
in any way out of this transaction including the obligation to defend any legal
action brought which in any way arises out of or is related to this Escrow.
ARTICLE 2
---------
MISCELLANEOUS
-------------
2.1 No waiver or any breach of any covenant or provision
herein contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed any extension of
the time for performance of any other obligation or act.
2.2 All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent by fax, overnight courier,
registered or certified mail, postage prepaid, return receipt requested, and
shall be deemed received upon receipt thereof, as follows:
(i) Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, FL 33313
Attention: Rebecca J. Del Medico, Esq.
Telephone: (954) 581-0555
Facsimile: (954) 581-0555
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(ii) The Goldstein Law Group, P.C.
65 Broadway
New York, NY 10006
Attention: Scott H. Goldstein, Esq.
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
(iii) To the Purchasers at their respective addresses
listed on Schedule A.
(iv) Settondown Capital International Ltd.
Charlotte House, Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas
Attention: Anthony L. M. Inder Riden
Telephone: (242) 325-1033
Facsimile: (242) 323-7918
2.3 This Agreement shall be binding upon and shall inure to
the benefit of the permitted successors and assigns of the parties hereto.
2.4 This Agreement is the final expression of, and contains
the entire Agreement between, the parties with respect to the subject matter
hereof and supersedes all prior understandings with respect thereto. This
Agreement may not be modified, changed, supplemented or terminated, nor may any
obligations hereunder be waived, except by written instrument signed by the
parties to be charged or by its agent duly authorized in writing or as otherwise
expressly permitted herein.
2.5 Whenever required by the context of this Agreement, the
singular shall include the plural and masculine shall include the feminine. This
Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to Articles are to this Agreement.
2.6 The Company acknowledges and confirms that it is not being
represented in a legal capacity by The Goldstein Law Group, P.C. and it has had
the opportunity to consult with its own legal advisors prior to the signing of
this Agreement.
2.7 This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of Florida, except for
matters arising under the Act, without reference to principles of conflicts of
law. The party who initiates legal action shall choose the jurisdiction of the
federal courts or the state courts in connection with any dispute arising under
this Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on FORUM NON CONVENIENS, to the
bringing of any such proceeding in such jurisdictions. Each party waives its
right to a trial by jury. Each party hereby agrees that if another party to this
Agreement obtains a judgment against it in such a proceeding, the party which
obtained such judgment may enforce same by summary judgment in the courts of any
country having jurisdiction over the party against whom such judgment was
obtained, and each party hereby waives any defenses available to it under local
law and agrees to the enforcement of such a judgment. Each party to this
Agreement irrevocably consents to the service of process in any such proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to such party at its address set forth herein. Nothing herein shall
affect the right of any party to serve process in any other manner permitted by
law.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the date first written above.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: ________________________
Linda Grable, President
AMRO INTERNATIONAL, S.A., Purchaser
By: ___________________________
NESHER INC., Purchaser
By: ___________________________
HEWLETT FUND, Purchaser
By: ___________________________
GUARANTY & FINANCE LTD., Purchaser
By: ___________________________
LIBRA FINANCE SA, Placement Agent
By: ___________________________
SETTONDOWN CAPITAL INTERNATIONAL, LTD.
Placement Agent
By: ___________________________
Anthony L.M. Inder Riden
THE GOLDSTEINLAW GROUP, P.C., Escrow Agent
By: ______________________________
Scott H. Goldstein
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EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of the 16th day
of March, 1999, between Settondown Capital International Ltd. and LIBRA FINANCE
SA (collectively the "PLACEMENT AGENT"), located at Charlotte House, Charlotte
Street, P.O. Box N. 9204, Nassau, Bahamas, the entities listed on Schedule A
(the "HOLDER" or "Holders") issued pursuant to a Convertible Preferred
Subscription Agreement of even date herewith, and IMAGING DIAGNOSTIC SYSTEMS,
INC., a Florida corporation having its principal place of business at 6531 NW
18th Court, Plantation, FL 33313 (the "COMPANY").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Holders are purchasing from the Company, pursuant to a
Convertible Preferred Subscription Agreement dated the date hereof (the
"AGREEMENT"), Three Hundred Fifty Thousand ($350,000) Dollars principal amount
of Preferred Stock and Warrants (hereinafter referred to as the "STOCK" or
"SECURITIES" of Imaging Diagnostic Systems, Inc.); and
WHEREAS, the Company shall issue to the Placement Agent, in
return for services rendered (in addition to fees set forth in the Escrow
Agreement), the number of shares of Preferred Stock equal to seven and one half
(7.5%) percent of the number of shares of Preferred Stock issued to the Holders
pursuant to the terms of the Subscription Agreement, the Company's Warrant to
purchase sixty five thousand six hundred twenty five (65,625) shares of Common
Stock; and
WHEREAS, the Company desires to grant to the Holders, and the
Placement Agent, the registration rights set forth herein with respect to the
Securities.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. REGISTRABLE SECURITIES. As used herein, the term
"REGISTRABLE SECURITY" means the Common Stock underlying the Preferred Stock and
the Common Stock underlying the Warrants; provided, however, that with respect
to any particular Registrable Security, such security shall cease to be a
Registrable Security when, as of the date of determination, (i) it has been
effectively registered under the Securities Act of 1933, as amended (the
"SECURITIES ACT") and disposed of pursuant thereto, (ii) registration under the
Securities Act is no longer required for the immediate public distribution of
such security as a result of the provisions of Rule 144, or (iii) it has ceased
to be outstanding. The term "REGISTRABLE SECURITIES" means any and/or all of the
securities falling within the foregoing definition of a "Registrable Security."
In the event of any merger, reorganization, consolidation, recapitalization or
other change in corporate structure affecting the Common Stock, such adjustment
shall be made in the definition of "Registrable Security" as is appropriate in
order to prevent any dilution or enlargement of the rights granted pursuant to
this Section 1.
Section 2. RESTRICTIONS ON TRANSFER. The Holders and the
Placement Agent, acknowledge and understand that prior to the registration of
the Securities as provided herein, the Securities are "restricted securities" as
defined in Rule 144 promulgated under the Act. The Holders and the Placement
Agent, understand that no disposition or transfer of the Securities may be made
by Holders or the Placement Agent, in the absence of (i) an opinion of counsel
reasonably satisfactory to the Company that such transfer may be made or (ii) a
registration statement under the Securities Act is then in effect with respect
thereto.
Section 3. REGISTRATION RIGHTS.
(a) The Company agrees that it will prepare and file a
registration statement on Form S-2 (the "REGISTRATION STATEMENT") with the
Securities and Exchange Commission ("SEC"), as soon as possible after the
Closing Date but in no event later than fourteen calendar (14) calendar days
after the Closing Date, at the sole expense of the Company (except as provided
in Section 3(c) hereof), in respect of all holders of Registrable Securities, so
as to permit a public offering and sale of the Registrable Securities under the
Act. This duty and the timely performance thereof shall be contingent upon the
Company receiving from all the Holders of the Registrable Securities and the
Placement Agent, the information set forth in Section 6 below.
The number of shares of Common Stock designated in the
Registration Statement to be registered shall be two hundred (100%) percent of
the number of Securities that would be required if all the Registrable
Securities were issued on the day before the filing of the Registration
Statement.
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(b) The Company will maintain any Registration Statement or
post-effective amendment filed under this Section 3 hereof current under the
Securities Act until the date that all of the Registrable Securities have been
sold pursuant to the Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
any Registration Statement under subparagraph 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees) shall be borne by the Company. The Holders and the Placement
Agent, shall bear the cost of underwriting discounts and commissions, if any,
applicable to the Registrable Securities being registered and the fees and
expenses of its counsel. The Company shall use its best efforts to qualify any
of the securities for sale in such states as the Holders and/or Placement Agent,
reasonably designates and shall furnish indemnification in the manner provided
in Section 9 hereof. However, the Company shall not be required to qualify in
any state that will require an escrow or other restriction relating to the
Company and/or the sellers. The Company at its expense will supply the Holders
and/or the Placement Agent, with copies of such Registration Statement and the
prospectus or offering circular included therein and other related documents in
such quantities as may be reasonably requested by the Holders and/or the
Placement Agent.
(d) The Company shall not be required by this Section 3 to
include a Holders and/or Placement Agent's Registrable Securities in any
Registration Statement which is to be filed if, in the opinion of counsel for
both the Holder, the Placement Agent, and the Company (or, should they not
agree, in the opinion of another counsel experienced in securities law matters
acceptable to counsel for the Holder, the Placement Agent, and the Company) the
proposed offering or other transfer as to which such registration is requested
is exempt from applicable federal and state securities laws and would result in
all purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the Securities Act.
(e) Except as set forth in Section 3 (a) above, in the event
the Registration Statement to be filed by the Company pursuant to Section 3(a)
above is not filed in proper form with the Securities and Exchange Commission
within fourteen (14) calendar days from the Closing Date or the Registration
Statement is not declared effective by the SEC within sixty (60) days after the
Closing Date, then the Company will pay Holders and the Placement Agent, by wire
transfer, as liquidated damages for such failure to timely file and/or 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 Registration Statement is either filed and/or
declared effective. If the Company does not remit the damages to the Purchasers
as set forth above, the Company will pay the Holders and the Placement Agent,
reasonable costs of collection, including attorneys fees, in addition to the
liquidated damages. Such payment shall be made to the Holders and the Placement
Agent, immediately in cash upon demand if the registration of the Securities are
not effected; provided, however, that the payment of such liquidated damages
shall not relieve the Company from its obligations to register the Securities
pursuant to this Section. The registration of the Securities pursuant to this
provision shall not affect or limit Holders or the Placement Agent's other
rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company
from selling securities pursuant to any Registration Statement in which it is
required to include Registrable Securities pursuant to this Section 3.
Section 4. COOPERATION WITH COMPANY. Holders and the Placement
Agent will cooperate with the Company in all respects in connection with this
Agreement, including, timely supplying all information reasonably requested by
the Company and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Securities.
Section 5. REGISTRATION PROCEDURES. If and whenever the
Company is required by any of the provisions of this Agreement to effect the
registration of any of the Registrable Securities under the Act, the Company
shall (except as otherwise provided in this Agreement), as expeditiously as
possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the holder of such securities shall desire to sell or otherwise dispose of the
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same (including prospectus supplements with respect to the sales of securities
from time to time in connection with a registration statement pursuant to Rule
415 of the Commission);
(b) furnish to each Holder and the Placement Agent such
numbers of copies of a summary prospectus or other prospectus, including a
preliminary prospectus or any amendment or supplement to any prospectus, in
conformity with the requirements of the Act, and such other documents, as such
Holder and the Placement Agent may reasonably request in order to facilitate the
public sale or other disposition of the securities owned by such Holder and the
Placement Agent;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holders or Placement Agent, shall
reasonably request, and do any and all other acts and things which may be
necessary or advisable to enable each Holder and/or the Placement Agent, to
consummate the public sale or other disposition in such jurisdiction of the
securities owned by such Holder and/or the Placement Agent, except that the
Company shall not for any such purpose be required to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to list such securities on the OTC
Bulletin Board or any securities exchange on which any securities of the Company
is then listed, if the listing of such securities is then permitted under the
rules of such exchange or OTC Bulletin Board;
(e) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(f) notify each holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
Section 6. INFORMATION BY HOLDER. Each holder of Registrable
Securities included in any registration shall furnished to the Company such
information regarding such holder and the distribution proposed by such Holder
as the Company may request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this Section
6.
Section 7. ASSIGNMENT. The rights granted the Holders and the
Placement Agent under this Agreement shall not be assigned without the written
consent of the Company, which consent shall not be unreasonably withheld. This
Agreement is binding upon and inures to the benefit of the parties hereto and
their respective heirs, successors and permitted assigns.
Section 8. TERMINATION OF REGISTRATION RIGHTS. The rights
granted pursuant to this Agreement shall terminate as to the Holder and the
Placement Agent (and permitted transferee under Section 7 above) upon the
occurrence of any of the following:
(a) all such Holder's and/or the Placement Agent's securities
subject to this Agreement have been registered;
(b) such Holder's and/or the Placement Agent's securities
subject to this Agreement may be sold without such registration pursuant to Rule
144 promulgated by the SEC pursuant to the Securities Act;
(c) such Holder's and/or the Placement Agent's securities
subject to this Agreement can be sold pursuant to Rule 144(k); or
(d) two years from the issuance of the Registrable Securities.
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Section 9. INDEMNIFICATION.
(a) In the event of the filing of any Registration Statement
with respect to Registrable Securities pursuant to Section 3 hereof, the Company
agrees to indemnify and hold harmless the Holders and/or the Placement Agent,
and each person, if any, who controls the Holders and/or the Placement Agent
within the meaning of the Securities Act ("DISTRIBUTING HOLDERS") against any
losses, claims, damages or liabilities, joint or several (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees), to which the Distributing Holders
may become subject, under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such Registration Statement, or any related
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
the Distributing Holders, specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability, which the Company may
otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof; arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in a Registration
Statement requested by such Distributing Holder, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement contained in this Section 9(b) shall not inure to the
benefit of the Company with respect to any person asserting such loss, claim,
damage or liability who purchased the Registrable Securities which are the
subject thereof if the Company failed to send or give (in violation of the
Securities Act or the rules and regulations promulgated thereunder) a copy of
the prospectus contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of such Registrable
Securities, where the Company was obligated to do so under the Securities Act or
the rules and regulations promulgated thereunder. This indemnity agreement will
be in addition to any liability, which the Distributing Holders may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
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satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 10. CONTRIBUTION. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
Distributing Holder makes a claim for indemnification pursuant to Section 9
hereof but is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
Section 9 hereof provide for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any Distributing Holder,
then the Company and the applicable Distributing Holder shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all attorneys' fees), in either
such case (after contribution from others) on the basis of relative fault as
well as any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the applicable Distributing Holder, on the other hand, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Distributing Holder
agree that it would not be just and equitable if contribution pursuant to this
Section were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
Section 11. NOTICES. Any notice pursuant to this Agreement by
the Company or by the Holder shall be in writing and shall be deemed to have
been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holders, to its, his or her address set forth on
the signature page of this Agreement, with a copy to the person designated in
the Agreement.
(b) If to the Placement Agent, at the address set forth
herein, or to such other address as any such party may designate by notice to
the other party.
(c) If to the Company, at the address set forth herein, or
such other address as it may designate to the parties.
Notices shall be deemed given at the time they are delivered personally
or five (5) days after they are mailed in the manner set forth above. If notice
is delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 12. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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Section 13. HEADINGS. The headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 14. GOVERNING LAW, VENUE. This Agreement shall be
governed by and construed in accordance with the laws of the State of Florida.
The party who initiates legal action shall choose the jurisdiction of the
federal courts or the state courts in connection with any dispute arising under
this Agreement and hereby waives, to the maximum permitted by law, any
objection, including any objection based on FORUM NON CONVENIENS, to the
bringing of any such proceeding in such jurisdictions. Each party waives its
right to a trial by jury.
Section 15. SEVERABILITY. If any provision of this Agreement
shall for any reason be held invalid or unenforceable, such invalidity or
unenforceablity shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable provision had never been
contained herein.
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed, as of the day and year first
above written.
Attest: IMAGING DIAGNOSTIC SYSTEMS, INC.
By:______________________ By:___________________________
Name: Linda B. Grable, President
Title:
AMRO INTERNATIONAL, S.A., Purchaser
By:___________________________
NESHER INC., Purchaser
By:___________________________
HEWLETT FUND, Purchaser
By:___________________________
GUARANTY & FINANCE LTD., Purchaser
By:___________________________
LIBRA FINANCE SA, Placement Agent
By:___________________________
SETTONDOWN CAPITAL INTER-
NATIONAL, LTD.
By:___________________________
Anthony L.M. Inder Riden
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EXHIBIT E
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT THE
SERIES G CONVERTIBLE PREFERRED STOCK)
The undersigned hereby irrevocably elects to convert the above Preferred Stock
No. ____ into Shares of common stock of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"COMPANY") according to the conditions hereof, as of the date written below.
The undersigned represents and warrants that
(i) The undersigned represents and warrants that all offers and sales
by the undersigned of the shares of Common Stock issuable to the
undersigned upon conversion of the Preferred Stock shall be made
in compliance with Regulation D, pursuant to an exemption from
registration under the Act, or pursuant to registration of the
Common Stock under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), subject to any restrictions on sale or transfer
set forth in the Securities Subscription Agreement between the
Company and the original holder of the Preferred Stock submitted
herewith for conversion.
(ii) the undersigned has not engaged in any transaction or series of
transactions that is a part of or a plan or scheme to evade the
registration requirements of the Securities Act.
(iii) Upon conversion pursuant to this Notice of Conversion, the
undersigned will not own 4.9% or more of the then issued and
outstanding shares of the Company.
_______________________________ ___________________________
Date of Conversion Applicable Conversion Price
_______________________________ ___________________________
Number of Common Shares upon $ Amount of Conversion
Conversion
_______________________________ ___________________________
Signature Name
_______________________________ ___________________________
Address: Delivery of Shares to:
* The original Preferred Stock Certificate and Notice of Conversion must be
received by the Company by the third business day following the Date of
Conversion.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of March
30, 1999, by and among IMAGING DIAGNOSTIC SYSTEMS, INC., a Florida corporation
(the "Company"), and the undersigned, (the "Subscriber").
. W I T N E S S E T H
WHEREAS, pursuant to Subscription Agreement (the "Subscription
Agreement"), by and among the Company and the Subscriber, the Company has agreed
to sell and the Subscriber has agreed to purchase an aggregate of 138 Series I,
Convertible Preferred Shares (the "Shares"), at $10,000 per Share, of the
Company convertible into shares of the Company's Common Stock, no par value per
share (the "Common Stock") upon the terms and conditions set forth in the
accompanying Subscription Agreement; and
WHEREAS, pursuant to assignment agreements between the Subscriber and
Goodland International Investments, Ltd. and the Subscriber and Weyburn
Overseas, Ltd. , the Subscriber has agreed to purchase an aggregate of 450
Series B Convertible Preferred Shares (the "Series B Shares"), of the Company
convertible into shares of the Company's Common Stock, no par value per share;
and
WHEREAS, pursuant to a subscription agreement by and among the Company
and the Subscriber, the Company has agreed to sell and the Subscriber has agreed
to purchase an aggregate of $2,750,000 of convertible debentures (the
"Debentures"), of the Company convertible into shares of the Company's Common
Stock, no par value per share, subject to certain terms and conditions,; and
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Subscriber purchasing the Shares, the Series B Shares and the Debentures,
the Company has agreed to provide the Subscriber with certain registration
rights with respect to the Common Stock;
NOW THEREFORE, in consideration of the mutual promises, representation,
warranties, covenants and conditions set forth in the Subscription Agreement and
this Registration Rights Agreement, the Company and the Subscriber agree as
follows:
1. CERTAIN DEFINITIONS. As used in this Agreement the following terms
shall have the following respective meanings:
"Closing Date" shall mean March 31, 1999.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, no par value per
share.
"Registrable Shares" shall mean (i) the Common Stock, (ii) any Common
Stock of the Company issued or issuable in respect of the Shares, the Debentures
issued to the Subscriber or the Series B Shares, or upon any stock split, stock
dividend, recapitalization or similar event; provided, however, that shares of
Common Stock or other securities shall no longer be treated as Registrable
Shares if (a) they have been sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, (b)
they have been sold in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933 so that all transfer
restrictions and restrictive legends with respect thereto are removed upon
consummation of such sale or (c) they are available for sale under Rule 144 or
otherwise, in the opinion of counsel to the Company, without compliance with the
registration and prospectus delivery requirements of the Securities Act of 1933
so that no transfer restrictions or restrictive legends will appear upon the
Common Stock certificates following the consummation of such sale.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933 and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement. Said registration shall include all amendments,
post-effective amendments and supplements to any such registration statement as
may be necessary under the Act and the regulations of the Commission to keep
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such registration effective with respect to the Registrable Shares until two (2)
years following the Closing Date.
"Registration Expenses" shall mean all expenses incurred by the Company
in compliance with Section 2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, reasonable fees and
disbursements of one counsel for Subscriber, and the reasonable expenses of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company). The Company shall not be responsible for any Underwriting
fees or Commissions.
The "Reserved Shares" shall mean the shares of Common Stock issuable
upon conversion of the Shares that have been duly and validly reserved for
issuance, and upon issuance which shall be duly and validly issued, fully paid,
and non-assessable.
The "Act" shall mean the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Shares.
2. REGISTRATION.
(a) MANDATORY REGISTRATION. The Company shall use its best efforts to
prepare and file with the SEC, no later than thirty (30) days after the Closing
Date, a Registration Statement on Form S-2 (or any other available form),
covering a sufficient number of shares of Common Stock for the Subscriber but in
no event less than 100% of the number of shares of Common Stock into which the
Shares, the Debentures issued to Subscriber and the Series B Shares would be
convertible. Such Registration Statement shall state that, in accordance with
the Securities Act, it also covers such indeterminate number of additional
shares of Common Stock as may become issuable to prevent dilution resulting from
Stock splits, or stock dividends). If at any time after the Closing Date, the
number of registered shares of common stock only covers 50% of the total number
of shares of common stock that would be issuable upon conversion of the then
remaining balances of the Shares, the Debentures issued to the Subscriber, and
the Series B Shares, then the Company shall, within twenty (20) business days
after receipt of written notice from any Subscriber, either (i) amend the
Registration Statement filed by the Company pursuant to the preceding sentence,
if such Registration Statement has not been declared effective by the SEC at
that time, to register all shares of Common Stock into which the Shares may be
converted, or (ii) if such Registration Statement has been declared effective by
the SEC at that time, file with the SEC an additional Registration Statement on
Form S-2 (or any other available form), to register the shares of Common Stock
into which the Shares may be converted that exceed the aggregate number of
shares of Common Stock already registered.
(b) UNDERWRITTEN OFFERING. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Subscribers acting by majority in interest of the Registrable Shares subject to
such underwritten offering shall have the right to select one legal counsel to
represent their interests, and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. The
Subscriber(s) who hold the Registrable Shares to be included in such
underwriting shall pay all underwriting discounts and commissions and other fees
and expenses of such investment banker or bankers and manager or managers so
selected in accordance with this Section 2(b) (other than fees and expenses
relating to registration of Registrable Shares under federal or state securities
laws, which are payable by the Company pursuant to Section 5 hereof) with
respect to their Registrable Shares and the fees and expenses of such legal
counsel so selected by the Subscriber.
(c) CERTAIN FEES. The Company shall pay cash liquidated damages as
follows:
(i) 1.0% of the principal amount of the Shares for each 30 day period,
or portion thereof, that the registration ceases to remain effective during the
"Registration Period" as defined in Section 3(a);
(ii) 1.0% of the principal amount of the Shares if the Registration
Statement covering this offering is not declared effective within 90 days
following the Closing Date; and
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(iii) 2.0% of the principal amount of the Shares for each 30 day
period, or portion thereof, 120 days following the Closing Date that
registration is not declared effective.
The above damages shall continue until the obligation is fulfilled, and shall be
paid within 5 business days after each 30 day period. Failure of the Company to
make payment within said 5 business days shall be considered a default. The
Company acknowledges that its failure to meet any of its obligations under
either Section 2(c) (i), (ii) or (iii) of this Agreement will cause the
Subscriber to suffer damages in an amount that will be difficult to ascertain.
Accordingly, the parties agree that it is appropriate to include in this
Agreement a provision for liquidated damages. The parties acknowledge and agree
that the liquidated damages provision set forth in this section represents the
parties' good faith effort to qualify such damages and, as such, agree that the
form and amount of such liquidated damages are reasonable and will not
constitute a penalty. The payment of liquidated damages shall not relieve the
Company from its obligations to deliver the Common Stock pursuant to the terms
of this Agreement and the Subscription Agreement.
3. OBLIGATION OF THE COMPANY. In connection with the registration of
the Registrable Shares, the Company shall do each of the following:
(a) Prepare promptly, and file with the SEC within thirty (30) days of
the Closing Date, a Registration Statement with respect to not less than the
number of Registrable Shares provided in Section 2(a), above, and thereafter use
its best efforts to cause each Registration Statement relating to Registrable
Shares to become effective the earlier of (A) five business days after notice
from the Securities and Exchange Commission that the Registration Statement may
be declared effective, or (B) ninety (90) days after the Closing Date, and keep
the Registration Statement effective at all times until two (2) years following
the Closing Date (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Shares of the Company covered by the Registration Statement until
such time as all of such Registrable Shares have been disposed of in accordance
with the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement;
(c) Furnish to each Subscriber whose Registrable Shares are included in
the Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents,
as the Subscriber may reasonably request in order to facilitate the disposition
of the Registrable Shares owned by such Subscriber;
(d) Use reasonable efforts to (i) register and qualify the Registrable
Shares covered by the Registration Statement under such other securities or blue
sky laws of such jurisdictions as the Subscriber(s) who hold a majority in
interest of the Registrable Shares being offered reasonably request and in which
significant volumes of shares of Common Stock are traded, (ii) prepare and file
in those jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualification in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Shares for sale in such jurisdictions: PROVIDED, HOWEVER, that the
Company shall not be required in connection therewith or as a condition thereto
to (A) qualify to do business in any jurisdiction where it would not otherwise
be required to qualify but for this Section 3(d), (B) subject itself to general
taxation in any such jurisdiction, (C) file a general consent to service of
process in any such jurisdiction, (D) provide any undertakings that cause more
than nominal expense or burden to the Company or (E) make any change in its
articles of incorporation or by-laws or any then existing contracts, which in
each case the Board of Directors of the Company determines to be contrary to the
best interests of the Company and its stockholders;
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(e) As promptly as practicable after becoming aware of such event,
notify each Subscriber of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and uses its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Subscriber as such Subscriber may
reasonably request;
(f) As promptly as practicable after becoming aware of such event,
notify each Subscriber who holds Registrable Shares being sold (or, in the event
of an underwritten offering, the managing underwriters) of the issuance by the
SEC of any notice of effectiveness or any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time;
(g) Use its commercially reasonable efforts, if eligible, either to (i)
cause all the Registrable Shares covered by the Registration Statement to be
listed on a national securities exchange and on each additional national
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable Shares
is then permitted under the rules of such exchange, or (ii) secure designation
of all the Registrable Shares covered by the Registration Statement on the
National Association of Securities Dealers Automated Quotations System
("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the
Registrable Shares on the NASDAQ National Market System; or if, despite the
Company's commercially reasonable efforts to satisfy the preceding clause (i) or
(ii), the Company is unsuccessful in doing so, to secure NASD authorization and
quotation for such Registrable Shares on either the SmallCap Market or the
over-the-counter bulletin board and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. ("NASD") as such with respect
to such Registrable Shares;
(h) Provide a transfer agent for the Registrable Shares not later than
the effective date of the Registration Statement;
(i) Cooperate with the Subscribers who hold Registrable Shares being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Shares to be offered pursuant to the Registration Statement and
enable such certificates for the Registrable Shares to be in such denominations
or amounts as the case may be, as the Subscribers may reasonably request and
registration in such names as the Subscribers may request; and, within five (5)
business days after a Registration Statement which includes Registrable Shares
is ordered effective by the SEC, the Company shall deliver, and shall cause
legal counsel selected by the Company to deliver, to the transfer agent for the
Registrable Shares (with copies to the Subscribers whose Registrable Shares are
included in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
(j) Take all other reasonable actions necessary to expedite and
facilitate distribution to the Subscriber of the Registrable Shares pursuant to
the Registration Statement.
The Company shall use its best efforts to effect such registration (including,
without limitation, the execution of an undertaking to file amendments,
post-effective amendments, and supplements appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Act and the Regulations of the
Commission) as may be so requested and as would permit or facilitate the sale
and distribution of all or such Registrable Shares as are specified in such
request.
4. EXPENSES OF REGISTRATION. Except as set forth in this Agreement the
Company shall bear all Registration Expenses incurred in connection with any
registration, qualification or compliance of the Registrable Shares pursuant to
this Agreement. All Selling Expenses shall be born by the Subscriber.
5. REGISTRATION PROCEDURES. The Company shall advise the Subscriber of
the initiation of a registration under the Agreement and as to the completion
thereof. At its expenses the Company will:
(a) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
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provisions of the Act and the Regulations of the Commission with respect to the
disposition of securities covered by such registration statement; and
(b) CONCERNING THE SECURITIES.The issuance, sale and delivery
of the Shares have been duly authorized by all required corporate action on the
part of Company, and when issued, sold and delivered in accordance with the
terms hereof and thereof for the consideration expressed herein and therein,
will be duly and validly issued and enforceable in accordance with their terms,
subject to the laws of bankruptcy and creditors' rights generally. At least 100%
of the number of shares of Common Stock issuable upon conversion of the Shares,
the Debentures issued to Subscriber and the Series B Shares, based upon the
current price of the Company's Common Stock, have been duly and validly reserved
for issuance and, upon issuance shall be duly and validly issued, fully paid,
and non-assessable (the "Reserved Shares"). The Company shall use its best
efforts to file within twenty (20) days additional Registration Statements
and/or amendments thereto whenever the number of registered shares of common
stock only covers 50% of the total number of shares of common stock that would
be issuable upon conversion of the then remaining balances of the Shares, the
Debentures issued to the Subscriber, and the Series B Shares.
Prior to conversion of all the Shares, if at anytime the conversion of
all the Shares outstanding results in an insufficient number of Reserved Shares
being available to cover all the conversions, then in such event, the Company
will move to call and hold a shareholder's meeting within 45 days of such event
for the sole purpose of authorizing additional Shares to facilitate the
conversions. In such an event the Company shall: (1) recommend its current or
future officers, directors and other control people to vote their shares in
favor of increasing the authorized number of shares of Common Stock and (2)
recommend to all shareholders to vote their shares in favor of increasing the
authorized number of shares of Common Stock . Company represents and warrants
that under no circumstances will it deny or prevent Subscriber's right to
convert the Shares as permitted under the terms of the Subscription Agreement or
this Registration Rights Agreement.
6. INDEMNIFICATION.
(a) The Company will indemnify and hold harmless the
Subscriber, each of its stockholders, executives, employees, representatives,
affiliates, officers, directors and partners, and each person controlling the
Subscriber, with respect to which registration has been effected pursuant to
this Agreement against all claims, losses, damages and liabilities (or actions,
proceedings or settlements in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus or other document incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
any violation by the Company of the Act or any rule or regulation thereunder
applicable to the Company and will reimburse the Subscriber, each of its
stockholders, executives, employees, representatives, affiliates, officers,
directors and partners, and each person controlling the Subscriber for any legal
and any other expenses as they are reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action,
provided, however, that the indemnity contained in this Section 6(a) shall not
apply to amounts paid in settlement of any such claim, loss, damage, liability
or action if such Settlement is effected without the consent of the Company, and
provided further that the Company shall not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by the Subscriber and stated to be specifically for use
in the registration statement filed pursuant to this Agreement. The foregoing
indemnity agreement is further subject to the condition that insofar as it
relates to any untrue prospectus, such indemnity agreement shall not inure to
the benefit of the foregoing unindemnified parties if copies of a final
prospectus correcting the misstatement, or alleged misstatement, omission or
alleged omission upon which such loss, liability, claim or damage is based is
timely delivered to such indemnified party and a copy thereof was not furnished
to the person asserting the loss, liability, claim or damage.
(b) The Subscriber will indemnify the Company, each of its
stockholders, executives, employers, representatives, affiliates, directors,
officers and each person who controls the Company within the meaning of the Act
and the rules and regulations thereunder against all claims, losses, damages and
liabilities (or actions, proceedings, or settlements in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus or other document incident to any such
registration or based upon any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation of the Act or any rule of regulation
thereunder applicable to the Company and will reimburse the Company, and its
stockholders, executives, employers, representatives, affiliates, directors,
officers, partners, persons, underwriters or control persons for any legal or
any other expense reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
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extent, and only to the extent, that such untrue statement (or alleged untrue
statement) or omission or alleged omission) relating to such holder is made in
such registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by the Subscriber and stated to be specifically for use therein;
provided, however, that the obligations of the Subscriber shall be limited to an
amount equal to the proceeds to the Subscriber and provided further that such
indemnification obligations shall not apply if the Company modifies or changes
to a material extent the written information furnished by such Holder.
(c) Each party entitled to indemnification under this Section
6 (an "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party, (whose approval shall not
unreasonably be withheld or delayed), and the Indemnified Party may participate
in such defense at such indemnified party's expense, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall except
with the consent of each Indemnified Party, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
7. INFORMATION BY HOLDER OF REGISTRABLE SHARES. The Company's
obligation to register the Registrable Shares shall be contingent upon the
Subscriber's timely furnishing to the Company such information regarding the
Subscriber and the distribution proposed by such holder of Registrable Shares as
the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration referred to in this Agreement.
8. TRANSFERS OR ASSIGNMENTS OF REGISTRATION RIGHTS. The Subscriber's
rights under this Agreement to cause the Company to register the Registrable
Shares may be transferred or assigned by the Subscriber only to affiliates of
the Subscriber or to a purchaser of the Shares, or any portion of the Shares, in
the principal amount of at least $50,000 or at least 50 Shares and such
assignment shall only be effective upon delivery of written notice of such
assignment to the Company within thirty (30) days of the assignment. Upon such
assignment the assignee shall have all the rights and obligations of the
Subscriber hereunder.
9. MISCELLANEOUS.
9.1 GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to
conflict of laws principles.
9.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
9.3 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof.
9.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first-class mail,
postage prepaid, or delivered by hand or by messenger or courier delivery
service, addressed (a) if to the Subscriber, at the address listed in the
Subscription Agreement or at such other address as the Subscriber shall have
furnished to the Company in writing, or (b) if to the Company, at its executive
office, or at such other address as the Company shall have furnished to the
Subscriber in writing.
9.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Registrable Shares, upon any
breach or default of the Company under this Agreement, shall impair any such
right, power, or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiesce therein, or of or in any similar
breach or default thereunder occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
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the part of any holder of any breach or default under this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
9.6 COUNTERPARTS. This agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument. An executed facsimile counterpart of this Agreement shall be
effective as an original.
9.7 SEVERABILITY. In the case any provision of this agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
9.8 AMENDMENTS. This provision of this Agreement may be amended at any
time and from time to time, and particular provisions of this Agreement may be
waived, with and only with an agreement or consent in writing signed by the
Company and by the owners of all of the Registrable Shares as of the date of
such amendment or waiver.
9.9 TERMINATION OR REGISTRATION RIGHTS.This Agreement shall terminate
at such time as there ceases to be any outstanding Shares, Debentures issued to
the Subscriber and Series B Shares.
The foregoing Registration Rights Agreement is hereby executed as of
the date first above written.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By:____________________________
HOLDER OF THE SERIES B SHARES
CHARLTON AVENUE, LLC
By__________________________
HOLDER OF THE SERIES I SHARES
CHARLTON AVENUE, LLC
By__________________________
HOLDER OF THE CONVERTIBLE DEBENTURE
CHARLTON AVENUE, LLC
By__________________________
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We hereby consent to the use in this Amendment No: 2 to Registration Statement
on Form S-2 of our report dated August 6, 1998, relating to the financial
statements of the Imaging Diagnostic Systems, Inc., and to the reference to our
firm under the caption "Experts" in the Prospectus.
/S/ MARGOLIES, FINK AND WICHROWSKI
----------------------------------
Margolies, Fink and Wichrowski
Pompano Beach, Florida
April 9, 1999
