FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[Mark One]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________to_____________
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
(State of incorporation)(IRS employer Ident. No.)
6531 NW 18th Court, Plantation, FL. 33313
(address of principal office) (Zip Code)
Issuer's telephone number: (954) 581-9800
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the Registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes __X_ No_____ .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. -0-
Based on the average closing bid and asked prices of the common stock on the
latest practicable date, September 13, 2000, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $61,524,136 with
105,158,403 shares outstanding.
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 13, 2000 was 105,158,403. As of September 13, 2000, the
number of shares outstanding of each of the issuer's classes of preferred stock
were: Series K Convertible Preferred 400.
Documents Incorporated By Reference
[None]
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH IN ITEM 6 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CAUTIONARY STATEMENTS."
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
Imaging Diagnostic Systems, Inc. (the "Company") is a development stage medical
technology company. Since its inception in December 1993, we have been engaged
in the development and testing of a Computed Tomography Laser Mammography device
for detecting breast cancer through the skin in a non-invasive procedure
("CTLM(TM)"). The CTLM(TM) employs a proprietary 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
by us into the CTLM(TM).
In connection with the CTLM(TM) clinical investigational trials, we are
developing a clinical atlas of the optical properties of benign and malignant
tissues with respect to absorption and scattering parameters as laser light
passes through the tissue. The CTLM(TM) is designed to provide the physician
with objective data for interpretation and further clinical work-up.
Accordingly, we believe that the CTLM(TM) will improve early diagnosis, reduce
diagnostic uncertainty, and decrease the number of biopsies performed on benign
lesions.
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, each year, approximately
178,700 new cases of invasive breast cancer will be diagnosed among women in the
United States, and approximately 43,500 women will die from this disease.
Excluding skin cancers, the breast is the most frequent site of cancer among
American women, accounting for 32% of incident cancers and 17% of cancer deaths.
It is the second leading cause of death for American women following lung cancer
and is the leading cause of cancer death among women aged 40 to 55. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
98% to 72% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. Extensive
documentation demonstrates that mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommended as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, ACS has published guidelines for breast cancer
screening including: (i) monthly breast self-examinations for all women over the
age of 20; (ii) a baseline mammogram for women by the age of 40; (iii) a
mammogram every one to two years for women between the ages of 40 and 49; and
(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
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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 in the ability of the currently available
modalities to identify malignant lesions, a large number of patients with
suspicious lesions proceed to surgical biopsy, an invasive and expensive
procedure. Approximately 800,000 surgical biopsies are performed each year in
the United States, of which approximately 700,000 result in the surgical removal
of benign breast tissue. The average cost of a surgical biopsy ranges from
approximately $1,000 to $5,000 per procedure. Thus biopsies of benign breast
tissue cost the U.S. health care system approximately $2.45 billion annually. In
addition, biopsies result in pain, scarring, and anxiety to patients. Patients
who are referred to biopsy usually are required to schedule the procedure in
advance and generally must wait up to 48 hours for their biopsy results.
SCREENING AND DIAGNOSTIC MODALITIES
Physical Examination
Physical examinations of the breast are normally conducted by a physician or
clinician as part of a medical examination, or by a woman performing a
self-examination. A physical examination of the breast can only detect
relatively large lesions, which may be advanced cancers. Furthermore, physical
examination of the breast does not reliably distinguish between malignant and
benign tissue. More than half the women who menstruate will have a lump in a
breast at some point, but fewer than 10% of such lumps will be malignant.
Mammography
Mammography is a non-invasive x-ray modality commonly used for both routine
breast cancer screening and as a diagnostic tool. A mammogram produces an image
of the internal structure of the breast that is intended to display lesions as
white spots against the black and/or white background of normal tissue. In a
screening mammogram, radiologists seek to detect suspicious lesions, while in a
diagnostic mammogram 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)
will cost approximately $300,000 and the cost of a bilateral exam will be $125
to $150. Due to the high capital costs associated with mammography equipment and
the specialized training necessary to operate the equipment and to interpret
radiographic images, mammography is usually available only at specialty clinics
or hospitals.
Ultrasound
Ultrasound uses high frequency sound waves to create an image of soft tissues in
the body in a non-invasive manner. Like mammography, this image requires
interpretation by a physician. Ultrasound's principal role in breast cancer
diagnosis has been to assist the physician in determining whether a palpable
lesion is likely to be a cyst (usually benign) or a solid mass (potentially
cancerous). The average cost for an ultrasound of the breast is approximately
$125 to $500 per procedure (an average of $235) and requires the use of capital
equipment ranging in cost from approximately $60,000 to $200,000. Again, it is
expected that the CTLM(TM) will cost approximately $300,000 and the cost of an
exam will be $125 to $150. Like mammography, ultrasound is generally performed
at specialty clinics or hospitals.
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Biopsy
Other currently available minimally invasive diagnostic techniques include fine
needle aspirations or core needle biopsy employing either the stereotactic or
hand held method. In each of these procedures a physician seeks to obtain either
cellular or tissue samples of suspicious lesions for cytodiagnosis or
histodiagnosis. Inadequate sampling can render these tests invalid. These
procedures are invasive, require follow-up, and range in cost from approximately
$370 to $1,000 per procedure.
THE COMPANY
We have a limited history of operations. Since our inception in December 1993,
we have been engaged principally in the development of the CTLM(TM). We
currently have no source of operating revenue and have incurred substantial net
operating losses since our inception. On June 30, 2000, we had an accumulated
deficit of $43,261,878 after discounts and dividends on Preferred Stock. Such
losses have resulted principally from costs associated with our operations. We
expect operating losses will continue for at least the next several years as
substantial costs and expenses continue 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. Our ability to achieve
profitability will depend in large part on our ability to obtain regulatory
approvals for our proposed products and to develop the capacity to manufacture
and market our approved products either by ourselves or in collaboration with
others. There can be no assurance as to if or when we will ever receive
regulatory approvals for the commercialization of the CTLM(TM), or achieve
profitability. See Item 6. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
CTLM(TM)
The CTLM(TM) is a system for detecting breast cancer through the skin in a
non-invasive procedure that does not require compression or x-ray. The CTLM(TM)
employs a proprietary laser and proprietary scanning geometry and reconstruction
algorithms that create contiguous cross sectional slice images of the breast
which are used in the detection and analysis of changes in the breast for
indicia of malignancy or benignancy. The components of the laser system are
purchased from two unaffiliated parties, and assembled and installed into the
CTLM(TM) by us.
Using the patient scans from our investigational clinical trials, we intend to
develop a clinical atlas of the optical properties of benign and malignant
tissues with respect to absorption and scattering parameters of light as it
passes through the tissue. This atlas will be expanded as we obtain additional
scans of breast abnormalities. The CTLM(TM) is designed to provide the physician
with objective data for interpretation and further clinical work-up.
Accordingly, we believe that the CTLM(TM) will improve early diagnosis, reduce
diagnostic uncertainty, and decrease the number of biopsies performed on benign
lesions. Further, the CTLM(TM) does not expose the patient to ionizing radiation
or painful compression, which we believe are factors contributing to the
unwillingness or inability of a significant portion of the patient population to
obtain 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
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.
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Clinical efficacy of conventional mammography diminishes proportionately with
the abundance of fibroglandular breast tissue. Based upon this fact, limited
interpretability of a mammogram increases the risk that a lesion may be
overlooked, and diagnosis and treatment may be delayed, thus threatening the
patient's survival probability. Forceful compression of breast tissue in order
to aid in the distinction between so-called normal and abnormal breast tissue is
fairly effective, but is uncomfortable, and often painful. This discomfort level
poses an obstacle for many women in deciding to have their first mammogram or
deciding whether to ever return for an annual screening mammogram.
Scanning of the breast with the CTLM(TM) utilizes no compression of tissue. The
laser and detector array orbits 360 degrees around the breast, gathering data
that is used to reconstruct multiple cross-sectional images of the breast's
internal structures. We believe that such images will provide the physician with
increased accuracy in lesion location, as well as determination of the extent
and involvement of breast disease. The CTLM(TM) will also be able to produce a
near three-dimensional view.
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. 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.
We believe there is a significant market opportunity for objective breast cancer
management technology which does not include discomfort and exposure to
radiation. We believe that use of the CTLM(TM) to detect breast cancer will be
especially promising for women between the ages of 20 to 50 (over 50 million
women in the United States) for whom x-ray mammography has lower efficacy. These
women often present diffuse palpable benign breast conditions, which can mask
malignancies or pre-malignant conditions.
FLUORESCENCE IMAGING
We are investigating the use of fluorescent and PDT compounds in conjunction
with the CTLM(TM) for detection of breast abnormalities. Certain molecules
exhibit the phenomenon of emitting light after being illuminated by light of the
appropriate wavelength, i.e., from a laser. This characteristic is referred to
as fluorescence. The compounds that produce fluorescence are commonly referred
to as fluorescent dyes or simply "dyes". A number of pharmaceutical companies
are developing fluorescent dyes that selectively attach to specific types of
cells, one of which is PDT compounds, a cancer-seeking drug activated by light.
When cells with the dye attached are illuminated with light of the proper
wavelength, the dye will fluoresce at a unique wavelength. If the dye has been
designed to attach to cancer cells, the fluorescence will be produced at the
location where the cancer cells are situated.
We have signed non-disclosure/confidentiality agreements with two of these
companies in order to share technology for the use of the CTLM(TM) with
fluorescence and PDT's. In February 1999, we demonstrated that the CTLM(TM) has
the ability to both excite fluorescent dyes and to detect the fluorescent light
produced by the dye. These experiments were conducted by placing fluorescent
dyes inside a breast equivalent phantom and producing an image of the
fluorescence using data acquired by the CTLM(TM). The CTLM(TM) was adjusted to
produce laser light of the required wavelength and had optical filters installed
to allow the detectors to sense only the fluorescent light. The ability to
excite the dye, detect the location of the fluorescence within the simulated
breast, and create an image of the result has not, to our knowledge, been
accomplished before. In January 1997, we applied for a patent for a
fluorescence-imaging scanner. The Patent was issued on September 14, 1999, as
Patent No 5,952,664.
The use of dyes, sometimes referred to as contrast agents or simply "contrast",
for radiographic imaging is a common medical practice. The use of contrast
agents for breast imaging is not currently a common medical practice. The FDA
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has recently approved the use of radioactive compounds to identify breast cancer
locations. The use of non-radioactive fluorescent dyes for breast imaging, we
believe, has the potential to play a significant role in breast cancer
detection. We intend to work with contrast agent manufacturers to explore and
possibly develop this emerging technique. The FDA must first approve the use of
non-radioactive florescent dyes before they can be used commercially. Any such
approval could take several years.
GOVERNMENT REGULATION
United States Regulation
The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(TM) in the
United States. Because the CTLM(TM) is a medical device, it is subject to the
relevant provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act") and
its implementing regulations. Pursuant to the FD&C Act, the 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 specific
labeling requirements and 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.
The FDA classifies medical devices intended for human use into three classes:
Class I; Class II; and Class III. In general, Class I devices are products for
which the FDA can determine that their safety and effectiveness 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 QSRs. 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
potentially unreasonable risk of illness or injury. Devices in Class III, such
as the CTLM,? 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. Manufacturers of Class II devices 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 review 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 quality system regulations commonly referred to as
QSR's (formerly GMP requirements) prior to approval of a PMA. While the FDA has
responded to some PMA applications within the allotted time period, PMA reviews
generally take approximately 12 to 18 months or more from the date of filing to
approval. The PMA process is a lengthy and expensive one, and there can be no
assurance that a PMA application will be reviewed within 180 days or that the
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FDA will ever approve a PMA application. We intend to request expedited review
of our PMA application. See Item 1. "Business-Regulatory and Clinical Status,
United States/FDA". If we were unable to obtain prompt FDA approval, it would
have a material adverse effect on our business and financial condition and could
result in postponement of the commercialization of the CTLM.? See "Regulatory
and Clinical Status".
Any products manufactured or distributed by us pursuant to a PMA are or will be
subject to pervasive and continuing regulation by the FDA. The FDA Act also
requires that our products be manufactured in registered establishments and in
accordance with QSR regulations. Labeling, advertising and promotional
activities are subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. The export of medical devices is also subject to
regulation in certain instances. In addition, the marketing and use of our
products may be regulated by various state agencies.
All lasers manufactured for us are subject to the Radiation Control for Health
and Safety Act administered by the Center for Devices and Radiological Health of
the FDA. The law requires laser manufacturers to file new product and annual
reports and to maintain quality control, product testing, and sales records, and
to comply with labeling and certification requirements. Various warning labels
must be affixed to the laser, depending on the class for the product under the
performance standard.
Both the FDA and the individual states may inspect the manufacturers of our
products on a routine basis for compliance with current QSR regulations and
other requirements.
In addition to the foregoing, we are subject to numerous federal, state, and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, and fire hazard control. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business. See Item 6. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements - Extensive Government Regulation, No Assurance
of Regulatory Approvals".
Foreign Regulation
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit us to
begin marketing the CTLM(TM) in Europe and Asia before marketing would be
permitted in the United States. In order to sell our products within the
European Economic Area ("EEA"), companies are required to achieve compliance
with requirements of the Medical Devices Directive ("MDD") and affix a "CE"
marking on their products to attest such compliance. In Europe, we will be
required to obtain the certifications necessary to enable the CE mark to be
affixed to our products in order to conduct sales in member countries of the
EEA. In order to obtain these certifications, we must utilize the services of a
notified body ("NB"), a regulatory body from the private sector which is
responsible for the review and approval of the documentation submitted by us in
order to enable the CE mark to be affixed to products. Certain standards and
steps must be complied with in order to obtain a CE Mark in order to distribute
the CTLM(TM) in the EEA. These standards include risk assessment, quality
assurance and labeling. The listed standards are for the EEA market only and
additional document requirements and standards exist for other markets.
In addition, unapproved products subject to the PMA requirements must receive
prior FDA export approval in order to be exported outside of the United States
unless they are approved for the use by any member country of the EEA or certain
other countries. These countries include Australia, Canada, Israel, Japan, New
Zealand, Switzerland, and South Africa. The device can be exported to the other
qualified countries that have approved the device for use, provided that the
following information must be submitted to the FDA: (i) a complete description
of the device intended for export; (ii) the status of the device in the U.S.;
(iii) a letter from the appropriate foreign liaison (person with authority to
sign a letter of acceptance for the foreign government stating that (a) the
device is not in conflict with the laws for the country to which it is intended
for export; (b) the foreign government has full knowledge of the status of the
device in the U.S.; and (c) import is permitted or not objected to. The FDA
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reviews export requests to determine that exportation of the device (1) is not
contrary to public health and safety and (2) has the approval of the country to
which it is intended for export. If the device meets the above criteria, it is
approved for export.
There can be no assurance that we will meet the FDA's export requirements or
receive FDA export approval when such approval is necessary, or that countries
to which the devices are to be exported will approve the devices for import.
Failure of the Company to meet the FDA's export requirements or obtain FDA
export approval when required to do so, or obtain approval for import, could
have a material adverse effect on our business, financial condition, cash flows
and results of operations.
REGULATORY AND CLINICAL STATUS
United States/FDA
In June 1998, the FDA granted our application for an investigational device
exemption ("IDE") in order to conduct human clinical trials of the CTLM(TM)
beyond the very limited trials we conducted in 1996. The IDE permitted us to
scan 20 patients at our in-house facilities in Plantation, Florida, subject to
review and monitoring by an Institutional Review Board ("IRB"). The IRB
consisted of, seven physicians and one physicist, all unaffiliated with us whose
task was to assure, both in advance and by periodic review, that appropriate
steps are taken to protect the rights and welfare of the persons participating
as subjects of our research. The IRB was not responsible for nor did it
participate in obtaining the data, the interpretation of data or clinical
results, or the approval of the CTLM(TM). IRBs use a group process to review
research protocols and related materials (e.g., informed consent documents and
investigator brochures) to ensure that:
o 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.
o 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.
o Selection of subjects is equitable.
o 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.
o Where appropriate, the research plan makes adequate provision for
monitoring the data collected to ensure the safety of subjects.
o There are adequate provisions to protect the privacy of subjects and
to maintain the confidentiality of data.
o Appropriate additional safeguards have been included in the study to
protect the rights and welfare of subjects who are members of a
vulnerable group.
In September 1998, we formally submitted the first and second series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.
The FDA responded to the submission in October 1998 asking that we limit future
submissions to significant findings, milestones, annual reports, or changes that
may affect the safety of the CTLM(TM). In all we scanned 20 women at our
in-house facility. These scans produced no significant findings, milestones or
changes that would affect the safety of the CTLM(TM) so there were no additional
submissions except for our request to expand the study to the Nassau County
Medical Center in East Meadow, New York ("NCMC"), where access to women with
breast cancer would be more practical.
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We received FDA approval to conduct the NCMC investigational study in February
1999. This IDE application is limited to 275 subjects. We selected the number
275 based on the distribution of the types of breast conditions outlined in the
IDE protocol. Pursuant to our original discussions with the FDA, approximately
425 cases will be in the PMA application when it is submitted. Because of the
limited experience acquired from the 20-patient in-house study, we elected to
establish one clinical site, NCMC, and begin testing before expanding the next
series of clinical tests to additional locations. In July 1999, the NCMC
clinical investigational trials began.
The IRB for NCMC is comprised of 23 unaffiliated members. The IRB was already
formed and was not impaneled specifically for the CTLM(TM) investigational
clinical trials.
The results of each patient's scan are compared to her mammogram by NCMC and
then the scan and the mammogram are forwarded to us for our review. The
comparisons may be done individually after each scan or in batches. Depending on
the quality of the images, the software or hardware of the CTLM(TM) may be
adjusted to obtain maximum clarity.
In November 1999, we received FDA approval to use the University of Virginia
Health System ("UVA Hospital") as the second approved testing site for the
CTLM(TM) breast imaging device. The UVA Hospital testing site will follow an IDE
protocol similar to the one approved for NCMC. The UVA Hospital clinical
investigational trials began in November 1999. The FDA approved protocol under
the IDE provides for a total of 275 subjects to be tested at each of the NCMC
and the UVA Hospital sites.
In March 2000, we submitted to the FDA an interim report on the trials being
conducted at NCMC and the UVA Hospital sites. The report contains statistical
results as well as comparative mammography and CTLM(TM) images of malignant and
benign case studies.
Clinical investigation of the use of indocyanine green as an optical breast
imaging contrast agent has commenced at the UVA Hospital in May 2000 and in July
2000 at NCMC. The CTLM(TM) scanner has been used to excite the indocyanine green
in the patient's blood and detect the radiated fluorescence. The rate at which
the indocyanine green travels through the breast has been measured.
Investigation is ongoing to evaluate how these observed parameters could be used
to enhance detectability of breast abnormalities. We intend to include 50 cases
utilizing indocyanine green in the 425 cases to be submitted with the PMA.
We are currently conducting discussions with three additional hospitals as we
are contemplating expanding the clinical trials to an additional test site so
that we can more quickly reach our desired total of 425 subjects to be included
in our PMA. As of the date of the report, we have completed trials with 329 of
the 425 subjects needed. We have received an oral approval of the protocol and
site plan from one of the proposed clinical sites. In order to expand our
clinical trials to another site, the IDE application for Nassau Hospital and UVA
Hospital will have to be amended by supplying the required documentation, i.e.,
the protocol, signed investigator agreement, IRB approvals and the informed
consent form. Once a formal commitment has been obtained and the IDE approved by
the FDA, the site will become operational. Additionally, we plan to develop an
atlas of clinical examples on CD-ROM for teaching purposes. With a large number
of examples of each breast condition typically encountered, the atlas is
expected to be of great value.
In order to sell the CTLM(TM) commercially in the United States, we must obtain
marketing clearance from the FDA. A PMA application must be supported by
extensive data, including pre-clinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device.
Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug, and Cosmetic Act, the FDA has
180 days to review a PMA application, although in most cases the FDA
substantially expands that time period through requests for additional
information or clarification of existing information.
9
<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.
After reviewing the FDA Modular Submission sequence of a Pre-market Approval
application (PMA), we decided to request permission to follow the guidelines of
the "Standardized Shell for Modular Submission" for the FDA approval process.
The FDA granted the request and assigned a Modular Shell Control Number and a
general description of items required for the submission. Although we believe
that our PMA will qualify for expedited review, there can be no assurance that
any such review will be granted or if granted, that the PMA will be approved, or
that such approval will be received on a timely basis. See "Government
Regulation".
Foreign
We have begun the process of evaluating the CTLM(TM) for application of
regulatory approval marks and showing compliance with the Medical Device
Directive ("MDD"), which contains rules and regulations which must be complied
with before placement of the CE mark. Many steps need to be taken into
consideration with the end goal of accessing the EEA market. At present, we have
not applied to the FDA for export approval for foreign sales. The following is a
brief explanation of the steps we have taken or are currently taking to achieve
this goal.
Evaluating and Securing a Notified Body ("NB") - The role of an NB is to assist
manufacturers (domestic and international) in showing compliance with the
governmental regulations that govern that specific category. Each country's
government is able to designate a competent authority, which, among other
things, is responsible for the evaluation of regulatory non-governmental
agencies for designation as an NB.
An agency can be approved to be an NB for different categories (i.e. electrical
products, machinery, medical, etc.). For instance, the NB that we 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 (e.g., quality assurance evaluations) and the manufacturer will need to
look to another NB for assistance in the other areas.
The evaluation and acceptance of an appropriate NB is critical since changing an
NB once chosen is a costly matter. Great care must be taken in finding an NB
with a reputation for educated interpretation of requirements and excellent
customer service. We had previously chosen DGM of Denmark to be our NB but we
are now considering selecting an NB that maintains offices in the United States.
Product Safety Evaluation -We believe that one of the most important aspects of
product safety is the design of the product. If safety standards are not
considered through the design of the product, the product safety evaluation may
require that the mechanical and electrical parts of the product be re-designed.
Throughout the CTLM(TM) design process, we have made every effort to confirm
that it complies with all domestic and international safety standards. New
requirements, or new interpretations of existing requirements, may affect the
CTLM(TM).
Quality Assurance - Our current goal is to implement a full quality system at
our corporate offices. Our Quality Assurance Manager ("QAM") has begun the
process of implementation in accordance with the required standards. After
10
<PAGE>
implementation of the quality system, auditors are required to review a history
of the system, in particular how it works and how the normal difficulties that
occur in design and manufacturing were overcome. Our QAM and the NB will need to
determine how much history is required for proper proof that the system is
adequate.
Software Evaluation - Our Software Manager heads the preparations for software
evaluation. Because the standards in this area are relatively new to the
industry, regulatory agencies will be very cautious in the evaluation. Through
advice from our consultant, we have begun document preparation for evaluation
submission. One of the larger steps in documentation preparation for this
evaluation is the risk analysis for the device. Although there may be changes to
the CTLM(TM) that may affect the report, we have completed a risk analysis for
the CTLM(TM) and are ready to proceed with the remainder of the documentation.
Efficacy - Almost any market will require the proof of the effectiveness of a
medical device. This is done by clinical trials and is a process that is the
same for the United States as for the EEA; however reporting methods may differ.
As we continue with clinical trials in the U.S., these efforts will also benefit
us in the EEA market, as we will be able to use our U.S. results to satisfy the
European regulators.
SALES AND MARKETING
At present, our President is also the Director of Sales. As Director of Sales,
she is in charge of locating, obtaining, and coordinating with strategic
marketing and distribution companies who have established marketing
capabilities, both domestic and international. The target domestic market
includes most of the over 10,000 mammography centers across the United States,
which are located in both large and small hospitals and in 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, the extent that, and rate at 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) over existing technology and
cancer detection methods. We have focused our efforts on establishing a presence
at major Breast Imaging Conferences that are held each year. Failure of our
products to gain market acceptance would have a material adverse effect on our
business, financial condition, and results of operations. There can be no
assurance that physicians or the medical community in general will accept and/or
utilize the CTLM(TM).
In order to market any products we may develop, we will have to develop a
marketing and sales force with technical expertise and distribution capability.
There can be no assurance that we will be able to establish sales and
distribution capabilities or that we will be successful in gaining market
acceptance for any products we may develop.
Reliance on International Sales
The laws of certain European and Asian countries may permit us to begin
marketing the CTLM(TM) in Europe and Asia before marketing would be permitted in
the United States. See "Government Regulation". We intend to commence
international sales of the CTLM(TM) in Europe and Asia prior to commencing
commercial sales in the United States, where sales cannot occur unless and until
we receive pre-market approval from the FDA. Until we receive pre-market
approval from the FDA to market the CTLM(TM) in the United States, as to which
there can be no assurance, our revenues, if any, will be derived from sales to
international distributors. A significant portion of our revenues, therefore,
may be subject to the risks associated with international sales, including
economical and political instability, shipping delays, fluctuation of foreign
currency exchange rates, foreign regulatory requirements and various trade
restrictions, all of which could have a significant impact on our ability to
deliver products on a timely basis. Future imposition of, or significant
increases in the level of customs, duties, export quotas or other trade
restrictions could have a material adverse effect on our business, financial
condition and results of operations. The regulation of medical devices,
particularly in Europe, continues to develop and there can be no assurance that
new laws or regulations will not have an adverse effect on us.
11
<PAGE>
INTERNATIONAL DISTRIBUTORS
Since 1997, we have entered into international distribution agreements with
distributors in various countries. These agreements provide for initial terms of
18 to 36 months, beginning upon our receipt of the PMA. Each agreement contains
a minimum sales quota adapted to the country in question and contains a one or
two-year extension in the event that the sales quota for the initial term is
met.
The following are our international agreements that we believe hold the most
promise:
o In January 1998, we entered into an International Distribution
Agreement with Emtron, a leading medical equipment distributor based
in Turkey. Emtron currently represents products for companies such as
Summit Technology, Sunrise Medical Technology, Iris Medical
Instruments, Telsar, and Medlab, among many others, in 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.
o Pursuant to the Agreement, Emtron will have exclusive rights to market
the CTLM(TM)in Turkey for a term of 18 months with an option to renew
for an additional one-year term.
o In April 1998, we entered into an exclusive International Distribution
Agreement with Focus Surgical LTD., to distribute the CTLM(TM) to
hospitals and clinics throughout the United Kingdom and Ireland. The
term of the Agreement is three years, with a minimum purchase
requirement of 10, 12, and 15 CTLM's(TM) in the first, second, and
third year(s) of the Agreement, respectively. Focus Surgical currently
distributes non-competitive laser products for companies such as
Sunrise Medical Technologies and Baltec, among many others.
In December 1998, we entered into distribution agreements with Consultronix and
Iberadac to distribute the CTLM(TM) throughout Poland, and Portugal and Spain,
respectively. The Agreements are for a term of 3 years, with a renewal option by
us for an additional one-year.
o 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.
o In November 1999, we entered into a distribution agreement with Cycle
of Life Technologies, Inc., a division of INTRACOR Inc., an
international trading company of medical products based in Canada.
This agreement gives Cycle of Life the exclusive right to distribute
and sell the CTLM(TM)in Canada and several other countries for a
period of three years with the possibility of a two-year extension of
the exclusive distribution and sales rights if Cycle of Life meets
specific sales requirements. The terms of the agreement provide that
Cycle of Life will distribute a minimum of 50 CTLM(TM)systems in its
countries at a purchase price of $250,000 per system over the initial
two years of the agreement; if these requirements are not met, we
would be able to terminate the agreement. As of August 31, 2000, we
have not earned any revenues from this agreement. The purchase order
received for two CTLM(TM)systems totaling $500,000 dated December 1,
1999 cannot be filled until we receive FDA export approval to send
CTLM(TM)systems to Canada. At present, we are having our
CTLM(TM)application reviewed by Canadian authorities, which approval
is required as part of the documentation we must submit to the FDA in
our application for export approval.
o In May 2000, we entered into an exclusive distribution agreement with
MD Export Inc. to distribute the CTLM(TM) in Mexico. The Agreement is
for a term of three years, with a renewal option by us for an
additional two years, if the distributor sells 50 CTLM(TM) systems in
the initial three-year term of the distribution agreement.
The following is a summary of our existing international distribution
agreements. All agreements are exclusive, except as indicated:
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<PAGE>
INTERNATIONAL DISTRIBUTORS BY COUNTRY
Country Term Renewal Period
Argentina 3 years 2 years
Australia 3 years 2 years
Austria 3 years 2 years
Barbados 3 years 2 years
Belgium 3 years 1 year
Bolivia 3 years 2 years
Bosnia 3 years 2 years
Brazil 3 years 2 years
Brunei 3 years 2 years
Bulgaria 3 years 2 years
Canada 3 years 2 years
Chile 3 years 2 years
China 3 years 2 years
Columbia 3 years 2 years
Croatia 3 years 2 years
Denmark 3 years 2 years
Ecuador 3 years 3 years
France 3 years 2 years
French Guyana 3 years 2 years
Germany 3 years 2 years
Greece 3 years 2 years
Guyana 3 years 2 years
Hong Kong 3 years 2 years
Hungary 3 years 2 years
India 3 years 2 years
Indonesia 3 years 2 years
Ireland 3 years 1 year
Israel 2 years 2 years
Italy 29 months 2 years
Kazakhstan 3 years 2 years
Kuwait 3 years 2 years
Kyrgyzstan 3 years 2 years
Luxembourg 3 years 1 year
Macao 3 years 2 years
Macedonia 3 years 2 years
Malaysia 3 years 2 years
Mexico 3 years 2 years
Netherlands 3 years 1 year
New Zealand 3 years 2 years
Paraguay 3 years 2 years
Peru 3 years 2 years
Philippines 3 years 2 years
Poland 3 years 1 year
Portugal 3 years 1 year
13
<PAGE>
Romania 3 years 2 years
Russia 3 years 2 years
San Marino 29 months 2 years
Saudi Arabia 3 years 2 years
Serbia 3 years 2 years
Singapore 3 years 2 years
Slovakia 3 years 2 years
Slovenia 3 years 2 years
South Africa 3 years 2 years
South Korea 2 years 2 years
Spain 3 years 1 year
Surinam 3 years 2 years
Switzerland 3 years 2 years
Taiwan 3 years 2 years
Tajikistan 3 years 2 years
Thailand 3 years 2 years
Trinidad & Tobago 3 years 2 years
Turkey 18 months 1 year
Ukraine 3 years 2 years
United Kingdom 3 years 1 year
Uruguay 3 years 2 years
Uzbekistan 3 years 2 years
Vatican City 29 months 2 years
Venezuela (Non-Excl) 3 years 2 years
While our distribution agreements contain sales quotas and other provisions
which allow us to terminate the agreements upon breach by the distributor, the
laws of many countries provide special statutory protections, which do not exist
in the United States, for distributors of imported products. Consequently, in
many countries we may find it very difficult, if not impossible to terminate a
non-performing exclusive distributor and replace that distributor with a more
capable distributor. The Company could be materially adversely affected if it is
unable to promptly terminate non-performing exclusive distributors in major
markets for the CTLM(TM).
THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of our products by regulating the level
of reimbursement provided by such payors to the physicians and clinics utilizing
the CTLM(TM) or by refusing reimbursement. If examinations utilizing our
products were not reimbursed under these programs, our ability to sell our
products may be materially and/or adversely affected. There can be no assurance
that third-party payors will provide reimbursement for use of our products.
Several states and the U.S. government are investigating a variety of
alternatives to reform the health care delivery system and further reduce and
control health care spending on health care items and services, limit coverage
for new technology and limit or control the price health care providers and drug
and device manufacturers may charge for their services and products,
respectively. If adopted and implemented, such reforms could have a material
adverse effect on our business, financial condition and results of operations.
In international markets, reimbursement by private third-party medical insurance
providers, including governmental insurers and independent providers, varies
from country to country. In certain countries, our ability to achieve
significant market penetration may depend upon the availability of third-party
governmental reimbursement. Revenues and profitability of medical device
companies may be affected by the continuing efforts of governmental and third
party payers to contain or reduce the cost of health care through various means.
14
<PAGE>
PRODUCT LIABILITY
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing and marketing of cancer detection products.
Significant litigation, not involving us, has occurred in the past based on
allegations of false negative diagnoses of cancer. While the CTLM(TM) is being
developed as an adjunct to other diagnostic techniques, there can be no
assurance that we will not be subjected to future claims and potential
liability. The FDA does not require liability insurance and we therefore did not
acquire it for our in-house clinical investigational trials. At present we carry
$3,000,000 in product liability insurance for both clinical sites and will
continue to carry it for further clinical testing and subsequent distributors.
COMPETITION
The medical device industry generally, and the cancer diagnostic imaging
segments in particular, are characterized by rapidly evolving technology and
intense competition. Other companies in the medical device industry may be
developing, or could in the future attempt to develop, additional products that
are competitive with the CTLM(TM). The market in which we intend to participate
is highly competitive. Many of the companies in the cancer diagnostic and
screening markets have substantially greater technological, financial, research
and development, regulatory, manufacturing, human and marketing resources, and
experience than we do. Our competitors may succeed in developing or marketing
technologies and products that are more effective or less costly than ours, or
that would render our technology and products obsolete or noncompetitive. We may
not be able to compete against such competitors and potential competitors in
terms of manufacturing, marketing, and sales.
The CTLM(TM) will be competing primarily 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 be reluctant to use a new product.
Although we believe that our products may offer certain technological advantages
over our competitors' currently marketed products, earlier entrants in the
market for a diagnostic application often obtain and maintain significant market
share relative to later entrants.
Currently, mammography is employed widely and our ability to sell the CTLM(TM)
to medical facilities will, in large part, be dependent on our ability to
demonstrate the clinical utility of the CTLM(TM) as an adjunct to mammography
and physical examination and our advantages over other available diagnostic
tests. The competition for developing a commercial device utilizing computed
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 CTLM(TM)
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 future technical changes will not
render our 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 our business, financial condition, and results of operations.
PATENTS
The patent for the CTLM(TM) was issued in December 1997 under Patent Number
5,692,511 (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. We own the rights to the Patent for its
17-year life pursuant to an exclusive patent licensing agreement with Richard
Grable, our Chief Executive Officer, who invented the CTLM(TM) and owns the
Patent. See "Patent Licensing Agreement" and "Certain Transactions."
15
<PAGE>
In September 1999, we were issued a patent for a laser imaging apparatus using
biomedical markers that bind to cancer cells. This patent was issued under
Patent Number 5,952,664 and is owned by the Company. The biomedical marker we
are currently testing is a fluorescent marker. We plan to continue studying
other biomedical markers in conjunction with major pharmaceutical companies as a
potential advanced diagnostic feature to be used with our CTLM(TM) system. The
CTLM(TM) in combination with the fluorescent feature has the potential to be
used with photodynamic therapy (PDT) to aid in the treatment of breast cancer.
In February 2000, our patent application for the reconstruction algorithm was
granted a notice of allowance by the United States Patent and Trademark office.
This patent, "Method for Reconstructing the Image of an Object Being Scanned",
should be issued to us in the next several months.
In February 2000, we were issued a patent for: "Device for Determining the
Perimeter of the Surface of an Object Being Scanned and for Limiting Reflection
from the Object Surface". The patent was issued under Patent Number 6,029,077
and is owned by the Company. This particular patent covers the technique for
determining the perimeter of the breast, which simplifies the algorithms
necessary to produce the image.
In March 2000, we were issued a patent for: "Apparatus and Method for
Determining the Perimeter of the Surface of an Object Being Scanned". The patent
was issued under Patent Number 6,044,288, and is owned by the Company. This
additional patent covers an optical technique to determine the perimeter of a
scanned breast. The Company's patent 6,029,077 described in the previous
paragraph covers a different technique to perform the same measurement.
Together, these two patents protect the practical techniques that can be used to
acquire this information.
In August 2000, we were issued a patent for: "Detector Array for Use in a Laser
Imaging Apparatus". The patent was issued under Patent Number 6,100,520 and is
owned by the Company. This patent describes the several different variations
that can be used while scanning the breast without any contact between the
breast and the optical components. Unlike the conventional method, this unique
feature allows the CTLM(TM) to scan the breast without the use of breast
compression.
Below is a table indicating all United States patents pending or issued with
regard to Optical Tomography:
<TABLE>
<CAPTION>
U.S. PATENTS PENDING AND ISSUED
<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 Structure) in addition
to above
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
Yes Apparatus and Method for Determining the 6558-1 08/965,148 11/6/97 6,044,288 3/28/00
Perimeter of the Surface of an Object
Being Scanned
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
Yes Device for Determining the Perimeter of 6559-1 08/965,149 11/6/97 6,029,077 2/22/00
the 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
16
<PAGE>
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
No Data Acquisition Technique Using Wall Eye 6571 60/032,593 11/29/96 Pending
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
No Detector Array with Variable Amplifiers 6572-1 08/979,328 11/26/97 Pending
for 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 6,100,520 8/8/00
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 Notice of
Object Scanned with a Laser Imaging Apparatus Allowance
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
Yes Laser Imaging Apparatus Using Biomedical 6647 09/008,477 1/16/98 5,952,664 9/14/99
Markers That Bind to Cancer Cells
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
No Phantom for Optical and Magnetic Resonance 6648 09/096,521 6/12/98 Pending
Imaging Quality Control
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
Yes Time-Resolved Breast Imaging Device 6707 09/199,440 11/25/98 Pending
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
Yes CCD Array Used as a Multiple Detector 6825 09/497/691 2/4/99 Pending
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
No Suppression of Optical Reflection 6996-Prv 60/197615 4/14/00 Provisional
in Medical Optical Imaging Scanner
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
No Multiple Wavelength Simultaneous Data 6997-Prv 60/202933 5/9/00 Provisional
Acquisition Device for Breast Imaging
PCT Appl. For Case # Serial # Filing Date Patent # Patent Date
No Use of Fluorescent Dye to Facilitate 7035-Prv 60/224350 8/11/00 Provisional
Surgery
</TABLE>
Neither Mr. Grable nor we hold foreign patents; however, the table below sets
forth certain information with regard to the patents that have been applied for.
<TABLE>
<CAPTION>
FOREIGN PATENT APPLICATIONS PENDING
<S> <C> <C> <C>
AUSTRALIA
Description For Intl. Appl. # Filing Date
National Phase in Australia Diagnostic Tomographic PCT/US95/08225 7/10/95
of PCT Appl. Laser Imaging Apparatus
CANADA
Description For Intl. Appl. # Filing Date
National Phase in Canada of Diagnostic Tomographic PCT/US95/08225 7/10/95
PCT Appl. Laser Imaging Apparatus
China
Description For Intl. Appl. # Filing Date
Chinese Patent Appl. For Diagnostic Tomographic PCT/US95/08225 7/10/95
Invention Laser Imaging Apparatus
European Office
Description For Intl. Appl. # Filing Date
National Stage in Europe of Diagnostic Tomographic PCT/US95/08225 7/10/95
PCT Appl. Laser Imaging Apparatus
17
<PAGE>
Japan For Intl. Appl. # Filing Date
Natl. Phase in Japan of PCT Diagnostic Tomographic PCT/US95/08225 7/10/95
Appl. Laser Imaging Apparatus
MEXICO
Description For Intl. Appl. # Filing Date
National Phase in Mexico Diagnostic Tomographic PCT/US95/08225 7/10/95
of PCT Appl. Laser Imaging Apparatus
PCT Covers European
Countries
Description For Intl. Appl. # Filing Date
PCT Appl. For RJG Diagnostic Tomographic PCT/US95/08225 7/10/95
Imaging Apparatus
PCT Intl. Appl of IDSI Detector Array for Use in PCT/US97/20970 11/28/97
a Laser Imaging Apparatus
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
PCT Intl. Appl. Of Wake, Device for Determining PCT/US97/19615 11/7/97
Grable & Rohler the Perimeter of the
Surface of an Object
Being Scanned and for
Limiting Reflection from
the Object Surface
PCT Intl. Appl of IDSI Apparatus for Determining PCT/US97/19614 11/7/97
the Perimeter of the
Surface of an Object
Being Scanned
PCT Intl. Appl of IDSI Time-Resolved Breast PCT/US98/24939 11/25/98
Imaging Device
</TABLE>
We intend to file for patents on products, including the CTLM(TM), for which we
believe the cost of obtaining a patent is economically reasonable in relation to
the expected protection obtained. There can be no assurances that any patent
that we apply for will be issued, or that any patents issued will protect our
technology. If the patents we license or obtain are infringed upon, or if we are
required to defend any patent infringement cases brought against us, that will
require substantial capital, the expenditure of which we might not be able to
afford.
PATENT LICENSING AGREEMENT
The Company's predecessor was formed in December 1993 for the sole purpose of
developing and commercializing Richard Grable's invention, a CT laser
breast-imaging device (the "Mammoscan(TM)"). The Mammoscan(TM) had already been
exhibited at the Radiology Society of North America ("RSNA") 1989 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 became available to speed up the processing, the Founders
believed that this device would be a major breakthrough in the early detection
of breast cancer.
Mr. Grable invented the CTLM(TM) by making major improvements in the
Mammoscan(TM) technology. In June 1998, we finalized an exclusive patent license
agreement with Mr. Grable, which encompasses the technology for the CTLM(TM).
The Company and Mr. Grable had previously entered into an oral agreement for the
exclusive license for the Patent that was never memorialized in written form.
The term of the license is for the life of the Patent (17 years) and any
renewals, subject to termination, under specific conditions. As consideration
for this license, we issued to Mr. Grable 7,000,000 shares of common stock. In
addition, we have agreed to pay Mr. Grable a royalty based upon a percentage,
ranging from 6% to 10%, of the net selling price (the dollar amount earned from
our sale, both international and domestic, before taxes minus the cost of the
goods sold and commissions or discounts paid) of all the products and goods in
which the patent is used. Mr. Grable has agreed that these royalty provisions
will not apply to any sales and deliveries of CTLM(TM) systems made by the
Company prior to receipt of the PMA for the CTLM(TM). In addition, following
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issuance of the PMA, the Company and Mr. Grable have agreed that Mr. Grable will
be paid guaranteed minimum royalties of at least $250,000 per year based on the
sales of the products and goods in which the CTLM(TM) patent is used.
The following table sets forth the Patent licensing royalty structure:
ANNUAL NET SELLING PRICE PERCENTAGE
$0 to $1,999,999 10%
$2,000,000 to $3,999,999 9%
$4,000,000 to $6,999,999 8%
$7,000,000 to $9,999,99 7%
Greater than $10,000,000 6%
OEM Agreement
In January 1998, we entered into an Original Equipment Manufacturer Agreement
(OEM) with Imation Corp. ("Imation") which was purchased by the Eastman Kodak
Company ("Kodak") in December 1998. Immediately after the purchase by Kodak, we
received correspondence from them, which confirmed that our OEM agreement would
not be changed by the acquisition of Imation. At that time, we purchased a new
Dry View Imager, which was delivered on April 5, 1999. The additional Imation
Dry View Imager on loan to us as a demonstrator was shipped to Nassau County
Medical Center on April 7, 1999. We subsequently received a new draft OEM
agreement from Kodak, which is currently being reviewed by our legal counsel.
Pursuant to the OEM Agreement, we have been granted a limited, nonexclusive,
worldwide, royalty-free license to use Imation's proprietary information with
regard to technical interface, and timing diagrams, specification, definitions,
and drawings defining such technical interface (the "Dry View Technology"). The
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.
It was originally believed that the OEM agreement could provide us 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
we would be competing with Imation's (now Kodak's own sales force) and others
who have far greater resources and personnel than us. Due to this competition
factor, we have not marketed any DryView to date and will use the technology as
a value-added option to the CTLM(TM) when sold, thus eliminating the need for
the customer to set up a dark room and purchase chemicals for processing, which
traditional image processors require.
NASDAQ LISTING
On July 21, 1999, we received an opinion of the U.S. Securities and Exchange
Commission (the "Commission") dismissing our application for review of our
appeal to the denial of our application for Nasdaq Small Cap Market listing. The
Commission found that Nasdaq did not exceed its authority by requiring us to (i)
satisfy the $4.00 per share bid price requirement; (ii) satisfy all other
requirements for initial listing; and (iii) evidence a minimum of $5,000,000 in
net tangible assets. The Commission went on to say that the specific grounds
identified as the basis for Nasdaq imposing the conditions for inclusion (i.e.
the our stock price was well below the $4.00 minimum required for Nasdaq
inclusion and concern that we would not be able to maintain compliance with the
$2,000,000 net tangible assets maintenance requirement over the long term)
existed in fact and therefore Nasdaq did not exceed its authority by requiring
the net tangible assets and share bid price conditions. We do not intend to take
any further action in this matter.
EMPLOYEES
As of the date of this Report, we have 37 full-time employees, including our
three executive officers, and two part-time employees. A majority of our
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employees (26) are employed in the areas of scientific and product research and
development. Our ability to provide our services is dependent upon our
recruiting, hiring and retaining qualified technical personnel. To date, we have
been able to recruit and retain sufficient qualified personnel. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
Due to the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific, technical
and managerial personnel. Therefore, we have entered into employment agreements
with certain of our executive officers and key employees. The loss of the
services of existing personnel as well as the failure to recruit key scientific,
technical and managerial personnel in a timely manner would be detrimental to
our research and development programs and to our business. Our anticipated
growth and expansion into areas and activities requiring additional expertise,
such as marketing, will require the addition of new management personnel.
Competition for qualified personnel is intense and there can be no assurance
that we will be able to continue to attract and retain qualified personnel
necessary for the development of our business.
YEAR 2000
We have successfully implemented our Year 2000 Compliance Plan and have
experienced no adverse effects from the transition from 1999.
ITEM 2. DESCRIPTION OF PROPERTY
Our facilities are located at 6531 N.W. 18th Court, Plantation, Florida. The
facilities are owned by us and comprise a 24,000-sq. ft. building with ample
space to easily expand, located on a 5-acre landscaped tract. In April 1999,
we placed a mortgage on our property in connection with the issuance of a
Convertible Debenture to Charlton Avenue LLC. Upon the full conversion of the
debenture, we received and recorded a discharge of mortgage. We believe that our
facility is adequate for our current and reasonably foreseeable future needs. We
intend to assemble the CTLM(TM) at our facility from hardware components that
will be made by vendors to our specifications. The software components of the
device are developed in-house by us.
ITEM 3. LEGAL PROCEEDINGS
On August 25, 1999, Andrew Abraham Skolnick served us with a civil lawsuit with
regard to certain employment matters, which we believe to be without merit. The
suit was resolved to the parties' mutual satisfaction and dismissed by
stipulation on June 21, 2000.
On May 1, 2000, we filed a civil lawsuit against DOE 1 a/k/a DEIGHTON and DOE 2
a/k/a docpatel in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida, Case No. CACE 00-006881 (04) for defamation and
tortious interference with the Company's contracts and business relationships. A
Final Judgment of Permanent Injunction against defendant Steven Cortopassi a/k/a
"docpatel" was ordered by the Court on July 12, 2000. This injunction
permanently enjoins and restrains Mr. Cortopassi from posting any messages
whatsoever concerning the Company, Richard Grable and Linda Grable on The Raging
Bull or any other Internet bulletin/message board and permanently enjoins and
restrains Mr. Cortopassi from publishing any false or defamatory statements
concerning the Company, and its officers, directors and employees. Mr.
Cortopassi is also permanently enjoined and restrained from interfering with any
contractual/business relationship by and between the Company, Richard Grable,
Linda Grable and/or its employees, customers, etc.
The civil lawsuit filed against Doe 1 a/k/a DEIGHTON is still pending and seeks
temporary and permanent relief which would restrain Doe 1 and their agents, etc.
from making any statement or engaging in any conduct to intentionally interfere
with any contractual/business relationship by and between the Company, Richard
Grable and Linda Grable and our customers, shareholders and/or investors, and
for damages, attorney fees, costs and interest in excess of $15,000.00. A
Summons and Verified Complaint was served on Doe 1 and a response was filed
by Diane M. Strait, a former employee of the Company. The defendant, Ms. Strait
has admitted to being the author, with another person, of over 1,000 postings on
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the Raging Bull message boards regarding the Company. Testimony on the motion
for a temporary injunction commenced on May 18, 2000 and a continuation of the
motion has been scheduled. We are currently conducting discovery in conjunction
with this case. We intend to vigorously prosecute this action and prevent the
further publication and dissemination of flagrantly false information.
On June 16, 2000 we filed a motion for the issuance of an Interlocutory and
Permanent Injunction against David J. Hall, Ph.D. (a former employee) and ART
Advanced Research Technologies Inc. (his current employer) in the Superior Court
of the Province of Quebec, District of Montreal, Case No. 500-05-058294-008
seeking to enjoin Dr. Hall from using, divulging or disclosing trade secrets or
other confidential information to ART and to enjoin Dr. Hall from breaching his
fiduciary duty of loyalty and contractual obligation of confidentiality and
non-competition. We have conducted "Examinations on Affidavits" of all parties
and legal arguments have been tentatively scheduled for November 2000.
We are not aware of any other material legal proceedings, pending or
contemplated, to which we are, or would be a party to or of which any of our
property is, or would be, the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 10, 2000 we held an annual meeting of stockholders at our corporate
offices at 6531 NW 18th Court, Plantation, Florida for the following purposes:
1. To elect six directors to serve a one-year term expiring upon the 2001
Annual Meeting of Stockholders or until his/her successor is duly
elected and qualified;
2. To consider and act upon a proposal to amend the Company's Certificate
of Incorporation to increase the number of authorized shares of the
Company's common stock, no par value, from 100,000,000 to 150,000,000;
3. To consider and act upon a proposal to adopt the Company's 2000
Non-Statutory Stock Option Plan; and
4. To ratify the Board of Directors' appointment of Margolies, Fink and
Wichrowski, CPA's as independent auditors for the Company for the
fiscal year ending June 30, 2000.
For proposal no. 1, the stockholders elected three incumbent directors, Richard
J. Grable, Linda B. Grable, and Allan L. Schwartz and three new directors, John
R. Liegey, Robert L. Kagan, M.D. and Irving H. Schwab with the voting as
follows: FOR 93,781,372 AGAINST 3,100 ABSTAIN 236,851
For proposal no. 2, the stockholders voted to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
common stock, no par value, from 100,000,000 to 150,000,000 with the following
votes: FOR 91,836,967 AGAINST 1,435,128 ABSTAIN 749,228
For proposal no. 3, the stockholders voted to adopt the Company's 2000
Non-Statutory Stock Option Plan with the following votes:
FOR 91,865,300 AGAINST 1,423,425 ABSTAIN 732,598
For proposal no. 4, the stockholders voted to ratify the Board of Directors'
action of its appointment of Margolies, Fink and Wichrowski, CPA's as
independent auditors for the Company for the fiscal year ending June 30, 2000
with the following votes:
FOR 93,604,097 AGAINST 266,792 ABSTAIN 150,434
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the NASDAQ over-the-counter bulletin board market
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under the symbol IMDS. There has been trading in our common stock since
September 20, 1994. The following table sets forth, for each of the fiscal
periods indicated, the high and low bid prices for the common stock, as reported
on the OTC Bulletin Board. These per share quotations reflect inter-dealer
prices in the over-the-counter market without real mark-up, markdown, or
commissions and may not necessarily represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 1999
First Quarter $0.56 $0.21
Second Quarter $1.00 $0.35
Third Quarter $0.59 $0.34
Fourth Quarter $0.47 $0.28
FISCAL YEAR 2000
First Quarter $0.33 $0.11
Second Quarter $0.80 $0.08
Third Quarter $5.75 $0.81
Fourth Quarter $3.03 $1.01
FISCAL YEAR 2001
First Quarter (through September 13, 2000) $3.44 $1.13
On September 13, 2000, the closing trade price of the common stock as reported
on the OTC Bulletin Board was $3.34. As of such date, there were approximately
1,194 registered holders of record of our common stock.
SALE OF UNREGISTERED SECURITIES
Private Placement of Preferred Stock
We have had to rely on the private placement of preferred and common stock to
obtain working capital. In deciding to issue preferred stock pursuant to the
private placements, we took into account the number of common shares authorized
and outstanding, the market price of the common stock at the time of each
preferred sale and the number of common shares the preferred stock would have
been convertible into at the time of the sale. At the time of each private
placement of preferred stock there were enough shares, based on the price of our
common stock at the time of the sale of the preferred to satisfy the preferred
conversion requirements. Although our board of directors tried to negotiate a
floor on the conversion price of each series of preferred stock prior to sale,
it was unable to do so. In order to obtain working capital we will continue to
seek capital through debt or equity financing which may include the issuance of
convertible preferred stock whose rights and preferences are superior to those
of the common stock holders. We have endeavored to negotiate the best
transaction possible taking into account the impact on our shareholders,
dilution, loss of voting power and the possibility of a change-in-control;
however, in order to satisfy our working capital needs, we have been and may
continue to be forced to issue convertible securities and debentures with no
limitations on conversion. In addition, the dividends on the preferred stock
affect the net losses applicable to shareholders. There are also applicable
adjustments as a result of the calculation of the deemed preferred stock
dividends because we have entered into contracts providing for discounts on the
preferred stock when it is converted. As a result of the dividends on cumulative
preferred stock, the net loss per common shareholder increased $.02 per share
for the fiscal year ending June 30, 1999, with a cumulative total of $.17 per
share. There was no effect on the fiscal year ending June 30, 2000.
In the event that we issue preferred stock without a limit on the number of
shares that can be issued upon conversion and the price of our common stock
decreases, the percentage of shares outstanding that will be held by preferred
holders upon conversion will increase accordingly. The lower the market price
the greater the number of shares to be issued to the preferred holders, upon
conversion, thus increasing the potential profits to the holders when the price
per share increases and the holders sell the common shares. In addition, the
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sale of a substantial amount of preferred stock to relatively few holders could
cause a possible change-in-control. In the event of a voluntary or involuntary
liquidation while the preferred stock is outstanding, the holders will be
entitled to a preference in distribution of our property available for
distribution equal to $10,000 per share. The following table summarizes certain
information with regard to the Company's sale and full conversion of its Series
B, C, D, E, F, G, H, and I preferred stock, all of which was sold to European
and American institutional investors in private placements pursuant to the
exemptions from registration contained in SEC Regulations D and S.
<TABLE>
<CAPTION>
Series B Series C Series D Series E Series F Series G Series H Series I
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regulation D or S Reg D. Reg. S Reg. S Reg. S Reg. S Reg. D Reg. D Reg. D
No. of Pfd. Shares 450 210 50 50 75 35 100 138
Price per Pfd. share $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
Total Offering $ 4,500,000 $2,100,000 $ 500,000 $ 500,000 $ 750,000 $ 350,000 $1,000,000 $1,380,000
Placement Fee-Cash None $ 220,500 $ 5,000 $ 5,000 $ 50,000 None $ 10,000 None
Placement Fee-Stock None None 4 Pfd. Sh. 4 Pfd. Sh. None 3 Pfd. Sh. 8 Pfd. Sh. None
Avg. Bid & Ask Price
at Time of Issuance:
Common Stock $ 4.70 $ 1.63 $ 1.22 $ 1.09 $ 1.31 $ 0.34 $ 0.56 $ 0.38
Conversion Price $ 3.85 $ 1.22 $ 0.9150 $ 0.8198 $ 0.9170 $ 0.2550 $ 0.42 $ 0.2850
# of Conversion Shares
at Time of Issuance 1,168,831 1,721,311 546,448 609,905 817,884 1,490,196 2,571,429 4,842,105
Option to Repay
Dividends in Cash
or Stock Yes No No No Yes No No Yes
4.99% Ownership Limit Yes Yes Yes Yes Yes Yes Yes Yes
# of Outstanding
Preferred Shares -0- -0- -0- -0- -0- -0- -0- -0-
Total # of Shares Issued
Upon Conversion to Date 30,444,719 2,646,527 1,717,134 1,282,826 3,410,571 3,834,492 11,161,725 3,675,160
</TABLE>
Series B Preferred Stock
In December 1996, Weyburn Overseas Limited and Goodland International Investment
Ltd. purchased 450 shares of our Series B preferred stock for $4,500,000. These
shares were convertible into common shares at any time beginning eighty days
after closing date and for three years thereafter at which time there was a
mandatory conversion of all outstanding convertible preferred shares. The
conversion rate was 82% of the average closing price over a five-day period
prior to conversion. The Series B shares carried a 7% cash dividend.
On April 6, 1999, the Series B preferred stock was sold by the Series B
preferred holders to Charlton Avenue, LLC, an unaffiliated third party with no
prior relationship to us or the Series B preferred holders. On April 6, 1999, we
also entered into a subscription agreement with Charlton whereby we agreed to
issue to Charlton 138 shares of our Series I, 7% convertible preferred stock as
discussed in the paragraph concerning the Series I Preferred Stock..
All of the Series B preferred stock was converted to 30,447,719 shares of common
stock from March 1999 to December 1999.
Series C Preferred Stock
In October 1997, we sold to Austost Anstalt Schaan, UFH Endowment, Inc., Chris
Baum, Avalon Capital Limited, Dominion Capital, Ltd. and The Cuttyhunk Fund
Limited, 210 shares of our Series C convertible preferred stock, together with
three year warrants to purchase up to 105,000 shares of our common stock at an
exercise price of $1.63 per share and a five year warrant to purchase up to
50,000 shares at an exercise price of $1.562 per share, for an aggregate price
of $2,100,000. We also issued a five year warrant to Settondown Capital
International, Ltd. to purchase 55,000 shares of common stock at an exercise
price of $1.63 per share. The common shares
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underlying these warrants have not been registered. These preferred shares were
convertible, at any time, commencing 45 days from the date of issuance and for a
period of 3 years thereafter, without additional consideration. The conversion
price was equal to 75% of the average closing price of our common stock for the
five-day trading period ending on the day prior to the date of conversion;
provided, however, in no event was the conversion price to be greater than
$1.222 per share.
All of the Series C preferred stock was converted to 2,646,527 shares of common
stock from November 1997 to January 1998.
Series D Preferred Stock
In January 1998, we sold to Avalon Capital Ltd. 50 shares of our Series D
convertible preferred stock, together with three year warrants to purchase up to
25,000 shares of our common stock at an exercise price of $1.22 per share, at an
aggregate price of $500,000.
These 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. The conversion price was equal to 75% of the average
closing price of our common stock for the five-day trading period ending on the
day prior to the date of conversion.
All of the Series D preferred stock was converted to 1,717,134 shares of common
stock from February 1998 to August 1998.
Series E Preferred Stock
In February 1998, we sold to Austost Anstalt Schaan and Balmore Funds S.A. 50
shares of our Series E convertible preferred stock, together with three year
warrants to purchase up to 25,000 shares of our common stock at an exercise
price of $1.093 per share, for an aggregate price of $500,000.
These 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. The conversion price was equal to 75% of the average
closing price of our common stock for the five-day trading period ending on the
day prior to the date of conversion.
All of the Series E preferred stock was fully converted to 1,282,826 shares of
common stock from March 1998 to July 1998.
Series F Preferred Stock
In February 1998, we sold to Dominion Capital Fund, LTD and Canadian Advantage,
LTD 75 shares of our Series F convertible preferred stock, for an aggregate
price of $750,000.
The preferred shares paid a dividend of 6% per annum, payable in common stock at
the time of each conversion and were convertible, at any time, commencing May
1998, and for a period of two years thereafter without additional consideration.
The conversion price was equal to 70% of the average closing price of our common
stock for the five-day trading period ending on the day prior to the date of
conversion. The shares underlying the preferred stock were entitled to demand
registration rights in the event that Regulation S was amended prior to the
conversion of the preferred stock. As a result of these rights and the 1998
amendment to Regulation S, the 1,971.375 shares of common stock issued upon the
conversion of the Series F preferred have been registered on behalf of the
holders by the Company pursuant to its registration statement on Form S-2
Post-Effective Amendment No.5, which became effective March 29, 2000 (the
"Registration Statement"). The remaining 1,439,196 common shares received in
conversion from the preferred stock were sold by the holder according to Rule
144.
All of the Series F preferred stock was fully converted to 3,410,571 common
stock from May 1998 to June 1998.
Series G Preferred Stock
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In March 1999, we sold to Amro International, S.A., Nesher Inc., Hewlett Fund,
and Guaranty & Finance Ltd., 35 shares of our Series G convertible preferred
stock, together with two-year warrants to purchase 65,625 shares of our common
stock at an exercise price of $.50 per share, for an aggregate price of
$350,000. From April 2000 to August 2000 the holders have exercised warrants to
acquire a total of 52,500 shares of our common stock.
The Series G convertible preferred stock has no dividend provisions. The
conversion price was equal to the lesser of (i) 75% discount to the two lowest
bids in a ten-day period immediately preceding the conversion date or (ii) $.54.
There was no floor on the conversion price and no time limits on conversion.
All of the Series G preferred stock was converted to 3,834,492 shares of common
stock from August 1999 to December 1999. Pursuant to the registration rights
granted to the Series G holders, 1,801,803 of those shares were registered in
the Registration Statement.
Series H Preferred Stock
In June 1998, we sold to Austost Anstalt Schaan and Balmore Funds S.A. 100
shares of our Series H convertible preferred stock, together with 75,000 A five
year warrants and 50,000 B five year warrants, exercisable at $1.00 and $1.50
per share, respectively, for an aggregate price of $150,000 beginning on
November 2, 1998.
The conversion price was equal to the lesser of $.53 and 75% of the lowest
closing bid price of our common stock for the ten-day trading period ending on
the day prior to the date of conversion. There was no floor on the conversion
price and no time limits on conversion. According to the terms of the
registration rights agreement, as amended, we have registered herein 100% of
that number of shares that would be required to be issued if the preferred stock
were converted on the day before the filing of the registration statement,
3,038,020 shares. We fell in default of the registration rights agreement, which
required the registration statement to be declared effective by October 2, 1998.
According to the registration rights agreement, we were required to pay the
Series H preferred holders in cash or in stock, as liquidated damages for
failure to have the registration statement declared effective, not as a penalty,
2% of the principal amount of the securities sold for first 30-day period, and
3% of the principal amount of the securities for each 30-day period thereafter
until we procure registration of the securities.
All of the Series H preferred stock was converted to 11,161,725 shares of common
stock. Pursuant to our registration rights agreement with the Series H holders,
3,038,020 of those shares were registered in the Registration Statement. Because
the Registration Statement did not become effective on a timely basis, we issued
424,242 additional shares of restricted common stock with registration rights to
the Series H holders in March 1999, in payment of $140,000 in aggregate
liquidated damages.
All of the Series H preferred stock was fully converted to 11,161,725 shares of
common stock from November 1998 to November 1999.
Series I Preferred
In April 1999, we entered into a subscription agreement with Charlton where we
agreed to issue Charlton 138 shares of our Series I, 7% convertible preferred
stock. Our board of directors established the value of the Series I preferred at
$10,000 per share. Consideration for the subscription was paid as follows:
(i) payments of all of the accumulated dividends (approximately
$725,795) in connection with the Series B preferred stock;
(ii) settlement and dismissal, with prejudice, of all litigation
concerning the Series B preferred stock and the exchange of
mutual releases;
(iii) cancellation of 112,500 warrants that were issued with the
Series B preferred stock; and
(iv) amendment of the Series B designation to impose a limitation on
the owner(s) of the Series B preferred stock to ownership of not
more than 4.99% of our outstanding common stock at any one time.
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The Series I preferred paid a 7% premium, to be paid in cash or freely trading
common stock in our sole discretion, at the time of each conversion. The
conversion price was equal to 75% of the average closing price of our common
stock for the five-day trading period ending on the day prior to the date of the
conversion.
According to the registration rights agreement, 100% of that number of shares
that would be required to be issued if the I preferred stock were converted on
the day before the filing of the registration statement, 5,947,763, are being
registered on behalf of the holders.
All of the Series I preferred stock was converted to 3,675,100 shares of common
stock from December 1999 to May 2000. Pursuant to our registration rights
agreement with the Series I holders, all of these shares were registered in the
Registration Statement.
Private Placement of Convertible Debentures
We have also had to rely on the private placement of convertible debentures to
obtain working capital. In deciding to issue convertible debentures, the board
of directors took into account many of the same considerations it did when it
decided to issue preferred stock. The following table summarizes certain
information with regard to our outstanding convertible debentures as of May 26,
2000, which is the last date of conversion for all of the Convertible Debentures
listed in the table below.
Charlton Debentures Spinneret Debentures
Regulation D or S Reg. D Reg. D
Annual Dividend % 7 7
# Tranches (up to) 3 3
Maximum Proceeds $ 3,080,000 $ 51,000
Placement Fee-Cash None None
Placement Fee-Stock None None
Avg. Bid & Ask Price
at Time of Issuance:
Common Stock $ .39 $ .0875
Conversion Price $ .29 $ .0656
of Conversion Shares
at Time of Registration 4,740,971 -0-
Option to Repay
Interest in Cash
or Stock Yes Yes
4.99% Ownership Limit Yes Yes
% of Outstanding
Debentures -0- -0-
Total # of Shares Issued
Upon Conversion to Date 3,908,883 158,812
Automatic Conversion Date 2 years from issuance 2 years from issuance
Convertible Debentures - Charlton
In March 1999, we entered into a subscription agreement with Charlton, where
Charlton purchased a convertible debenture for $1,100,000. In addition, in
August 1999, we entered into a subscription agreement and subsequently drew down
multiple tranches in the aggregate amount of $825,000. We entered into another
subscription agreement in October 1999 and subsequently drew down multiple
tranches in the aggregate amount of $825,000. The gross proceeds from the
original debenture offering were $2,750,000. In December 1999 we entered into an
additional subscription agreement with Charlton and drew down multiple tranches
totaling $330,000. The debentures were to mature in two years from the date of
issuance.
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The conversion price of the debentures was equal to 75% of the average closing
price of our common stock for the five-day trading period ending on the day
prior to the date of the conversion.
The Charlton debentures were secured by a mortgage on our corporate office
building. The mortgage was released in June 14, 2000 after the conversion in
full of all the convertible debentures into 3,908,883 shares of common stock.
Convertible Debenture - Spinneret
In August 1999, we entered into a subscription agreement with Spinneret
Financial, Ltd., where Spinneret purchased a convertible debenture for $51,000.
The sum of $1,000 was paid upon issuance of the debenture for Spinneret's legal
fees. The sum of $50,000 was advanced as a loan in July 1999, and the debenture
was issued in the principal amount of $51,000 in August 1999. The debenture was
to mature in August 2001.
The conversion price is equal to 75% of the average closing price of our common
stock for the five-day trading period ending on the day prior to the date of the
conversion.
On December 31, 1999, the debenture was converted into 158,812 shares of common
stock.
Private Placement of Common Stock
In September 1998, we sold one unit, consisting of a $250,000 promissory note
and 200,000 shares of common stock, to Settondown Capital International, Ltd.,
an unaffiliated third party, pursuant to Regulation D, for an aggregate purchase
price of $250,000. These shares are included in the Registration Statement. At
the time the sale occurred, the average of the bid and ask price of our common
stock was $.595. The note bore interest at the rate of 12% per annum. In
connection with this sale, we 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 for working capital,. On December 30, 1999, we repaid the
$359,203.33 accrued balance of the promissory note in full by issuing 2,112,961
shares of restricted common stock valued at $.17 per share. On December 30,
1999, the bid-ask range of the common stock was $.56 - $.80.
In October 1998, we sold one unit, consisting of a $100,000 promissory note and
80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated third
party, pursuant to Regulation D, for an aggregate purchase price of $100,000.
These shares are included in the Registration Statement. No placement fee was
paid in connection with this offering, however, we did issue 5,000 shares of
common stock to Goldstein, Goldstein and Reis LLC, an unaffiliated third party,
as payment for the attorney's fees incurred by the purchaser pursuant to the
sale. At the time the placement was concluded, the average of the bid and ask
price of our common stock was approximately $.50 per share. The note bore
interest at the rate of 12% per annum. Net proceeds of $100,000 were used for
working capital, $15,703. On December 30, 1999, we repaid the $119,041.67
accrued balance of the promissory note in full by issuing 700,245 shares of
restricted common stock valued at $.17 per share.
In October 1998, we 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 were included in the Registration Statement. At
the time the placement was concluded, the average of the bid and ask price of
our common stock was approximately $.43 per share. The note bore interest at the
rate of 12% per annum. In connection with the sale, we paid the sum of $23,000
to LKB Financial LLC, an unaffiliated third party, as a placement fee. We also
issued a three year warrant beginning on January 20, 1999 to purchase 50,000
shares of common stock at $1.00 per share to GCA Global Advisors. The common
shares underlying these warrants have not been registered. Net proceeds of
$187,000 were used for working capital. The note, and all accrued interest, was
paid in January 1999. Our officers provided the payment for this loan through
the sale of a portion of their shares of our common stock.
In November 1998, we issued 286,000 shares of common stock as partial
consideration for a $115,000 aggregated loan to us by Deborah O'Brien, an
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employee. At the time the loan was concluded, the average of the bid and ask
price of our common stock was approximately $.625 per share. We were obligated
to repay the lender the sum of $50,000; the balance of the loan was applied to
the purchase of the shares. In January 1999, we issued a note evidencing this
indebtedness. The note bore interest at the rate of 7% per annum and was due and
payable upon demand. Net proceeds of $115,000 were used for working capital.
From November 1998 to April 1999, we paid the balance due on the loan to the
lender. The 286,000 shares were included in the Registration Statement.
On June 25, July 12 and November 18, 1999, we entered into loans with Balmore
Funds S.A. for the aggregate sum of $100,000 and signed promissory notes with an
interest rate of 15% per annum. On the respective dates of the loans, the
average of the bid and ask prices of our common stock were approximately $.48
per share, $.29 per share and $.36 per share. These notes were guaranteed by
Richard and Linda Grable. On December 30, 1999, we agreed to pay the notes in
full with restricted common stock. The total principal and interest accrued was
$104,802.08. On December 30, 1999, the bid-ask range of our common stock was
$.56 - $.80. For the notes, we issued a total of 616,483 shares of restricted
stock, a price of $.17 per share. As of June 29 and July 6, 1999, we also
entered into loans with Austost Anstalt Schaan for the aggregate sum of $50,000
and signed promissory notes with an interest rate of 15% per annum. On the
respective dates of the loans, the average of the bid and ask prices of our
common stock were approximately $.38 per share and $.30 per share. These notes
were also guaranteed by Richard and by Linda Grable. On December 30, 1999, we
paid these notes in full with restricted stock. The total principal and interest
accrued was $53,822.92. For the notes, we issued a total of 316,605 shares of
restricted stock at a price of $.17 per share.
On January 26, 2000, we entered into a consulting agreement with Anthony
Giambrone, an unaffiliated third party, which provided payment for services
rendered to us over a six month period with warrants exercisable into 500,000
shares of common stock at a price of $0.93 per share. The term of the warrants
ran concurrent with the term of the consulting agreement. On the date of the
execution of the agreement, the bid-ask range of our common stock was $1.81 -
$2.00. The agreement provided that Mr. Giambrone, an investment banker with 30
years of experience in the financial sector, including fund management and
public relations, would assist us in implementing our short and long range
business plans, including implementing a marketing program, monitoring our hired
advertising and public relations firms, advising us on our stockholders
relations program and raising the awareness of institutional investors regarding
our products and company. In March 2000, Mr. Giambrone, in accordance with his
consulting agreement, exercised warrants to purchase 107,527 common shares and
paid us the sum of $100,000. The shares have not been registered as of the date
of this report. The consulting agreement and the warrants expired on July 26,
2000.
On April 27, 2000, we sold 100,000 shares of restricted common stock to Michael
Associates, an unaffiliated third party, pursuant to Regulation D for an
aggregate purchase price of $157,000. No placement fee was paid in connection
with this offering. Net proceeds of $157,000 were used for working capital. At
the time the placement was concluded, the average of the bid and ask price of
our common stock was approximately $2.00 per share. These shares have not been
registered as of the date of this report.
ISSUANCE OF STOCK FOR SERVICES
The Company from time to time, has issued and may continue to issue stock for
services performed and to be performed by consultants, all of which have been
unaffiliated. The consultants have provided the following consulting services
pursuant to their Consulting Agreements.
Legal-General Counseling.
Legal-Litigation Counseling.
Investor Relations-Introducing us and our emerging technology to
stockbrokers and the investment community.
Shareholder Relations-Keeping shareholders informed of new
developments.
Public Relations-Creating public awareness of us and our emerging
technology to the public through print and electronic media.
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Product Planning & Feasibility-Research into all aspects of product
planning and our acceptance into the medical imaging marketplace.
Clinical Site Consulting-Selection and introduction to potential
clinical sites.
Design Consulting-Design and feasibility of components for the
CTLM(TM).
SEC Filing and Compliance-Filing and compliance consultation.
Engineering-Mechanical engineering and prototype development.
Video Production Consultant-Script writing and production
consultation.
Since we have generated no revenues to date, our ability to obtain and retain
consultants may be dependent on our ability to issue stock for services in lieu
of cash payment. Since 1996, we have issued an aggregate of 1,806,500 shares of
Common stock to independent consultants pursuant to Registration Statements on
Form S-8. The aggregate fair market value of the shares at the time of issuance
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 in our control.
FINANCING/EQUITY LINE OF CREDIT
We will require substantial additional funds for working capital, including
operating expenses, clinical testing, regulatory processes and manufacturing and
marketing programs and our continuing research and development programs. Our
capital requirements will depend on numerous factors, including the progress of
our research and development programs, results of pre-clinical and clinical
testing, the time and cost 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
and changes in our existing research, licensing and other relationships and the
terms of any new collaborative, licensing and other arrangements that we may
establish. Moreover, our fixed commitments, including salaries and fees for
current employees and consultants, and other contractual agreements are likely
to increase as additional agreements are entered into and additional personnel
are retained.
On August 17, 2000, we entered into a $25 million Private Equity Agreement (the
"Private Equity Agreement") with Charlton Avenue LLC, which followed our July
17, 2000, private placement to Charlton of 400 shares of our Series K
convertible preferred stock for $4 million, which was designed to serve as
bridge financing pending draws on the private equity line established in the
Private Equity Agreement. We are obligated to pay a 9% dividend on the
convertible preferred in cash or common stock at our option semi-annually on
June 30 and December 31 of each calendar year or upon the conversion date. We
have the option of redeeming the convertible preferred solely through the use of
the private equity line by paying cash with the following redemption premiums.
Days from closing 0-120 121-180 180
Redemption price
As a % of Principal 105% 107.5% 110%
In the event that, for whatever reason, we are unable to redeem the convertible
preferred according to the above schedule, the holder has the right to convert
the convertible preferred into common stock at a price equal to 87.5% of the
average of the three lowest closing bid prices (which need not be consecutive)
of the 20 consecutive trading days prior to the conversion date. The agreement
further provides that we must register the underlying common shares of the
Series K Convertible Preferred stock in a registration statement as soon as
possible after the closing date. We must use our best efforts to file timely
within 45 days (which has now been extended to 70 days by the holder) after
closing and cause the registration statement to become effective within 120 days
(which has been extended to 145 days by the holder) from the closing date. In
the event that the registration statement does not become effective, we will be
liable for liquidated damages in the amount of 2% of the purchase price of the
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unredeemed convertible preferred stock for the first 30 days and 2% for every 30
day period thereafter until the registration statement has been filed and/or
declared effective. The liquidated damages will be payable upon demand in cash
or stock at our option. Charlton has agreed to extend the deadline for filing
the Registration Statement to September 25, 2000, and the deadline for
effectiveness to December 9, 2000. Based on the formula for conversion as of
September 14, 2000, approximately 2,252,252 shares would be required to convert
all of the Series K convertible preferred stock. There are no other convertible
securities outstanding as of the date of this report.
The Private Equity Agreement commits Charlton to purchase up to $25 million of
common stock subject to certain conditions pursuant to Regulation D over the
course of 12 months after an effective registration of the Private Equity
Agreement common shares. The timing and amounts of the purchase by the investor
are at our sole discretion. We do, however, have to draw down a minimum of $10
million from the credit line over the 12-month period. The purchase price of the
shares of common stock are set at 91% of the market price. The market price, as
defined in the agreement, is the average of the three lowest closing bid prices
of the common stock over the ten day trading period beginning on the put date
and ending on the trading day prior to the relevant closing date of the
particular tranche. We expect to redeem the bridge financing of $4 million in
Series K convertible preferred stock with the proceeds of the sale of common
stock in the equity credit line. In order to use the equity credit line we must
use our best efforts to file and cause our registration statement to become
effective as soon as possible. If, subsequent to effectiveness, the registration
statement is suspended at any time, we are obligated to pay liquidated damages
of 1.5% of the cost of all common stock then held by the investor for each
fifteen-day period or portion thereof, beginning on the date of the suspension.
If such suspension is cured within the first fifteen days, the damages shall not
apply. This financing agreement has no warrants attached to either the bridge
financing or the private equity line. The only fees associated with this
financing were a 5% consulting fee payable to Spinneret Financial Ltd.
There can be no assurance that the financing will be available when needed, or
if available, will be available on acceptable terms. Insufficient funds may
prevent us from implementing our business plan or may require us to delay, scale
back, or eliminate certain of our research and product development programs or
to license to third parties rights to commercialize products or technologies
that the we would otherwise seek to develop ourselves. If we utilize the Private
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 our control.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth below should be read in conjunction with our Financial
Statements and the Notes included elsewhere in this Report.
RESULTS OF OPERATIONS
Twelve Months Ended June 30, 2000 and June 30, 1999.
----------------------------------------------------
General and administration expenses in the aggregate during the 12 months
ended June 30, 2000 were $3,885,742 representing a decrease of $116,312 or 2.9%
from $4,002,054 during the 12 months ended June 30, 1999. 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. Selling, general and administrative expenses ("SG&A")
in the aggregate during the year ended June 30, 2000, were $388,789 representing
an increase of $2,965 or 1% from $385,824 during the year ended June 30, 1999.
Compensation and related benefits during the year ended June 30, 2000, were
$3,835,667 representing an increase of $1,413,871 or 58% from $2,421,796 during
the year ended June 30, 1999. The increase in compensation is due to the hiring
of additional software engineers, a medical physicist, clinical application
specialist required for the clinical investigational trials and non-cash costs
of converting the officers' incentive stock options.
Research and development expenses during the year June 30, 2000, were $2,525
representing a decrease of $68,983 or 96% from $71,508 during the year ended
June 30, 1999. This decrease is due primarily to the finalization of the
principal components of the CTLM(TM).
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Consulting expenses during the year ended June 30, 2000, were $148,972
representing an increase of $59,335 or 66% from $89,637 during the year ended
June 30, 1999. The increase was due primarily to the engagement of outside
consultants needed for special non-recurring projects required prior to
launching the CTLM(TM) System in those countries where permitted.
Inventory Valuation Adjustments during the year ended June 30, 2000, were
$776,157 representing an increase of $776,157 from $0 during the year ended June
30, 1999. The increase is due to the initial adjustment to our inventory after
the finalization of the CTLM(TM) System.
Inventory Restocking Costs during the year ended June 30, 2000, were $377,006
representing an increase of $377,006 from $0 during the year ended June 30,
1999. The increase is due primarily due to the return of the Spectra Physics
Lasers.
Professional expenses during the year ended June 30, 2000, were $227,345
representing a decrease of $65,483, or 22% from $292,828 during the year ended
June 30, 1999. The decrease was due primarily to reduced legal expenses See Item
3. "Legal Proceedings".
Travel and subsistence costs during the year ended June 30, 2000, were $255,304
representing an increase of $143,943 or 129% from $111,361 during the year ended
June 30, 1999. This increase was primarily due to increased travel and housing
expenses for our clinical application specialists at Nassau County Medical
Center and the University of Virginia Health Systems.
Interest expense during the year ended June 30, 2000, was $967,652 representing
an increase of $279,008, or 41% from $688,644 during the year ended June 30,
1999. The increase was due to interest paid on short-term loans used for working
capital for our operations and the discounts for shares issued to pay loans at a
discount from the market price.
Liquidated damage costs during the year ended June 30, 2000, were $31,000
representing a decrease of $229,000, or 88% from $260,000 during the year ended
June 30, 1999. The decrease was due to the Registration Statement being declared
effective in March 2000.
Dividends on cumulative preferred stock from discount at issuance during the
year ended June 30, 2000, were $0 representing a decrease of $619,974 from
$619,974 during the year ended June 30, 1999. This decrease is due to the fact
that no preferred stock was issued in the year ended June 30, 2000.
Dividends on cumulative Preferred stock earned during the year ended June 30,
2000, were $145,950 representing a decrease of $183,226, or 56%, from $329,176
during the year ended June 30, 1999. This decrease is due primarily to the final
conversions on the series B cumulative preferred stock.
BALANCE SHEET DATA
We have financed our operations since inception by the issuance of equity
securities with aggregate net proceeds of approximately $18,985,043 and through
loan transactions in the aggregate net amount of $3,550,339. Furthermore, we
issued equity securities for the conversion of all outstanding convertible
debentures in the aggregate net amount of $3,240,000.
Our combined cash and cash equivalents totaled $159,126 at June 30, 2000. We do
not expect to generate a positive internal cash flow for at least the next
12 months due to the expected spending for research and development and the
expected costs of commercializing our initial product, the CTLM(TM).
Our inventory totaled $2,595,878 at June 30, 2000 and $3,698,343 at June 30,
1999. This decrease is primarily due to the return of certain laser components
and other parts to their respective manufacturers. Our property and equipment,
net, totaled $2,525,287 at June 30, 2000 and $2,707,994 at June 30, 1999. This
decrease is due to depreciation and retirement of certain equipment.
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LIQUIDITY AND CAPITAL RESOURCES
We are currently a development stage company and our continued existence is
dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt and/or equity financing. We have yet to generate an
internal cash flow, and until the sales of our product begin, we are totally
dependent upon debt and equity funding from outside investors. In the event that
we are unable to obtain debt or equity financing or are unable to obtain such
financing on terms and conditions acceptable to us, we may have to cease or
severely curtail our operations. This would materially impact our ability to
continue as a going concern.
We have financed our operating and research and development activities through
several Regulation S and Regulation D private placement transactions. Net cash
used for operating and research and development expenses during fiscal 2000 was
$4,025,365 primarily due to our purchase of additional materials to continue the
manufacture of CTLM(TM) Systems in anticipation of receiving orders from our
distributors in certain countries where permitted by law and the hiring of five
additional employees, compared to net cash used by operating activities of
research and development of the CTLM(TM) and related software development of
$3,699,728 in fiscal 1999. At June 30, 2000, we had a working capital deficit
of$(1,988,979) compared to working capital of $487,774 at June 30, 1999. We
estimate that of our estimated $7 million annual fixed commitment, $2.3 million
will be required to complete FDA clinical trials through PMA submission and to
prepare for the manufacture of the CTLM(TM).
We have also financed our operations with loans from unaffiliated third parties.
On January 27, 2000, we executed a promissory note with Cycle of Life
Technologies, Inc. The note was for a principal sum of $500,000, together with
interest of twelve percent (12%) per annum on the on the unpaid balance. The
maturity date was July 26, 2000. The note provided that, on its maturity, Cycle
of Life had the option of being repaid the principal and accrued interest either
in cash or by issuance of a two-year warrant to purchase 1,500,000 shares of
common stock at an exercise price of $.35 per share. On the date of the note's
issuance, January 27, 2000, the bid-ask range of our common stock was
$1.91-$1.97. Prior to the note's maturity, we elected to prepay the note
consistent with its terms and applicable law. On July 18, 2000, we sent Cycle of
Life the sum of $530,000 representing payment in full of the principal and
interest due. Cycle of Life, after receiving the payment, responded by rejecting
the payment and subsequently requested issuance of the warrants in lieu of the
payment. We have placed the funds in escrow with our counsel. As of the date of
this report there has been no legal action filed.
On March 31, 2000, we received a loan from Charlton Avenue LLC in the amount of
$500,000, which was repaid in full on July 18, 2000. The accrued interest (12%
per year) was waived by the holder. On June 8, 2000, we received a loan from
Aspen International Ltd. in the amount of $110,000 evidenced by a promissory
note bearing interest of 10% per annum. If certain terms and conditions of the
promissory note were not met, we were required to issue a two-year warrant to
purchase 50,000 shares of our common stock at $1.452 per share in addition to
the principal and interest. Those terms were not met, and on August 23, 2000, we
paid the sum of $112,291.03 in principal and interest and issued the warrant as
required.
In the event that we receive a PMA from the FDA, which cannot be assured, we
believe that, based on our current business plan approximately $5 million will
be required above and beyond normal operating expenses over the next year to
complete all necessary stages in order for us to market the CTLM(TM) in the
United States and foreign countries. Substantially all of the $5 million will be
used to purchase inventory, sub-contracted components, tooling, manufacturing
templates and non-recurring engineering costs associated with preparation for
full capacity manufacturing and assembly. If the need should arise for capital
in excess of the Private Equity Line or if the Private Equity Line is
unavailable due to the price of our common stock, our inability to comply with
the registration provision, Charlton's breach of its agreement, or any other
reason, we may be forced to seek additional funding through public or private
financing, collaboration, licensing and other arrangements with corporate
partners.
In May 1998, we entered into an irrevocable commitment with a consortium of
prominent European banking institutions to invest up to $15 million in the
Company over the next three years. A formal Equity Line of Credit Agreement was
to be drafted, reviewed, and executed at a later date. The Equity Agreement was
not finalized until November 1998. Although this equity line of credit is in
place, we have chosen not to utilize this equity line as it has been replaced
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with the new $25 million Private Equity Credit Agreement with Charlton dated
August 17, 2000. This new equity credit agreement contains terms that are more
favorable for us. We plan on filing a registration statement to utilize the new
equity credit line. See "Sale of Unregistered Securities-Financing/Equity Line
of Credit"
During fiscal 2000, we were able to raise a total of $2,814,373 less expenses
through Regulation S and Regulation D transactions. We do not expect to generate
a positive internal cash flow for at least the next 12 months due to the
expected costs of commercializing our initial product, the CTLM(TM) and for the
expense of continuing our research and development program. We will require
additional funds for operating expenses, clinical testing, FDA regulatory
processes, manufacturing and marketing programs and to continue our research and
development program. Accordingly, we plan to utilize the Private Equity
Agreement to raise the funds required prior to the end of fiscal year 2001 in
order to continue operations. In the event that we are unable to utilize the
Private Equity Agreement, we would have to raise the additional funds required
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 by obtaining mortgage financing on our real
property and improvements, which we believe has a fair market value of at least
$2.7 million. 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 he necessary future financing will be
available or, if available, that it will be obtained at terms satisfactory to
us. Our ability to effectuate our business plan and continue operations is
dependent on our ability to raise capital, structure a profitable business, and
generate revenues. If our working capital were insufficient to fund our
operations, we would have to explore additional sources of financing.
Capital expenditures for the fiscal 2000 were $84,956 as compared to $64,423 for
fiscal 1999. These expenditures were a direct result of purchases of computer
and other equipment, office, warehouse and manufacturing fixtures, trade show
equipment, computer software, laboratory equipment, and other fixed assets. We
anticipate that our capital expenditures for fiscal 2001 will be approximately
$100,000.
During the year ending June 30, 2000, there were no changes in our existing debt
agreements and we had no outstanding bank loans as of June 30, 2000. Our annual
fixed commitments, including salaries and fees for current employees and
consultants, rent, payments under license agreements and other contractual
commitments are approximately $7 million, as of the date of this report and are
likely to increase as additional agreements are entered into and additional
personnel are retained. We will require substantial additional funds for our
research and development programs, pre-clinical and clinical investigational
studies, operating expenses, regulatory processes, and manufacturing and
marketing programs, which are presently estimated at approximately $500,000. The
foregoing projections are subject to many conditions most of which are beyond
our control. Our future capital requirements will depend on many factors,
including the following: the progress of our research and development projects;
the progress of pre-clinical and clinical testing; the time and cost involved in
obtaining regulatory approvals; the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights; competing
technological and market developments; changes and developments in our existing
collaborative, licensing and other relationships and the terms of any new
collaborative, licensing and other arrangements that we may establish; and the
development of commercialization activities and arrangements. We do not expect
to generate a positive internal cash flow for at least 12 months due to
expected increases in capital expenditures, working capital and ongoing losses,
including the expected cost of commercializing the CTLM(TM). On the date of this
filing we have approximately $1.4 million in cash for working capital. We will
use the private equity line for raising additional capital. We plan to continue
our policy of investing excess funds, if any, in a daily cash management account
at First Union National Bank.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among others,
statements relating to our business strategy, which is based upon our
interpretation and analysis of trends in the healthcare treatment industry,
especially those related to the diagnosis and treatment of breast cancer, and
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upon management's ability to successfully develop and commercialize its
principal product, the CTLM(TM). This strategy assumes that the CTLM(TM) will
prove superior, from both a medical and an economic perspective, to alternative
techniques for diagnosing breast cancer. This strategy also assumes that we will
be able to promptly obtain from the FDA and the relevant foreign governmental
agencies the approvals which are needed to market the CTLM(TM) in the United
States and key foreign markets and that we will be able to raise the capital
necessary to finance the completion of the development and commercialization of
the CTLM(TM). Many known and unknown risks, uncertainties and other factors,
including, but not limited to, technological changes and competition from new
diagnostic equipment and techniques, changes in general economic conditions,
healthcare reform initiatives, legal claims, regulatory changes and risk factors
detailed from time to time in our Securities and Exchange Commission filings may
cause these assumptions to prove incorrect and may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Report of Independent Certified Public Accountants F-1
Financial Statements
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5-10
Statement of Cash Flows F-11-12
Notes to Financial Statement F-13-49
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheets of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 2000 and 1999, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 2000 and 1999 and for the period December 10, 1993 (date of
inception) to June 30, 2000. 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, 2000 and 1999 and the results
of its operations and its cash flows for the years ended June 30, 2000 and 1999
and for the period December 10, 1993 (date of inception) to June 30, 2000 in
conformity with generally accepted accounting principles.
The Company is in the development stage as of June 30, 2000 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 recurring losses and
has yet to generate an internal cash flow that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 4. 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 11, 2000
F-2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheets
June 30, 2000 and 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 159,126 $ 70,037
Loans receivable - employees 3,000 30,950
Inventory 2,595,878 3,698,343
Prepaid expenses 37,339 58,250
------ ------
Total current assets 2,795,343 3,857,580
--------- ---------
Property and equipment, net 2,525,287 2,707,994
Other assets 593,800 561,158
------- -------
$ 5,914,430 $ 7,126,732
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 995,954 $ 1,597,083
Loans payable 1,755,716 1,232,271
Current maturities of capital lease obligations 11,505 10,572
Other current liabilities 2,021,147 529,880
------- -------
Total current liabilities 4,784,322 3,369,806
--------- ---------
Convertible debenture -- 1,100,000
Long-term capital lease obligations 4,057 15,561
----- ------
Total liabilities 4,788,379 4,485,367
--------- ---------
Commitments and contingencies
Redeemable convertible preferred stock (Series G),
no par value; authorized 38 shares,
issued 0 and 38 shares , respectively -- 477,117
------- -------
Stockholders' equity:
Convertible preferred stock (Series B),
7% cumulative annual dividend, no par value;
authorized 450 shares,
issued 0 and 390 shares, respectively -- 3,900,000
Convertible preferred stock (Series H),
no par value; authorized 108 shares,
issued 0 and 68 shares, respectively -- 680,000
Convertible preferred stock (Series I),
7% cumulative annual dividend, no par value;
authorized 138 shares,
issued 0 and 138 shares, respectively -- 1,380,000
Common stock, no par value; authorized 150,000,000
shares, issued 105,511,678
and 49,297,675 shares, respectively 42,818,057 29,820,729
Additional paid-in capital 1,597,780 1,490,827
Deficit accumulated during the development stage (43,261,878) (35,092,999)
----------- -----------
1,153,959 2,178,557
Less: subscriptions receivable (27,908) (14,309)
------- -------
Total stockholders' equity 1,126,051 2,164,248
--------- ---------
$ 5,914,430 $ 7,126,732
============ ============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 2,982,966 $ 1,477,296 $ 10,935,500
Research and development 852,701 944,500 3,542,290
Research and development expenses 2,525 71,508 2,992,927
Advertising and promotion expenses 31,932 27,273 933,046
Selling, general and administrative expenses 388,789 385,824 2,076,750
Clinical expenses 68,198 16,764 445,637
Consulting expenses 148,972 89,637 3,175,193
Insurance costs 174,806 172,416 676,013
Inventory valuation adjustments 776,157 -- 776,157
Inventory restocking costs 377,006 -- 377,006
Professional fees 227,345 292,828 1,872,008
Stockholder expenses 62,506 65,165 224,181
Trade show expenses 155,536 151,403 812,397
Travel and subsistence costs 255,304 111,361 823,824
Rent expense 15,539 28,808 291,808
Interest expense 967,652 688,644 1,738,892
Loan placement expenses and fees 205,000 201,494 406,494
Depreciation and amortization 304,582 312,956 1,293,400
Amortization of deferred compensation -- 1,510,437 4,064,250
Liquidated damages costs 31,000 260,000 291,000
Interest income (5,587) (1,120) (204,124)
------------ ------------ ------------
8,022,929 6,807,194 37,544,649
------------ ------------ ------------
Net loss (8,022,929) (6,807,194) (37,544,649)
Dividends on cumulative preferred stock:
From discount at issuance -- (619,974) (4,694,583)
Earned (145,950) (329,176) (1,022,646)
------------ ------------ ------------
Net loss applicable to common shareholders $ (8,168,879) $ (7,756,344) $(43,261,878)
============ ============ ============
Net loss per common share:
Basic
Net loss per common share $ (.10) $ (.20) $ (1.30)
============ ============ ============
Weighted average number of common shares 79,222,066 39,333,668 33,160,714
============ ============ ============
Diluted
Net loss per common share $ (.10) $ (.20) $ (1.30)
============ ============ ============
Weighted average number of common shares 79,222,066 39,333,668 33,160,714
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity
From December 10, 1993 (date of inception) to June 30, 2000
Preferred Stock (**) Common Stock Additional
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 10, 1993 (date of inception) 0 $- 0 $ -- $ --
Issuance of common stock, restated for reverse
stock split -- -- 510,000 50,000 --
Acquisition of public shell -- -- 178,752 --
Net issuance of additional shares of stock -- -- 15,342,520 16,451
Common stock sold -- -- 36,500 36,500
Net loss -- -- --
----------- --- ----------- ----------- -----------
Balance at June 30, 1994 -- -- 16,067,772 102,951 --
Common stock sold -- -- 1,980,791 1,566,595 --
Common stock issued in exchange for services -- -- 115,650 102,942 --
Common stock issued with employment agreements -- -- 75,000 78,750 --
Common stock issued for compensation -- -- 377,500 151,000 --
Stock options granted -- -- -- -- 622,500
Amortization of deferred compentsation -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 50,333
Net loss -- -- -- -- --
----------- --- ----------- ----------- -----------
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
----------- --- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 10, 1993 (date of inception) $ -- $ -- $ -- $ --
Issuance of common stock, restated for reverse
stock split -- -- -- 50,000
Acquisition of public shell -- -- -- --
Net issuance of additional shares of stock -- -- -- 16,451
Common stock sold -- -- -- 36,500
Net loss -- (66,951) -- (66,951)
----------- ----------- ----------- -----------
Balance at June 30, 1994 (66,951) -- -- 36,000
Common stock sold -- (523,118) -- 1,043,477
Common stock issued in exchange for services -- -- -- 102,942
Common stock issued with employment agreements -- -- -- 78,750
Common stock issued for compensation -- -- -- 151,000
Stock options granted -- -- (622,500) --
Amortization of deferred compentsation -- -- 114,375 114,375
Forgiveness of officers' compensation -- -- -- 50,333
Net loss (1,086,436) -- -- (1,086,436)
----------- ----------- ----------- -----------
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
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 compentsation -- -- -- -- --
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
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ----------- ----------- -----------
Preferred stock sold, including dividends (1,335,474) -- -- 3,600,000
Common stock sold -- -- -- 1,561,110
Cancellation of stock subscription -- 405,130 -- --
Common stock issued in exchange for services -- -- -- 4,257,320
Common stock issued with exercise of stock 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 compentsation -- -- 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
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
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 --
Common 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 compentsation -- -- -- -- --
Net loss (restated) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
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
Common 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 compentsation -- -- 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
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
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 agreement -- -- 3,500,000 1,890,000 (3,199,000)
Dividends accrued on preferred stock not
yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,340,625
Collection of stock subscriptions -- -- -- 12,500 --
Amortization of deferred compentsation -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 611 6,110,000 36,493,544 23,983,073 1,884,846
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
----------- ----------- ----------- -----------
Preferred stock sold, including dividends
and placement fees (1,741,015) -- -- 4,559,500
Conversion of preferred stock to common stock -- -- -- 33,893
Common stock sold -- -- -- 200,000
Common stock issued in exchange for services -- -- -- 1,419,130
Common stock issued for compensation -- -- -- 54,408
Common stock issued with exercise of stock options -- -- -- 22,999
Common stock issued in exchange for
licensing agreement -- -- -- (1,309,000)
Dividends accrued on preferred stock not
yet converted (315,000) -- -- (315,000)
Stock options granted -- -- (1,340,625) --
Collection of stock subscriptions -- 21,250 -- 33,750
Amortization of deferred compentsation -- -- 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 accompanying notes to the financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
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, 1998 611 6,110,000 36,493,544 23,983,073 1,884,846
----------- ----------- ----------- ----------- -----------
Preferred stock issued - satisfaction of debt 138 1,380,000 -- -- (161,348)
Conversion of preferred stock to common stock (153) (1,530,000) 4,865,034 1,972,296 (442,296)
Common stock sold -- -- 200,000 60,000 --
Common stock issued - exchange for services
and compensation -- -- 719,442 301,210 --
Common stock issued - repayment of debt -- -- 2,974,043 1,196,992 --
Common stock issued in exchange for loan fees -- -- 480,000 292,694 --
Common stock issued with exercise of stock options -- -- 65,612 124,464 --
Common stock issued in satisfaction of
licensing agreement payable -- -- 3,500,000 1,890,000 --
Redeemable preferred stock sold, deemed dividend -- -- -- -- --
Dividends accrued-preferred stock not yet converted -- -- -- -- --
Stock options granted -- -- -- -- 209,625
Amortization of deferred compentsation -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 596 5,960,000 49,297,675 29,820,729 1,490,827
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1998 (27,336,655) (14,309) (1,300,812) 3,326,143
----------- ----------- ----------- -----------
Preferred stock issued - satisfaction of debt (492,857) -- -- 725,795
Conversion of preferred stock to common stock -- -- -- --
Common stock sold -- -- -- 60,000
Common stock issued - exchange for services
and compensation -- -- -- 301,210
Common stock issued - repayment of debt -- -- -- 1,196,992
Common stock issued in exchange for loan fees -- -- -- 292,694
Common stock issued with exercise of stock options -- -- -- 124,464
Common stock issued in satisfaction of
licensing agreement payable -- -- -- 1,890,000
Redeemable preferred stock sold, deemed dividend (127,117) -- -- (127,117)
Dividends accrued-preferred stock not yet converted (329,176) -- -- (329,176)
Stock options granted -- -- (209,625) --
Amortization of deferred compentsation -- -- 1,510,437 1,510,437
Net loss (6,807,194) -- -- (6,807,194)
----------- ----------- ----------- -----------
Balance at June 30, 1999 (35,092,999) (14,309) -- 2,164,248
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
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, 1999 596 5,960,000 49,297,675 29,820,729 1,490,827
------------ ------------ ------------ ------------ ------------
Conversion of convertible debentures -- -- 4,060,398 3,958,223 --
Conversion of preferred stock to common, net (596) (5,960,000) 45,415,734 7,313,334 (648,885)
Common stock sold -- -- 100,000 157,000 --
Common stock issued - exchange for services
and compensation, net of cancelled shares -- -- 137,000 (18,675) --
Common stock issued - repayment of debt
and accrued interest -- -- 5,061,294 1,067,665 --
Common stock issued in exchange for
interest and loan fees -- -- 7,297 2,408 --
Common stock issued with exercise of stock options -- -- 1,281,628 395,810 157,988
Common stock issued with exercise of warrants -- -- 150,652 121,563 97,850
Issuance of note payable with warrants at a discount -- -- -- -- 500,000
Dividends accrued-preferred stock not yet converted -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 -- $ -- 105,511,678 $ 42,818,057 $ 1,597,780
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1999 (35,092,999) (14,309) -- 2,164,248
------------ ------------ --- ------------
Conversion of convertible debentures -- -- -- 3,958,223
Conversion of preferred stock to common, net -- -- -- 704,449
Common stock sold -- -- -- 157,000
Common stock issued - exchange for services
and compensation, net of cancelled shares -- -- -- (18,675)
Common stock issued - repayment of debt
and accrued interest -- -- -- 1,067,665
Common stock issued in exchange for
interest and loan fees -- -- -- 2,408
Common stock issued with exercise of stock options -- (13,599) -- 540,199
Common stock issued with exercise of warrants -- -- -- 219,413
Issuance of note payable with warrants at a discount -- -- -- 500,000
Dividends accrued-preferred stock not yet converted (145,950) -- -- (145,950)
Net loss (8,022,929) -- -- (8,022,929)
------------ ------------ --- ------------
Balance at June 30, 2000 $(43,261,878) $ (27,908) $-- $ 1,126,051
============ ============ === ============
</TABLE>
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F-10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- -------------- --------------
<S> <C> <C> <C>
Net loss $ (8,022,929) $ (6,807,194) $(37,544,649)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 304,582 312,956 1,293,400
Amortization of deferred compensation -- 1,510,437 4,064,250
Noncash interest, compensation and consulting expenses 1,811,817 593,904 9,793,868
(Increase) decrease in loans receivable - other 14,351 (44,310) (41,686)
(Increase) decrease in inventory 1,102,465 (484,298) 462,385
(Increase) decrease in prepaid expenses 20,911 (24,711) (37,339)
(Increase) decrease in other assets 1,870 91,758 (13,835)
Increase (decrease) in accounts payable and
accrued expenses (749,699) 887,828 1,030,334
Increase (decrease) in other current liabilities 1,491,267 263,902 2,021,147
---------- ------------ ------------
Total adjustments 3,997,564 3,107,466 18,572,524
----------- ------------ ------------
Net cash used for operating activities (4,025,365) (3,699,728) (18,972,125)
------------ ------------ ------------
Cash flows from investing activities:
Prototype equipment -- -- (2,799,031)
Capital expenditures (84,956) (64,423) (3,810,373)
------------ ------------ ------------
Net cash used for investing activities (84,956) (64,423) (6,609,404)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (10,571) (9,716) (34,727)
Proceeds from convertible debenture 2,140,000 1,100,000 3,240,000
Proceeds from loan payable, net 1,395,608 1,869,324 3,550,339
Proceeds from issuance of preferred stock -- 380,000 13,039,500
Net proceeds from issuance of common stock 674,373 184,464 5,945,543
------------ ------------ ------------
Net cash provided by financing activities 4,199,410 3,524,072 25,740,655
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 89,089 (240,079) 159,126
Cash and cash equivalents at beginning of period 70,037 310,116 -0-
------------ ------------ ------------
Cash and cash equivalents at end of period $ 159,126 $ 70,037 $ 159,126
============ ============ ============
</TABLE>
(Continued)
See accompanying notes to the financial statements.
F-11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 21,077 $ 16,628 $ 67,863
============== ========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ - $ 221,788 $ 4,837,747
============== ========== ===========
Issuance of common stock as loan fees in
connection with loans to the Company $ 1,000 $ 292,694 $ 293,694
============== ========== ===========
Issuance of common stock as satisfaction of
loans payable and accrued interest $ 1,066,665 $ 939,100 $ 2,005,765
============== ========== ===========
Issuance of common stock as satisfaction of
certain accounts payable $ - $ 257,892 $ 257,892
============== ========== ===========
Issuance of common stock in
exchange for property and equipment $ - $ - $ 89,650
============== ========== ===========
Issuance of common stock and other current liability
in exchange for patent licensing agreement $ - $ - $ 581,000
============== ========== ===========
Issuance of common stock for
compensation $ 79,175 $ 79,422 $ 1,849,533
============== ========== ===========
Issuance of common stock through
exercise of incentive stock options $ 157,988 $ - $ 1,261,191
============== ========== ===========
Issuance of common stock as
payment for preferred stock dividends $ 236,993 $ - $ 301,225
============== ========== ===========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ - $ - $ 50,289
============== ========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-12
<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 3) 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 has
continued to exhibit its latest technology and clinical images at the RSNA
conferences held annually in Chicago during the last week of November.
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. During 1999, the FDA granted the Company's request to
expand the clinical investigational trials to Nassau County Medical Center
("NCMC") in East Meadow, NY and University of Virginia Health Systems ("UVA") in
Charlottesville, VA.
On June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995 was granted with 7 independent
and 16 subordinate claims. Foreign patent applications have been filed and are
pending. On September 14, 1999, the Company was advised by patent counsel that a
patent for laser imaging apparatus using biomedical markers that bind to cancer
cells was issued.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
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-13
<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,
work-in-process and completed units under testing, are carried
at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
(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 $164,942 as computer and lab equipment. The original
amortization period of two years was increased to five years to
provide for the estimated period of time the clinical equipment
would be in service to gain FDA approval.
During the fiscal year ended June 30, 1998, the costs associated
with the various pre-production units available for sale have
been reclassified as inventory and the remaining costs which
will no longer benefit future periods were expensed to research
and development costs.
(Continued)
F-14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements
(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-15
<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, 2000.
(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-16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Deemed preferred stock dividend
The accretion resulting from the incremental yield embedded in
the conversion terms of the convertible preferred stock is
computed based upon the discount from market of the common stock
at the date the preferred stock was issued. The resulting deemed
preferred stock dividend subsequently increases the value of the
common shares upon conversion.
(m) Discount on convertible debt
The discount which arises as a result of the allocation of
proceeds to the beneficial conversion feature upon the issuance
of the convertible debt increases the effective interest rate of
the convertible debt and will be reflected as a charge to
interest expense. The amortization period will be from the date
of the convertible debt to the date the debt first becomes
convertible.
(n) Comprehensive income
SFAS 130, "Reporting Comprehensive Income", requires a full set
of general purpose financial statements to be expanded to
include the reporting of "comprehensive income". Comprehensive
income is comprised of two components, net income and other
comprehensive income. For the period from December 10, 1993
(date of inception) to June 30, 2000, the Company had no items
qualifying as other comprehensive income.
(o) Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to conform with the current period
presentation.
(Continued)
F-17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(3) 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.
(4) 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.
(Continued)
F-18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(5) INVENTORIES
Inventories consisted of the following:
June 30,
-------------------------------
2000 1999
-------------- -------------
Raw materials $ 2,156,329 $ 2,125,035
Work-in process 15,487 391,875
Completed units under testing 424,062 1,181,433
------------ ------------
$ 2,595,878 $ 3,698,343
=========== ============
(6) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
June 30,
---------------------------
2000 1999
------------ -------------
Furniture and fixtures $ 261,625 $ 246,730
Building and land (See Note 11) 2,084,085 2,084,085
Clinical equipment 30,714 30,714
Computers and equipment 584,768 516,551
CTLM(TM) software costs 352,932 352,932
Trade show equipment 154,468 154,468
Laboratory equipment 193,392 191,548
----------- -----------
3,661,984 3,577,028
Less: accumulated depreciation (1,136,697) (869,034)
----------- -----------
Totals $ 2,525,287 $ 2,707,994
=========== ===========
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
(Continued)
F-19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(6) PROPERTY AND EQUIPMENT (Continued)
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM(TM) software at June 30, 2000 and 1999 are $16,241 and $67,666,
respectively, which represents the net realizable value of the CTLM(TM) software
at the end of each period presented.
Amortization expense related to the CTLM(TM) software for each period presented
in the statement of operations is as follows:
Period ended Amount
------------ ---------
6/30/00 $ 51,425
6/30/99 70,514
6/30/98 70,587
Prior 144,165
---------
Total $ 336,691
=========
(7) OTHER ASSETS
Other assets consist of the following:
June 30,
--------------------
2000 1999
-------- --------
Patent license agreement, net of accumulated
amortization of $68,353 and $34,176, respectively $512,647 $546,824
UL and CE approvals, net of accumulated
amortization of $4,113 and $1,371, respectively 4,113 6,854
Unamortized debt discount (See Note 10) 71,430 -
Security deposits 5,610 7,480
-------- --------
Totals $593,800 $561,158
======== ========
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
7,000,000 shares of common stock (See Note 16). The License agreement has been
recorded at the historical cost basis of the chief executive officer, who owns
the patent.
(Continued)
F-20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
-------------------------------
2000 1999
------------- -----------
Accounts payable - trade $ 561,947 $ 773,827
Preferred stock dividends payable -- 86,669
Accrued property taxes payable 14,085 15,585
Accrued compensated absences 39,725 30,297
Accrued interest payable 82,041 461,462
Liquidated damages payable (see Note 15) 151,000 120,000
Accrued wages payable 89,839 109,243
Other 57,317 --
---------- ----------
Totals $ 995,954 $1,597,083
========== ==========
(9) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
June 30,
--------------------------------
2000 1999
-------------- ---------------
Accrued compensation-stock options $ 2,021,147 $ 529,880
------------- -------------
$ 2,021,147 $ 529,880
============= =============
(10) LOANS PAYABLE
Loans payable consisted of the following:
June 30,
-------------------------
2000 1999
----------- ----------
Loans and note payable $ 910,407 $ 300,407
Loans payable to officers, net of loan receivable
of $11,712 and 13,359, respectively 345,309 443,864
Loans payable to related parties 500,000 488,000
------------- ----------
$ 1,755,716 $ 1,232,271
=========== ===========
(Continued)
F-21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(10) LOANS PAYABLE (Continued)
The Company has borrowed a total of $475,407, from an unrelated third-party on
an unsecured basis. The loan accrues interest at a rate of 6% per annum and is
payable on demand. The Company has repaid $175,000 as of June 30, 2000. Accrued
interest of $54,452 is reflected in accrued expenses on the balance sheet.
Additionally, on January 27, 2000 the Company borrowed $500,000 from an
unrelated third-party on an unsecured basis. The holder had the option to be
repaid in warrants, at an exercise price of $.35 per share. As the Company's
common stock was trading in excess of the $.35 at the date of the note, a
discount of $500,000 was recorded on the transaction, in accordance with the
guidelines of EITF Abstract No. 96-13. The discount is being amortized over the
term of the note (see Note 7). The note and accrued interest ($530,000) was
repaid on July 18, 2000. Finally, on June 8, 2000, the Company issued a 10%
convertible promissory note in the amount of $110,000. The note was to be repaid
on July 10, 2000, or it would be converted into convertible preferred stock at
the option of the holder. If the closing of the pending convertible preferred
stock issuance did not take place on July 10, 2000, the Company would issue to
the note holder, a warrant to purchase 50,000 shares of the Company's common
stock at an exercise price equal to 110% of the closing price of the common
stock at such date provided under the terms of the agreement. On August 23,
2000, the Company repaid the $110,000 debenture, including accrued interest of
$2,291, and issued a warrant to purchase 50,000 shares of the Company's stock at
an exercise price of $1.452 per share.
During the year ended June 30, 1999, the officers of the Company made loans
totaling $1,433,487. The loans were non-interest bearing and originally due by
August 31, 1999. On May 18, 1999 the officers were issued a total of 2,171,743
shares of stock as full satisfaction ($874,100) of the loans outstanding at that
date. During the year ended June 30, 2000, the officers loaned an additional
$352,241. During the year ended June 30, 2000 a portion of the loans were
repaid, $21,633 in cash and $430,795 in common stock of the Company .
The Company had received various loans from related parties (stockholders of the
Company) during the year ended June 30, 1999 totaling $1,093,000. A total of
$605,000 had been repaid as of June 30, 1999. These loans bore interest at rates
varying from 6% to 15%, and accrued interest as of June 30, 1999 amounted to
$38,921. An additional $600,000 was loaned by related parties during the year
ended June 30, 2000. The Company repaid a total of $588,000 ( $35,000 in cash
and $553,000 in common stock of the Company) during the year ended June 30,
2000, including accrued interest of $85,945 ($5,000 in cash and $80,945 in
common stock). The remaining balance of $500,000 was repaid on July 18, 2000.
(Continued)
F-22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) CONVERTIBLE DEBENTURES
The Company entered into a Subscription Agreement with the Purchaser of the
Series B Convertible Preferred Stock on April 6, 1999 (see Note 15). The
Purchaser agreed to purchase $2,750,000 of the Company's Debentures. The
Debentures had 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 were subject to automatic conversion at the end
of the two years from the date of issuance, at which time all Debentures
outstanding would be converted based upon a formula detailed within the
Debenture document.
The Debentures were secured by a mortgage on the Company's land and building
(see Note 6). The mortgage shall only be released upon the Company meeting
certain conditions described in the mortgage document. The funds were available
to the Company as follows:
1. The Purchaser irrevocably agreed to purchase $1,100,000 of
the Debentures, which will net the Company proceeds of
$1,000,000 after fees.
2. The Company may draw a second $825,000 ($750,000 net of fees)
anytime thirty days after the effective date of the S-2
Registration Statement (July 29, 2000), 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 limited 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 had registration rights and were registered in the Company's S-2
Registration Statement.
The Company was able to borrow a revised total of $3,080,000 under the
debenture. The entire amount, including interest of $171,205, was converted
during the year ended June 30, 2000 into 3,908,883 shares of the Company's
common stock. The interest relating to the discount at issuance of $367,972 was
expensed during the year ended June 30, 1999, as the debenture could have been
converted immediately, and would ultimately have no conversion period.
(Continued)
F-23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) CONVERTIBLE DEBENTURES (Continued)
During the year ended June 30, 2000, the Company issued additional convertible
debentures totaling $161,000. In August 1999, the Company received $51,000 (net
proceeds to the Company of $50,000), which was converted into 158,812 shares of
stock on December 31, 1999. The debenture had provided for a 40% discount on the
conversion price per share, and as a result the Company had recorded a discount
of $15,938 at the issuance of the debenture and expensed the discount during
that quarter. A total of $1,408 of accrued interest was included in the shares
issued at conversion.
(12) 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 6) and the obligation has been
recorded as debt. At June 30, 2000, approximate future minimum lease payments
under capitalized lease obligations were as follows:
Year ending June 30,
-------------------
2001 $ 12,384
2002 4,128
--------
Total minimum lease payments 16,512
Less amount representing interest (950)
--------
Present value of net minimum lease payments 15,562
Less current portion (11,505)
--------
Long-term portion $ 4,057
========
The Company also leases certain office equipment under an operating lease
expiring in June 2002.
Minimum future lease payments under the non-cancelable operating lease having a
remaining term in excess of one year as of June 30, 2000 are as follows:
Year ending June 30, Amount
-------------------- --------
2001 $ 3,676
2002 3,676
---------
Total minimum future lease payments $ 7,352
=========
(Continued)
F-24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) 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 $27,796,000 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 $9,451,000 and $7,716,000 at June 30, 2000 and 1999, 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, 1999 to June 30, 2000 was an increase of
approximately $1,735,000.
(14) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 17, 1999, the Company finalized the private placement to foreign
investors of 35 shares of its Series G Redeemable Convertible Preferred Stock at
a purchase price of $10,000 per share and two year warrants to purchase 65,625
shares of the Company's common stock at an exercise price of $.50 per share. The
agreement was executed pursuant to Regulation D as promulgated by the Securities
Act of 1933, as amended. A total of 43,125 warrants were exercised during the
year ended June 30, 2000, and an additional 9,375 warrants were exercised
subsequent to June 30, 2000.
The Series G Preferred Stock had no dividend provisions. The preferred stock was
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 stated that the holder of the
Series G Preferred Stock would receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to the lesser of $.54 or seventy-five
percent (75%) of the Average Closing Price of the Company's common stock for the
ten-day trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued three preferred shares to an
unaffiliated investment banker for placement and legal fees, providing net
proceeds to the Company of $350,000. The shares underlying the preferred shares
and warrant are entitled to demand registration rights under certain conditions.
(Continued)
F-25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) REDEEMABLE CONVERTIBLE PREFERRED STOCK (Continued)
Pursuant to the Registration Rights Agreement ("RRA") the Company was required
to register 100% of the number of shares that would be required to be issued if
the Preferred Stock were converted on the day before the filing of the S-2
Registration Statement. In the event the Registration Statement was not declared
effective within 120 days, the Series G Holders had the right to force the
Company to redeem the Series G Preferred Stock at a redemption price of 120% of
the face value of the preferred stock. The Registration Statement was declared
effective on July 29, 2000. During the year ended June 30, 2000, the Series G
Preferred Stock was converted into 3,834,492 shares of the Company's common
stock.
(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-26
<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-27
<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.
On September 4, 1998, the Company received a notice of conversion from the
Series B Holders. The Series B Holders filed a lawsuit against the Company on
October 7, 1998. The Company was served on October 19, 1998. The lawsuit alleged
that the Company has breached its contract of sale to the Series B Holders by
failing to convert the Series B Holders and failure to register the common stock
underlying the Preferred Stock. The Series B Holders demanded damages in excess
of $75,000, to be determined at trial, together with interest costs and legal
fees. On April 6, 1999, the Series B Holders sold their preferred stock to an
unaffiliated third party ("the Purchaser") with no prior relationship to the
Company, or the Series B Holders. As part of the purchase agreement, the Series
B Holders were required to dismiss the lawsuit with prejudice and the Company
and the Series B Holders exchanged mutual general releases (see Series I).
As of June 30, 2000, the Series B Preferred Stock has been converted into
30,463,164 shares of the Company's common stock, and 60 shares were canceled at
the request of the holder.
During the years ended June 30, 1999 and 1998 the Company issued a total of six
Private Placements of convertible preferred stock (see schedule incorporated
into Note 15). The Private Placements are summarized as follows:
(Continued)
F-28
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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 160,000
shares of the Company's common stock at an exercise price of $1.63 per share,
and warrants to purchase up to 50,000 shares of the Company's common stock at an
exercise price of $1.562 per share. The agreement was executed pursuant to
Regulation S as promulgated by the Securities Act of 1933, as amended. As of
June 30, 2000 none of the warrants had been exercised.
The Series C Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in whole
or in part, without the payment of any additional consideration, into fully paid
and 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.
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock; however, in no event will
the "Conversion Price" be greater than $1.222. Pursuant to the Regulation S
documents, the Company was also required to escrow an aggregate of 3,435,583
shares of its common stock (200% of the number of shares the investor would have
received had the shares been converted on the closing date of the Regulation S
sale).
In connection with the sale, the Company paid an unaffiliated investment banker
$220,500 for placement and legal fees, providing net proceeds to the Company of
$1,879,500.
Series D Preferred Stock
On January 9, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series D Convertible Preferred Stock at a purchase
price of $10,000 per share and warrants to purchase up to 25,000 shares of the
Company's common stock at an exercise price of $1.22 per share. The agreement
was executed pursuant to Regulation S as promulgated by the Securities Act of
1933, as amended. As of June 30, 2000 none of the warrants had been exercised.
(Continued)
F-29
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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. As of June 30, 2000 none of the warrants had been exercised.
The Series E Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in whole
or in part, without the payment of any additional consideration, into fully paid
and 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.
(Continued)
F-30
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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, 1999 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 Series H-"A" warrants to purchase up to
75,000 shares of the Company's common stock at an exercise price of $1.00 per
share, and Series H-"B" warrants to purchase up to 50,000 shares of the
Company's common stock at an exercise price of $1.50 per share. The agreement
was executed pursuant to Regulation D as promulgated by the Securities Act of
1933, as amended. As of June 30, 2000 none of the warrants had been exercised.
The Series H Preferred Stock is convertible, at any time, for a period of two
years thereafter, in whole or in part, without the payment of any additional
consideration, into fully paid and 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.
(Continued)
F-31
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
In connection with the sale, the Company issued eight preferred shares and paid
$10,000 to an unaffiliated investment banker for placement and legal fees,
providing net proceeds to the Company of $990,000. The shares underlying the
preferred shares and warrant are entitled to demand registration rights under
certain conditions.
The Company was in technical default of the Registration Rights Agreement
("RRA"), which required the S-2 Registration Statement to be declared effective
by October 2, 1998. Pursuant to the RRA, the Company was required to pay the
Series H holders, as liquidated damages for failure to have the Registration
Statement declared effective, and not as a penalty, 2% of the principal amount
of the Securities for the first thirty days, and 3% of the principal amount of
the Securities for each thirty day period thereafter until the Company procures
registration of the Securities. On March 25, 1999, the Company issued 424,242
shares of common stock as partial payment of the liquidated damages. The total
expense for the years ended June 30, 2000 and 1999 amounted to $31,000 and
$260,000, respectively, and a balance of $151,000 remains outstanding as of June
30, 2000 (See Note 8).
Series I Preferred Stock
On April 6, 1999, the Company entered into a Subscription Agreement with the
Purchaser of the Series B Preferred Stock whereby the Company agreed to issue
138 shares of its Series I, 7% Convertible Preferred Stock ($1,380,000). The
consideration for the subscription agreement was paid as follows:
1. Forgiveness of approximately $725,795 of accrued interest
(dividends) in connection with the Series B Convertible Preferred
stock. The Company recorded the forgiveness of the accrued interest
(dividends) by reducing the accrual along with a reduction in the
accumulated deficit.
2. Settlement of all litigation concerning the Series B Convertible
Preferred stock.
3. Cancellation of 112,500 warrants that were issued with the Series B
Convertible Preferred stock.
4. A limitation on the owner(s) of the Series B Convertible Preferred
stock to ownership of not more than 4.99% of the Company's outstanding
common stock at any one time.
The Series I Preferred stock pays a 7% premium, to be paid in cash or freely
trading common stock at the Company's sole discretion, upon conversion.
(Continued)
F-32
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The Series I Preferred Stock is convertible, at any time, in whole or in part,
without the payment of any additional consideration, into fully paid and
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 I Preferred Stock will receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
Pursuant to the Series I designation and the Subscription Agreement, the Series
I Holder, or any subsequent holder of the Preferred Shares, is prohibited from
converting any portion of the Preferred Stock which would result in the Holder
being deemed the beneficial owner of 4.99% or more of the then issued and
outstanding common stock of the Company.
The agreements provided that no fractional shares shall be issued. In addition,
provisions were made for any stock dividends or stock splits that the Company
may issue with respect to their no par value common stock. The Company was 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, 2000, 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-33
<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 Series E Series F
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
----------------- ----------------- ----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - - $ - - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------ ----------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
------ ----------
Balance at June 30, 1997 - - 450 4,500,000
Sale of preferred stock
(Series C - H) 210 2,100,000 54 540,000 54 540,000 75 750,000
Conversion of preferred stock (210) (2,100,000) (25) (250,000) (30) (300,000) (75) (750,000)
---- ---------- --- -------- --- -------- --- --------
Balance at June 30, 1998 - - 450 4,500,000 - - 29 290,000 24 240,000 - -
Sale of Series I
Conversion of preferred stock (60) (600,000) (29) (290,000) (24) (240,000)
--- -------- --- -------- --- --------
Balance at June 30, 1999 - - 390 3,900,000 - - - - - - - -
Conversion of preferred
stock, net (390) (3,900,000)
---- ----------
Balance at June 30, 2000 - $ - - $ - - $ - - $ - - $ - - $ -
====== ======= ======= ======= ====== ======= ===== ======= ====== ======= ===== =======
Additional information:
Discount off market price 25% 18% 25% 25% 25% 30%
== == == == == ==
Fair market
value-issue rate $ 8.31 $ 3.25 $ 1.63 $ 0.99 $ 1.07 $ 1.24
====== ====== ====== ====== ====== ======
Deemed preferred
stock dividend $1,335,474 $ 998,120 $ 705,738 $182,433 $182,250 $318,966
========== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Series H Series I Total
Shares Amount Shares Amount Shares Amount
------ -------- ------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------ ----------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
Balance at June 30, 1997 450 4,500,000
Sale of preferred stock
(Series C - H) 108 1,080,000 501 5,010,000
Conversion of preferred stock (340) (3,400,000)
---- ----------
Balance at June 30, 1998 108 1,080,000 611 6,110,000
Sale of Series I 138 1,380,000 138 1,380,000
Conversion of preferred stock (40) (400,000) (153) (1,530,000)
--- -------- ---- ----------
Balance at June 30, 1999 68 680,000 138 1,380,000 596 5,960,000
Conversion of preferred
stock, net (68) (680,000) (138) (1,380,000) (596) (5,960,000)
--- -------- ---- ---------- ---- ----------
Balance at June 30, 2000 - $ - - $ - - $ -
===== ======== ======= ======== ====== =========
Additional information:
Discount off market price 25% 25%
== ==
Fair market
value-issue rate $ 0.57 $ 0.38
====== ======
Deemed preferred
stock dividend $351,628 $ 492,857
======== =========
</TABLE>
(Continued)
F-34
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-35
<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.
F-36
(Continued)
<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 16) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for
100,000 shares. Consulting expenses of $221,900 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-37
<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 7). 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.
On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Majority Shareholders consent with respect to the Amendment was effective on
February 18, 1999. The number of authorized shares was further increased to
150,000,000 shares during the shareholders annual meeting held on May 10, 2000.
During the year ended June 30, 1999, the Company issued a total of 12,804,131
shares ($5,837,656) of its common stock. The conversion of Convertible Preferred
Stock (see Note 15) accounted for the issuance of 4,865,034 shares ($1,972,296).
The remaining 7,939,097 shares were issued as follows:
(Continued)
F-38
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
1. The Company sold 200,000 shares on August 5, 1998 in a
Regulation D offering at $.30 per share, and received cash
proceeds of $60,000.
2. In June 1999, the Company issued to its chief executive
officer 3,500,000 shares ($1,890,000), representing the balance
of shares to be issued as consideration for the exclusive Patent
License Agreement (see Note 7).
3. On November 9, 1998, the Company issued 15,000 shares to its
corporate counsel as additional bonus compensation. Legal
expenses of $10,800 were recorded as the market value of the
stock on that date was $.72 per share.
4. A total of 65,612 non-qualified stock options were exercised
and proceeds of $22,964 ($.35 per share) was received by the
Company. An additional $101,500 was received this year for stock
sold in the prior year.
5. A total of 480,000 shares were issued in connection with
loans that were received by the Company. The total loan fee
expenses (based on the market value of the stock at the date of
issuance) charged to the statement of operations for the year
was $292,694, or an average of $.61 per share.
6. A total of 2,974,043 share were issued as repayment of
various accounts payable and loans payable during the year. A
total of $1,196,992 (average of $.40 per share) of debts were
satisfied through the issuance of the stock.
7. On December 11, 1998, bonus stock was issued to Company
employees, for 130,200 shares. Compensation expense of $79,422
was charged as the fair market value at that date was $.61 per
share.
8. On March 26, 1999, the Company issued 424,242 shares of stock
as partial-payment ($140,000) on the liquidated damages in
connection with Series H Preferred Stock. The fair market value
at that date was $.33 per share.
9. During the year a total of 150,000 shares was issued for to
various independent parties for services rendered to the
Company. Expenses of $81,788 were charged, or an average price
of $.50 per share.
(Continued)
F-39
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
During the year ended June 30, 2000, the Company issued a total of 56,214,003
shares ($12,997,328) of its common stock. The conversion of Convertible
Debentures (see Note 11) accounted for the issuance of 4,060,398 shares
($3,958,223), the conversion of Redeemable Convertible Preferred Stock (see Note
14) accounted for the issuance of 3,834,492 shares ($507,115), and the
conversion of Convertible Preferred Stock (see Note 15) accounted for the
issuance of 41,581,242 shares ($6,806,219). The remaining 6,737,871 shares were
issued as follows:
1. The Company sold 100,000 shares on April 27, 2000 in a
Regulation D offering at $1.57 per share, and received cash
proceeds of $157,000.
2. A total of 5,061,294 shares were issued as repayment of
various loans payable during the year. A total of $1,067,665
(average of $.21 per share) of debts were satisfied through the
issuance of the stock.
3. On November 12, 1999, bonus stock was issued to Company
employees, for 145,000 shares. Compensation expense of $12,325
was charged as the fair market value at that date was $.09 per
share. The company also canceled 8,000 shares which had been
previously issued to an independent contractor for consulting
services. A reduction of $31,000 was recorded to consulting
expenses for the year.
4. A total of 7,297 shares were issued in connection with a loan
that was received by the Company. The total loan fee expense and
interest charged to income amounted to $2,408 during the year.
5. During the year at total of 150,652 shares were issued for
the exercise of warrants. On March 21, 2000, the Company
received $100,000 for the exercise of 107,527 warrants at an
exercise price of $.93 per share. The Company recorded a charge
to consulting expense, as the fair market value at the date the
warrants were issued was $1.84. The Company also received
$21,563 from the exercise of 43,125 of Series G Preferred Stock
warrants during the last quarter of the fiscal year.
6. Exercise of 1,281,628 incentive stock options, ($395,810)
exercised and paid for at prices ranging from $.13 per share to
$1.13 per share.
(Continued)
F-40
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(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.
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 original
plan was revised and on January 3, 2000 the Board of Directors adopted the
Company's "2000 Non-Statutory Plan", and the plan was subsequently approved by
the shareholders on May 10, 2000 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 4,850,000 shares of common stock of the Company. The Board of
Directors or a company established compensation committee has direct
responsibility for the administration of this plan.
The exercise price of the non-statutory stock options shall be equal to no less
than 50% of the fair market value of the common stock on the date such option is
granted.
In accordance with the provisions of APB No. 25, the Company records the
discount from fair market value on the non-qualified stock options as a charge
to deferred compensation at the date of grant and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as
follows:
(Continued)
F-41
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17 ) STOCK OPTIONS (Continued)
<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
Granted 786,635 .48 750,000 .43
Exercised -- (65,612) .35
Canceled (82,500) 3.37 --
------- ----------
Outstanding at June 30, 1999 1,406,031 .53 ** 2,568,676 2.24
Granted 3,139,459 .34 --
Exercised (770,702) .37 (318,676) .35
Canceled (64,334) .47 --
--------- ----------
Outstanding at June 30, 2000 3,710,454 .42 2,250,000 2.35
========= ==========
</TABLE>
**On June 25, 1999, the exercise price of 502,225 outstanding incentive
stock options was restated to $.60 per share. The Company has recorded
compensation of $330,569 during the fiscal year ended June 30, 1999 as a
result of this repricing, in accordance with the guidelines discussed in
the proposed FASB interpretation of APB Opinion No. 25.
At June 30, 2000 and 1999, 3,372,505 and 1,096,825, respectively, of the
incentive stock options were vested and exercisable and 2,250,000 and 2,568,676,
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:
(Continued)
F-42
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
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, 1999. 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, 1999
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.
(Continued)
F-43
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
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).
At various dates during the year ended June 30, 1998, the Company issued to
various employees incentive options to purchase 204,905 shares of common stock
at prices ranging from $.55 to $2.60. In all instances, the exercise price was
established as the fair market value of the common stock at the date of grant,
therefore no compensation was recorded on the issuance of the options. In most
cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
On July 5, 1998, the Company issued non-qualified options to its officers and
directors to purchase 750,000 shares of common stock at 35% of the fair market
value at the date of grant. Deferred compensation of $622,500 was recorded on
the transaction and is being amortized over the remaining term of the employment
contract (one year).
(Continued)
F-44
<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, 1999, the Company issued to
various employees incentive options to purchase 786,635 shares of common stock
at prices ranging from $.46 to $.60. In all instances, the exercise price was
established as the fair market value of the common stock at the date of grant,
therefore no compensation was recorded on the issuance of the options. In most
cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
At various dates during the year ended June 30, 2000, the Company issued to its
officers and various employees incentive options to purchase 3,139,459 shares of
common stock at prices ranging from $.23 to $4.38. The exercise price was
established as the fair market value of the common stock at the date of grant
for employees, and 110% of the fair market value at the date of the grant for
officers, therefore no compensation was recorded on the issuance of the options.
The officers options vested immediately, while the employees options vest
one-third from the grant date, with one-third vesting each of the next two
years. The options expire in five years from the grant date.
The following table summarizes information about all of the stock options
outstanding at June 30, 2000:
Outstanding options Exercisable options
------------------------------------------- -------------------
Weighted
average
Range of remaining Weighted Weighted
exercise prices Shares life (years) avg. price Shares avg. price
--------------- ----------- ------------ ---------- --------- ----------
$ .23 - 1.25 5,101,304 4.89 $ .44 4,934,321 $ .42
1.36 - 2.99 839,350 6.79 1.38 750,000 1.22
3.00 - 4.38 19,800 5.00 4.38
-------------- ---------- ---- ------ --------- ------
$ .23 - 4.38 5,960,454 5.16 $ .58 5,684,321 $ .55
============ ========= ==== ====== ========= ======
At June 30, 2000, 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
$1,649,255 and $(66,667) for 2000 and 1999, respectively.
(Continued)
F-45
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
The weighted average Black-Scholes value of options granted during 2000 and 1999
was $2.22 and $.42 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:
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
Net loss to common shareholders -
As reported $ (8,168,879) $ (7,756,344) $ (43,261,878)
============== ============= ==============
Pro forma $ (13,935,057) $ (7,469,637) $ (49,028,056)
============== ============= ==============
Basic loss per share -
As reported $ (.10) $ (.20) $ (1.30)
============== ============= ==============
Pro forma $ (.18) $ (.19) $ (1.48)
============== ============= ==============
Diluted loss per share -
As reported $ (.10) $ (.20) $ (1.30)
============== ============= ==============
Pro forma $ (.18) $ (.19) $ (1.48)
============== ============= ==============
</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 2000 and 1999, respectively: no dividend yield;
volatility of 78.8% and 28.2%; risk-free interest rate of 6.5% and 6.0%; 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,
2000 was $88,393.
(Continued)
F-46
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximated their fair values due to the short maturity
of these instruments. The fair value of the Company's debt obligations is
estimated based on the quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
At June 30, 2000 and 1999, the aggregate fair value of the Company's debt
obligations approximated its carrying value.
(20) COMMITMENTS AND CONTINGENCIES
On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements expired on July 6, 1999 and new employment agreements were entered
into on August 30, 1999. The new agreements will be for a term of five years and
provide for compensation to these individuals at the annual rate of $286,225,
$119,070, and $119,070, respectively. The agreements provide for annual
increases based upon changes in the Consumer Price Index, but in no event shall
the cost of living increase be less than seven percent. The agreements provide
for bonus arrangements and other normal benefits.
As additional consideration for his development efforts in the 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 percentages in the revised
patent licensing agreement, entered into on June 2, 1998, and approved at the
shareholders' annual meeting 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. On April6, 2000, the
contract was further extended for fifteen months at an annual salary of
$110,000. During the year the Director also received 36,300 incentive stock
options at an exercise price of $1.66 per share, the fair market value at the
date of the grant.
The Company has entered into agreements with various distributors located
throughout Europe, Asia, Canada 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.
(Continued)
F-47
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(20) COMMITMENTS AND CONTINGENCIES (Continued)
The Company entered into an agreement for a fifteen million dollar, three year
equity line of credit, during the year ended June 30, 1998. The Company, as it
deems necessary, may raise capital through the sale of its common stock to a
consortium of prominent European banking institutions. This agreement was
superceded on August 17, 2000, with a new $25 million equity financing with a
private institutional equity investor (see Note 21).
(21) SUBSEQUENT EVENTS
On August 17, 2000 the Company finalized a financing agreement with a private
institutional equity investor which contains two component parts, a $25 million
Private Equity Agreement and a private placement of 400 shares of Series K
convertible preferred stock as bridge financing in the amount of $4,000,000. The
Company is obligated to pay a 9% dividend on the convertible preferred in cash
or common stock at its option semi-annually, on June 30 and December 31, of each
calendar year or upon conversion date. The Company also has the option of
redeeming the convertible preferred solely through the use of the private equity
line by paying cash with the following redemption premiums:
Days from closing 0-120 121-180 180
Redemption price as a % of Principal 105% 107.5% 110%
If the Company, for whatever reason, is unable to redeem the convertible
preferred according to the above schedule, the holder has the right to convert
the convertible preferred into common stock at a price equal to 87.5% of the
average of the three lowest closing bid prices (which need not be consecutive)
of the twenty consecutive trading days prior to the conversion date. The
agreement further provides that the Company register the underlying common
shares in a registration statement as soon as possible after the closing date,
and must use their best efforts to file timely and cause the registration
statement to become effective within 120 days from the closing date. In the
event that the registration statement does not become effective, the Company
will be liable for liquidated damages in the amount of 2% of the purchase price
of the unredeemed convertible preferred stock for the first 30 days and 2% for
every 30 day period thereafter until the registration statement has been filed
and/or declared effective. The liquidated damages will be payable upon demand in
cash or stock at the Company's option.
(Continued)
F-48
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) SUBSEQUENT EVENT (Continued)
The Private Equity Agreement commits the investor to purchase up to $25 million
of common stock subject to certain conditions pursuant to Regulation D over the
course of 12 months after an effective registration of the shares. The timing
and amounts of the purchase by the investor are at the sole discretion of the
Company. However, they do have to draw down a minimum of $10 million from the
credit line over the twelve-month period. The purchase price of the shares of
common stock are set at 91% of the market price. The market price, as defined in
the agreement, is the average of the three lowest closing bid prices of the
common stock over the ten day trading period beginning on the put date and
ending on the trading day prior to the relevant closing date of the particular
tranche. The Company expects to redeem the bridge financing of $4,000,000 in
convertible preferred stock with the proceeds of the sale of common stock in the
equity credit line. In order to use the equity credit line, the Company must use
their best efforts to file and cause the registration statement to become
effective as soon as possible. If subsequent to the registration statement
becoming effective, it is suspended at any time, the Company is obligated to pay
damages of 1.5% of the cost of all common stock then held by the investor for
each fifteen-day period or portion thereof, beginning on the date of the
suspension. If such suspension is cured within the first fifteen days, the
damages shall not apply. This financing agreement has no warrants attached to
either the bridge financing or the private equity line. Furthermore, the Company
was not required to pay the investor's legal fees, but the Company did pay a 5%
consulting fee for the money funded in this transaction.
F-49
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective August 1, 1997, the accounting firm of Margolies and Fink, Certified
Public Accountants for the Company, changed the accounting firm's name to
Margolies, Fink and Wichrowski, Certified Public Accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; AND
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning current directors
and executive officers of the Company, as well as a former director who served
during a portion of fiscal 2000:
<TABLE>
<CAPTION>
Name Age Position Date Elected or Appointed
<S> <C> <C> <C>
Richard J. Grable 58 Chief Executive Officer and Director 1994
Linda B. Grable 62 Chairman of the Board and President 1994
Allan L. Schwartz 58 Executive Vice-President, Chief 1994
Financial Officer and Director
John R. Liegey 44 Director 2000
Irving H. Schwab 57 Director 2000
David E. Danovitch 38 Director 2000
Robert L. Kagan(1) 54 Director 2000
</TABLE>
(1) Mr. Kagan was elected in May 2000 and resigned in August 2000.
34
<PAGE>
Richard Grable, Allan Schwartz and Linda Grable are our founders 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
Mr. Grable is Chief Executive Officer and Director of Research and Development
and is the inventor of the CTLM(TM) device. He is considered a pioneer in the
Optical Imaging field with over 25 years experience. Mr. Grable is a graduate of
the University of Miami School of Business with a Masters Degree in Business
Administration. He has over 30 years of electronic design experience and has
been directly involved in the development and sales of CT, Nuclear Medicine and
Ultrasound instrumentation since 1972. He has over sixteen years of experience
of preparing and filing 510(k)'s, Investigation Device Exemptions, and Premarket
Notification documents for the Food and Drug Administration. He holds two United
States Patents and is co-inventor for one other medical device. He is a member
of the Institute of Electrical & Electronics Engineers, Optical Society of
America, the American Association for the Advancement of Science, the New York
Academy of Science, and a member and guest speaker of the International Society
for Optical Engineering. Mr. Grable has been a Director and Officer of the
Company since its inception in 1993.
Linda B. Grable
Mrs. Grable has been President, Chairman of the Board and Director of the
Company since its inception in 1993. She has played a major role in raising over
$35 million in debt and equity funding for the research and development of the
CTLM(TM) device. She has over 35 years experience in negotiating funding with
banking institutions for both medical and real estate development businesses.
Mrs. Grable has over 20 years of executive experience in the medical device
industry, for both sales and marketing in the U.S. and foreign countries. She is
a graduate of Ohio State University and holds a BA in Journalism and Marketing.
Allan L. Schwartz
Mr. Schwartz is Executive Vice-President and Chief Financial Officer of the
Company and is responsible for its financial affairs. He is an operationally
oriented executive with a wide range of management, marketing, field
engineering, construction, and business development experience. Prior to joining
the Company as a founder in 1993, he developed the Chronometric Trading System
for analyzing stock market trends using neural networks and developed
pre-engineered homes for export to Belize, Central America for S.E. Enterprises
of Miami, Florida. In 1991 he formed Tron Industries, Inc. for the development
of low-voltage neon novelty items and self-contained battery powered portable
neon. He is a graduate of C.W. Post College of Long Island University with a
B.S. in Business Administration. Previous innovations by Mr. Schwartz before
relocating to Florida have included the use of motion detection sensors in
commercial burglar alarm systems for Tron-Guard Security Systems. Inc. and the
use of water reclamation systems with automatic carwash equipment. Mr. Schwartz
has been a Director and Officer of the Company since its inception.
John R. Liegey
Mr. Liegey has been a Director of the Company since May 2000. He is the Chairman
and Chief Executive Officer of The Weston Group LLC, New York City, an
international investment banking firm which he founded in 1988. Prior to
founding The Weston Group LLC, Mr. Liegey was Managing Director for Global Fixed
Income Sales and Trading at Dean Witter Reynolds Inc., New York City, from 1984
to 1985 and then from _1985 to 1988 he was President and Chief Operating Officer
for Dean Witter International Capital Markets Ltd., London, U.K., managing a
35
<PAGE>
staff of 600 professionals in nine offices and six countries. He is a graduate
of Georgetown University and holds a degree in International Economics. Mr.
Liegey has been involved in investment banking for over 20 years.
Irving H. Schwab
Mr. Schwab of Great Neck, New York, has been a Director of the Company since May
2000. He has been involved in healthcare advertising and marketing for over 25
years. Since 1993, he has been an industry consultant and President of Pathways
in Business Planning. In the 15 years prior to that, he was a senior officer for
William Douglas McAdams, the healthcare marketing and advertising firm. In both
firms, he has organized strategic planning processes for phase III and IV
products, directed launch planning and implementation, assisted in the
regulatory processes and overseen the development of advertising, promotion and
public relations programs for ethical and consumer pharmaceuticals and medical
devices. In his career, he has been involved with many of the top 25 healthcare
companies and selected start-ups. Among them are Pfizer, American Home Products,
Johnson and Johnson, Novartis, Schering Plough and Searle. He holds a B.S. and
M.A. from University of Hartford with areas of concentration in Economics,
Chemistry and Psychology.
David E. Danovitch
Mr. Danovitch was appointed by the Board of Directors in August 2000 to replace
Dr. Robert Kagan who resigned effective August 1, 2000.. Since January 2000, he
has been a senior partner of NewWest Associates, LLC, an international
consulting firm, and Del Rey Investments, LLC, a merchant banking firm, both
based in New York, New York. From January 2000 to present , Mr. Danovitch was a
Managing Director of Cambridge Partners, a merchant banking firm which focused
on misunderstood companies and assets. From 1995 to 1997, he was a founding
principal of Snowden Capital, Inc., a New York City-based investment banking
firm. From 1993 to1994, he served as Chief of Staff to Gerald Mczarne, a Senior
Vice President of IBM. Mr. Danovitch is an attorney and member of the District
of Columbia, Massachusetts and New York bars. He holds an A.B. from Kenyon
College, a J.D. from Suffolk University Law School and a LL.M.-Taxation from
Boston University School of Law.
Robert L. Kagan, M.D.
Dr. Kagan was a Director of the Company from May 2000 to August 2000. He is the
medical director of the MRI Scan Centers in Fort Lauderdale, Florida, which he
founded in1983. He is a graduate of Georgetown University School of Medicine and
is board certified in pathology and nuclear medicine. He is a diplomate of the
National Board of Medical Examiners, the American Board of Nuclear Medicine, the
American Board of Pathology in Clinical Pathology and the American Board of
Hyperbaric Medicine. Dr. Kagan has served as Director of our medical advisory
board. The Board regretfully accepted Dr. Kagan's resignation from the Board of
Directors as he could not afford the time required to be a director because of
his commitment to his MRI Centers.
Our Directors 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 our 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.
COMPENSATION OF DIRECTORS
Each director who is not our employee receives $500 per board meeting
attended at our corporate offices plus reimbursement of reasonable travel
expenses.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10 percent of our common
stock, to file with the SEC initial reports of ownership and reports of changes
in ownership, furnishing us with copies of all Section 16(a) forms they file. To
the best of our knowledge, based solely on review of the copies of such reports
36
<PAGE>
furnished to us, all Section 16(a) filing requirements applicable to our
officers and directors were complied with during the year ended June 30, 2000,
except that Form 4 filings have not yet been made due to an oversight with
respect to the options granted to Richard J. Grable, Linda B. Grable and Allan
L. Schwartz in August 1999 and August 2000. Those officers have stated their
intention to make such filings by the end of September 2000.
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or paid to
our Chief Executive Officer and other executive officers for services rendered
to us during fiscal 2000, 1999 and 1998. No other person during these years, who
served as one of our executive officers, had a total annual salary and bonus in
excess of $100,000. Also, see "Stock Option Plan-Option/SAR Grants in Last
Fiscal Year".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensatio Long-Term Compensation
<S> <C> <C> <C> <C> <C>
Name & Principal
Position Year Salary(2) Other Annual Restricted Securities/Underlying
Compensation Stock Awards Option/SARs (1)
Richard J. Grable, CEO 1998 $286,225 534,602
and Director 1999 $286,225 458,333
2000 $286,225 793,255
Linda B Grable, 1998 $119,070 534,602
President and Director 1999 $119,070 458,333
2000 $119,070 793,255
Allan L. Schwartz, 1998 $119,070 534,602
Exec. V.P., CFO and 1999 $119,070 458,333
Director 2000 $119,070 793,255
</TABLE>
1. The aggregate dollar value of the 1998, 1999 and 2000 options, based
on the averaged high and low price on June 30, 2000 are as follows:
Richard J. Grable -$2,715,009; Linda B. Grable-$2,715,009; and Allan L
Schwartz-$2,715,009.
2. The salaries include compensation, which has been accrued and not paid
as of June 30, 2000 in the amounts as follows: Richard J. Grable
$47,704, Linda B. Grable $19,890 and Allan L. Schwartz $19,845.
Subsequent to the fiscal year the amounts owned to the officers for
accrued compensation were paid.
EMPLOYMENT AGREEMENTS
On August 29, 1999, we entered into five-year employment agreements with Richard
J. Grable, Allan L. Schwartz and Linda B. Grable. Under these agreements, base
annual salaries, are as follows: Richard J. Grable, $286,225; Linda B. Grable,
$119,070; and Allan L. Schwartz, $119,070. In addition, each person receives a
car allowance of $500 per month. Each employment agreement provides for bonuses,
health insurance, car allowance, and related benefits, and a cost of living
adjustment of 7% per annum. No bonuses have been paid to date.
The following table sets forth certain information with regard to the
Options/SAR grants by the Company to management for the fiscal year ended June
30, 2000. No options were exercised by management during fiscal 2000.
37
<PAGE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
No. of Securities % of Total Options
Underlying Granted to Exercise or Market Price
Options Employees In Base Price On Date of Expiration
Name Granted Fiscal Year ($/Share) Grant Date
<S> <C> <C> <C> <C> <C>
Richard J. Grable 293,255 9% $.34 $.31 7/5/04
500,000 16% $.23 $.21 8/30/04
Linda B. Grable 293,255 9% $.34 $.31 7/5/04
500,000 16% $.23 $.21 8/30/04
Allan L. Schwartz 293,255 9% $.34 $.31 7/5/04
500,000 16% $.23 $.21 8/30/04
</TABLE>
Stock Option Plans
For the fiscal year ended June 30, 2000, all of our executive officers were
participants in our 1995 stock option plan. The plan was approved by our board
of directors and adopted by the shareholders at the March 1995 annual meeting.
The plan provides for the granting, exercising and issuing of incentive options
pursuant to Internal Revenue Code, Section 422. We may grant incentive stock
options to purchase up to 5% of our issued and outstanding common stock at any
time. Our Board of Directors has direct responsibility for the administration of
the plan.
On August 30, 1999, we established an equity incentive plan. The shareholders
had to approve this plan within one year. The maximum number of shares that
could be granted under this plan is 15,000,000 shares of common stock and
5,000,000 shares of preferred stock. The series, rights and preferences of the
preferred stock were to be determined by our Board of Directors. This plan also
included any stock available for future stock rights under our 1995 stock option
plan. On January 3, 2000 the Board of Directors decided to replace this equity
incentive plan and adopted our 2000 Non-Statutory Stock Option Plan so as to
provide a critical long-term incentive for employees, non-employee directors,
consultants, attorneys and advisors of the Company. On May 10, 2000 our
shareholders approved the 2000 Non-Statutory Stock Option Plan. The Board of
Directors believes that our policy of granting stock options to such persons
will continue to provide us with a critical advantage in attracting and
retaining qualified candidates. In addition, the Stock Option Plan is intended
to provide us with maximum flexibility to compensate plan participants. It is
expected that such flexibility will be an integral part of our policy to
encourage employees, non-employee directors, consultants, attorneys and advisors
to focus on the long-term growth of stockholder value. The Board of Directors
believes that important advantages to us are gained by an option program such as
the 2000 Non-Statutory Stock Option Plan which includes incentives for
motivating our employees , while at the same time promoting a closer identity of
interest between our employees, non-employee directors, consultants, attorneys
and advisors on the one hand, and the stockholders on the other.
According to their stock option agreements, which are part of their new
employment agreements, Mr. Richard J. Grable, Mr. Allan L. Schwartz and Mrs.
Linda B. Grable each have an option to purchase 2,500,000 shares of common stock
or preferred stock. These options are granted and vest in equal installments
over a five-year period. Beginning August 30, 1999, the officers may exercise
their options to purchase 500,000 shares at an exercise price of $.23 per share
(110% of the fair market value of the shares on the date of grant, August 30,
1999). On each subsequent anniversary date, August 30th, the officers may
exercise their stock options for 500,000 shares at 110% of the fair market value
of the shares on that date. These stock option agreements terminate on August
30, 2004. The new employment and stock option agreements were approved by the
Board of Directors and will be submitted to our shareholders for ratification at
our next annual meeting, which is expected to be held in November 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows the beneficial ownership of our common stock as of
September 14 , 2000 regarding:
o each person that we know of who beneficially owns more than 5% of the
outstanding shares of our common stock,
o each current director and executive officer, and
o all executive officers and directors as a group.
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<PAGE>
The actual number of shares of common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 11,494,540 and 3,572,300 shares,
respectively. Both Richard Grable and Linda Grable specifically disclaim any
beneficial interest in each other's shares.
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
Richard J. Grable 18,570,016(3) 16.8%
6531 NW 18th Court
Plantation, FL 33313
Linda B. Grable 18,570,016(4) 16.8%
6531 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 5,114,148(5) 4.6%
6531 NW 18th Court
Plantation, FL 33313
John R. Liegey -0- 0%
Irving H. Schwab 100,000 0.09%
David E. Danovitch -0- 0%
All officers and directors 23,784,164 (6) 21.5%
as a group (6 persons)
(1) Except as indicated in the footnotes to this table, based on
information provided by such persons, the persons named in the table
above have sole voting power and investment power with respect to all
shares of common stock shown beneficially owned by them.
(2) Percentage of ownership is based on 110,413,167 shares of common stock
outstanding as of September 14, 2000 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 September 14,
2000 are deemed outstanding for computing the percentage of that
person and the group.
(3) Includes 1,751,588 shares subject to options and 3,572,300 shares
owned by the wife of Richard J. Grable, Linda B. Grable, of which he
disclaims beneficial ownership.
(4) Includes 1,751,588 shares subject to options and 11,494,540 shares
owned by the husband of Linda B. Grable, Richard J. Grable, of which
she disclaims beneficial ownership.
(5) Includes 1,751,588 shares subject to options and 9,000 shares owned by
the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
beneficial ownership.
(6) Includes 3,503,176 shares subject to options held by Linda and Richard
Grable and 1, 751,588 shares subject to options held by Allan
Schwartz. Also includes 9,000 shares owned by the wife of Allan L.
Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
Dividend Policy
To date, we have not declared or paid any dividends with respect to our common
stock, and the current policy of the Board of Directors is to retain any
earnings to provide for our growth. We do not anticipate paying cash dividends
on our common stock in the foreseeable future.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Richard J. Grable and Linda B. Grable are husband and wife. They are each
"control persons" as a result of their control of a substantial portion of our
outstanding stock. Each of them disclaims, however, any beneficial interest or
ownership in the shares owned by the other.
In September and October 1998, Ms. Grable, our president, personally guaranteed
three promissory notes totaling $600,000 which we issued to third parties. Ms.
Grable received no compensation for these guarantees. All three notes have been
repaid as of the date of this filing.
In June 1998, we finalized an exclusive patent license agreement with Richard
Grable. Mr. Grable is the owner of the patent which encompasses the technology
for the CTLM(TM). The Company and Mr. Grable had previously entered into an oral
agreement for the exclusive license for the patent that was never memorialized
in written form. The term of the license is for the life of the patent (17
years) and any renewals, subject to termination, under specific conditions. As
consideration for this license, we issued to Mr. Grable 7,000,000 shares of
common stock. In addition, we have agreed to pay Mr. Grable a royalty based upon
a percentage, ranging from 6% to 10%, of the net selling price (the dollar
amount earned from our sale, both international and domestic, before taxes minus
the cost of the goods sold and commissions or discounts paid) of all the
products and goods in which the patent is used. Mr. Grable has agreed that these
royalty provisions will not apply to any sales and deliveries of CTLM(TM)
systems made by the Company prior to receipt of the PMA for the CTLM(TM). In
addition, following issuance of the PMA, the Company and Mr. Grable have agreed
that Mr. Grable will be paid guaranteed minimum royalties of at least $250,000
per year based on the sales of the products and goods in which the CTLM(TM)
patent is used.
In January 1999 and February 1999, Richard Grable, sold an aggregate of 831,743
shares of our common stock owned by him in excess of 4 years, in accordance with
SEC Rule 144, and lent the aggregate proceeds of approximately $347,775 directly
to us. In January 1999, February 1999 and March 1999, Linda Grable, also sold an
aggregate of 520,000 shares of our common stock owned by her in excess of 4
years, in accordance with Rule 144, and lent the aggregate proceeds of
approximately $166,618 directly to us. In December 1998, January 1999 and
February 1999, Allan Schwartz, sold an aggregate of 820,000 shares owned by him
in excess of 4 years, in accordance with Rule 144, and lent the aggregate
proceeds of approximately $359,707 directly to us. All of these loans were
interest free and were evidenced by promissory notes. These promissory notes
were due on January 30, 1999, February 28, 1999, March 31, 1999, and April 30,
1999, respectively. The net proceeds were recorded as a loan payable to each
respective lender.
A meeting of our Board of Directors was held on May 12, 1999 to review and act
upon the previously adopted schedule of repayment of the loans, interest and
potential tax liability. Based on an opinion of the Grables' personal outside
counsel and upon advice of a tax advisor, our board voted to authorize the
repayment of the promissory notes in full by the issuance of shares equal to the
number of shares sold. The restricted shares issued as repayment for the loans
bear registration rights. Since the loans were repaid on a share for share basis
with no other consideration, the Grables have been advised that there is no
capital gain and therefore no tax liability. Messrs. Grable and Schwartz and Ms.
Grable received 831,743, 820,000, and 520,000 shares of our restricted common
stock, respectively, in May 1999 as payment in full for the loans made by them
between December 1998 and March 1999.
In May 1999, Messrs. Grable and Schwartz each sold 110,000 shares, respectively,
of our common stock owned by them in excess of 4 years, in accordance with Rule
144, and lent the aggregate proceeds of approximately $91,759 directly to us.
The loans were evidenced by interest free promissory notes, which were due and
payable on June 30, 1999. In June 1999, Messrs. Grable and Schwartz each sold
280,000 and 315,020 shares, respectively, of our common stock owned by them in
excess of 4 years, in accordance with Rule 144, and lent the aggregate proceeds
of approximately $201,795 directly to us. The loans were evidenced by interest
free promissory notes, which were due, and payable on July 31, 1999. In July
1999, Mr. Schwartz sold 500,000 shares of our common stock owned by him in
excess of 4 years, in accordance with Rule 144, and lent the aggregate proceeds
of approximately $137,241 directly to us. The loan was evidenced by an interest
40
<PAGE>
free promissory note, which was due and payable on August 31, 1999. The net
proceeds of each loan were recorded as a loan payable to the lender. In August
1999, Messrs. Grable and Schwartz received 390,000 and 925,500 shares of our
restricted common stock, respectively, as payment in full for the loans made
between May 1999 and July 1999.
At our Annual Meeting held on May 10, 2000, Irving H. Schwab was elected a
director of the Company. Mr. Schwab has an ownership interest of $200,000 in the
$500,000 Promissory Note dated February 1, 2000, held by Cycle of Life
Technologies, Inc., as the lender.
In June 2000, Linda B. Grable loaned us an aggregate total of $215,000. The
loans were evidenced by interest free promissory notes, which were due and
payable on July 31, 2000. On July 19, 2000 we paid back the loans in full with
cash.
At June 30, 2000, we owed a total of $86,619.24 in accrued salaries payable to
our three executive officers and directors, Richard J. Grable ($47,704), Allan
Schwartz ($19,890) and Linda B. Grable ($19,806). On July 24, 2000, we paid
these amounts in full.
41
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to Exhibit
3(a) of our Form 10-KSB for the fiscal year ending June 30, 1995
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to Exhibit 3.
(i). 6 of our Form 10-KSB for the fiscal year ending June 30, 1996. File
number 033-04008.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to our
Registration Statement on Form S-1 dated July 1, 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated October 15, 1997.
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). Incorporated by reference to our
Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of our Form 10-KSB for the fiscal year ending June 30, 1995.
3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated by
reference to Exhibit 3 (i) of our Form 10-SB, as amended, file number
0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11 Certificate and Plan of Merger - is incorporated by reference to Exhibit
3(i) of the Form 10-SB.
3.12 Certificate of Amendment - is incorporated by reference to Exhibit 3(i)
of the Form 10-SB.
3.13 Amended Certificate of Amendment-Series G Designation.
3.14 Certificate of Amendment-Series I Designation
3.15 Amended Certificate of Amendment-Series B Designation
3.16 Certificate of Amendment -Series K Designation
10.1 Form of Subscription Agreement by and between Imaging Diagnostic Systems,
Inc. and Alfred Ricciardi. Incorporated by reference to our Registration
Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to our Registration
Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
Form 10-SB.
10.5 Lock Up Agreement By and Between the Company and Richard J. Grable, Linda
B. Grable, and Allan L. Schwartz, is incorporated by reference to Exhibit
10.5 of our Form 10-KSB for the fiscal year ending June 30, 1996. File
number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated by
reference to our Registration Statement on Form S-2, File Number
333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated by
reference to our Registration Statement on Form S-2, File Number
333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of our Form
10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of our Form 10-KSB for the fiscal year ending June 30, 1998.
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<PAGE>
10.10 Focus Distribution Agreement (United Kingdom and Ireland). Incorporated
by reference to our Form 10 QSB/A filed on April 2, 1999.
10.11 Focus Distribution Agreement (Benelux countries). Incorporated by
reference to our Amendment number 1 to Registration on Form S-2, File
Number 333-60405.
10.12 Syncor Distribution Agreement. Incorporated by reference to our Amendment
number 1 to Registration on Form S-2, File Number 333-60405.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
our Form 10 KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference to our
Form 10 KSB/A filed on April 9, 1999.
10.16 Form of Series I Preferred Stock Subscription Documents. Incorporated by
reference to our Amendment number 1 to Registration on Form S-2, File
Number 333-60405.
10.17 Form of Debenture Subscription Documents. Incorporated by reference to
our Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.18 Form of Mortgage. Incorporated by reference to our Amendment number 1 to
Registration on Form S-2, File Number 333-60405.
10.19 Form of Series G Subscription Documents. Incorporated by reference to our
Amendment number 1 to Registration on Form S-2, File Number 333-60405.
10.20 1999 Equity Incentive Plan
10.21 Form of Debenture in the amount of $825,000
10.22 Registration Rights Agreement $825,000 Convertible Debenture
10.23 Subscription Agreement $825,000 Convertible Debenture
10.25 Distribution Agreement between IDSI and Cycle of Life Technologies
10.26 Promissory Note between IDSI and Cycle of Life Technologies
10.27 Consulting Agreement between IDSI and Anthony Giambrone
10.28 Employment Agreements for Richard, Allan and Linda, Exhibit 10c
10.29 2000 Non-Statutory Stock Option Plan
10.30 Distribution Agreement between IDSI and MD Export Inc.
10.31 Securities Purchase Agreement for Series K between IDSI and Charlton
Avenue LLC
10.32 Registration Rights Agreement for Series K between IDSI and Charlton
Avenue LLC
10.33 Private Equity Credit Agreement between IDSI and Charlton Avenue LLC
10.34 Registration Rights Agreement for Private Equity Agreement for $25
Million between IDSI and Charlton Avenue LLC
10.35 Convertible Promissory Note between IDSI and Aspen International Ltd.
10.36 Promissory Note from IDSI to Charlton Avenue LLC
10.37 Subscription Agreement for Private Placement with Michael Associates
(b) Reports on Form 8-k
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly caused this
report to be signed on our behalf by the undersigned, thereunto duly authorized,
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/Linda B. Grable
Linda B. Grable, Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Annual Report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
/s/Linda B. Grable Chairman of the Board and President September 14, 2000
------------------
Linda B. Grable
/s/Richard J. Grable Director and Chief Executive Officer September 14, 2000
--------------------
Richard J. Grable
/s/Allan L. Schwartz Director, Executive Vice-President September 14, 2000
-------------------- (Principal Accounting and Financial
Allan L. Schwartz Officer)
/s/Irving H. Schwab Director September 14, 2000
-------------------
Irving H. Schwab
/s/ David E. Danovitch Director September 14, 2000
----------------------
David E. Danovitch
44
<PAGE>
