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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000
COMMISSION FILE NO.: 333-60405
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
POST-EFFECTIVE AMENDMENT NO. 5
TO FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
Florida 3845 22-2671269
(State of Incorporation) (Primary Standard Industrial (IRS Employer I.D. Number)
Classification Code Number)
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
-----------------------------------
(Address, including zip code and telephone number, including
area code of registrant's principal executive offices)
LINDA B. GRABLE, PRESIDENT
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
(Name, address and telephone number of Agent for Service)
Copy to:
CHRISTOPHER S. AUGUSTE, ESQUIRE
PARKER CHAPIN LLP
405 LEXINGTON AVENUE
9TH FLOOR
NEW YORK, NEW YORK 10174
TEL: (212) 704-6000
FAX: (212) 704-6288
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholders after the effective date of
this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest Form 10-KSB, as amended, to
security holders or a complete and legible facsimile thereof, pursuant to Item
11.(a)(1) of this Form, check the following box. [X]
If the registrant elects to deliver its latest Form 10-QSB, as amended, to the
security holder or a complete and legible facsimile thereof, pursuant to Item
11.(a)(2)(ii) of this Form, check the following box. [X]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE REGISTRATION FEE
SHARE (1) OFFERING PRICE(1)
<S> <C> <C> <C> <C>
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR VALUE 5,349,458 $.2969 $1,588,254.08 $ 481.29
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR, ISSUABLE UPON
CONVERSION OF THE SERIES B PREFERRED 16,016,427 $.2969 $4,755,277.18 $1,440.99
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR, ISSUABLE UPON
CONVERSION OF THE SERIES G PREFERRED 1,801,803 $.2969 $ 534,955.31 $ 162.11
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR, ISSUABLE UPON
CONVERSION OF THE SERIES H PREFERRED 3,038,020 $.2969 $ 901,988.14 $ 273.33
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR, ISSUABLE UPON
CONVERSION OF THE SERIES I PREFERRED 5,947,763 $.2969 $1,765,890.83 $ 535.12
STOCK (2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR, ISSUABLE UPON
CONVERSION OF THE CONVERTIBLE 4,740,971 $.2969 $1,407,594.29 $ 426.54
DEBENTURE(2) (3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
COMMON STOCK, NO PAR VALUE, ISSUABLE 190,625 $.2969 $56,596.56 $ 17.15
UPON EXERCISE OF WARRANTS (2)(3)
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
TOTAL (4) (5) 37,085,067 $.2969 $ 11,010,556.39 $3,336.53
- ------------------------------------------ ---------------- -------------------- ------------------- -----------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee according
to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the
average bid and ask price of our common stock on the NASDAQ Electronic Bulletin
Board on July 27, 1999.
(2) According to Rule 416 contained in the Securities Act of 1933, as amended,
this Registration Statement also covers such indeterminable additional shares of
common stock as may be issuable, as a result of any future anti-dilution
adjustments made in accordance with the terms of our Series B, G, H and I
convertible preferred stock and the warrants. In the event that the shares
registered in this prospectus are insufficient to meet the conversion
requirement at the actual time of conversion, we will file a new registration
statement to register the additional shares.
(3) According to the amended terms of the Registration Rights Agreement between
us and the Series H preferred holder, and the Registration Rights Agreements
with the Series B, G, I and the debenture holders, the amount being registered
is 100% of the number of shares that would be required to be issued if the
preferred stock and debentures were converted on the day before the filing of
the Registration Statement..
(4) All of the shares of common stock registered in this prospectus will be sold
by the selling security holders. In the event that the shares registered in this
prospectus are insufficient to meet the conversion requirement at the actual
time of conversion, we will file a new registration statement to register the
additional shares.
(5) A filing fee of $4,283.70 was paid in connection with the initial filing of
the Registration Statement and Amendment No. 2.
WE WILL AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY WHICH MAY DELAY ITS EFFECTIVE DATE UNTIL WE FILE A FURTHER AMENDMENT
WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933
OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING ACCORDING TO SECTION 8(A), MAY DETERMINE.
ii
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SEEKING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 28, 2000
PROSPECTUS
IMAGING DIAGNOSTIC SYSTEMS, INC.
37,085,067 SHARES OF COMMON STOCK
o The shares of common stock offered by this prospectus are
being sold by the stockholders listed in the section of this
prospectus called "selling stockholders". We will not receive
any proceeds from the sale of these shares. We could receive
up to $182,813 in proceeds from the exercise of 190,625
warrants, the underlying shares of which we are registering in
this prospectus, by the selling stockholders, which proceeds
would be used for general corporate purposes. As of the date
of this prospectus, none of these warrants have been
exercised.
o Our common stock is traded on the OTC Bulletin Board under the
symbol "IMDS".
o On March 20, 2000, the closing bid price of our common stock
on the OTC Bulletin Board was $3.75.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING
"RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
--------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------------
The date of this prospectus is March 28, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Forward-Looking Statements...............................................................................3
Prospectus Summary.......................................................................................3
Recent Developments......................................................................................4
The Offering.............................................................................................6
Risk Factors.............................................................................................7
Where You Can Find More Information.....................................................................19
Incorporation of Certain Documents by Reference.........................................................20
Information With Respect to the Registrant..............................................................20
Management's Discussion and Analysis of Financial Condition and Results of Operation....................21
Material Changes........................................................................................21
Summary of Compensation Table...........................................................................21
Option/SAR Grants in Last Fiscal Year...................................................................22
Security Ownership of Certain Beneficial Owners and Management..........................................22
Certain Relationships and Related Transactions..........................................................23
Sale of Unregistered Securities.........................................................................24
Price Range of Common Stock.............................................................................31
Dividend Policy.........................................................................................32
Selling Security Holders................................................................................32
Use of Proceeds.........................................................................................35
Plan of Distribution....................................................................................35
Description of Securities...............................................................................36
Disclosure of Commission Position on Indemnification for Securities and Liabilities.....................36
Experts ...............................................................................................37
Legal Opinion...........................................................................................37
Financial Information...................................................................................37
</TABLE>
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FORWARD-LOOKING STATEMENTS
This prospectus contains some forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified by the use of forward-looking words like "may," "will,"
"except," "anticipate," "intend," "estimate," "continue," "believe" or other
similar words. Similarly, statements that describe our future expectations,
objectives and goals or contain projections of our future results of operations
or financial condition are also forward-looking statements. Our future results,
performance or achievements could differ materially from those expressed or
implied in these forward-looking statements as a result of certain factors,
including those listed under the heading "Risk Factors" and in other cautionary
statements in this prospectus.
PROSPECTUS SUMMARY
This summary highlights information in this document. You should
carefully review the more detailed information and financial statements included
in this document. The summary is not complete and may not contain all of the
information you may need to consider before investing in our common stock. We
urge you to carefully read this document, including the "Risk Factors" and the
financial statements and their accompanying notes.
THE COMPANY
We are a medical technology company that has developed and is testing a Computed
Tomography Laser Mammography (CTLM(TM)) for detecting breast cancer through the
skin in a non-invasive procedure. The CTLM(TM) employs a laser and proprietary
scanning technology to produce visual images of the breast which may be used to
detect and analyze tissue for indicia of malignancy or benignancy. The
components of the laser system are purchased from two unrelated parties and
assembled and installed into the CTLM(TM) by us. The CTLM(TM) will be used as an
adjunct to traditional breast imaging devices, such as mammography and
ultrasound machines, to assist in the detection of breast cancer. Medical
personnel will use the CTLM(TM) at medical facilities to do breast examinations
during routine check-ups and during more specific investigations in connection
with breast cancer.
Computed Tomography has had a basis in the science of medical imaging since the
early 1970's. Our chief executive officer Richard Grable, had experience with
Computed Tomography that inspired him to invent CT Laser Mammography in 1989.
The issues of evolving laser technology and software occupied the first several
years of our existence. After several limited clinical trials in our facilities
and the Strax Diagnostic Breast Clinic we learned what changes were required to
improve performance and stability of CTLM(TM). These changes included the
technological advances made with the lasers and other components. On July 8,
1999 we began a clinical investigational trial at Nassau County Medical Center,
East Meadow, NY. The clinical trials were then expanded to University of
Virginia Health System, Charlottesville, VA on November 15, 1999.
In connection with CTLM(TM) clinical trials, we are developing a clinical atlas
of the optical properties of benign and malignant tissues. The CTLM(TM) is
designed to provide the physician with objective visual data for interpretation
and further clinical analysis. Accordingly, we believe that the CTLM(TM) will
improve early diagnosis, reduce diagnostic uncertainty and decrease the number
of biopsies performed on benign breast lesions. Due to the delays in obtaining
the new laser system, the delays in the modification and redesign of the
CTLM(TM) and delays beyond our control regarding hospital-based clinical trials,
we are unable to determine when we will receive FDA marketing clearance. In
addition, due to these delays, we are currently unable to accurately determine
when we will begin to generate revenues. However, we expect to generate revenues
of at least $500,000 in the quarter of our receipt of FDA export approval to
send CTLM(TM) systems to Canada. As of March 20, 2000, we have not generated any
revenues.
3
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Our executive offices are located at 6531 NW 18th Court, Plantation, Florida
33313. Our telephone number is (954) 581-9800.
RECENT DEVELOPMENTS
On October 14, 1999, we exhibited our most recent clinical studies from our
ongoing clinical trials at Nassau County Medical Center at the 19th Annual
Breast Imaging Conference in Anaheim, CA. At this conference, our clinical
images were compared against those of x-ray mammograms.
In December 1999 at the 1999 Radiological Society of North America Meeting, we
presented for the first time for review to radiologists and other medical
professionals from around the world clinical images produced by the CTLM(TM). We
compared our images of various breast abnormalities acquired through our ongoing
clinical trials at Nassau County Medical Center with those images produced by
mammography equipment and ultrasound machines. We also demonstrated the
potential of fluorescence through a simulation with our CTLM(TM) device.
Furthermore, on November 29, 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 a number of
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 total of a minimum of 50 CTLM(TM) systems in selected
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 March 20, 2000, we have not earned any revenues
from this agreement. We have, however, as of March 20, received a purchase order
for two CTLM(TM) systems, but will be unable to fulfill these orders 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.
In January 1997, we applied for a patent for a fluorescence imaging scanner. We
have received Issue Notification from the U.S. Department of Commerce, Patent
and Trademark Office indicating that the Patent for the fluorescence imaging
scanner was issued on September 14, 1999, as Patent No. 5,952,664. A fluorescent
marker is a chemical compound that allows light to be absorbed at specific
locations in the tissue which assists in detection of cancerous tissues.
On February 1, 2000, we received a loan from Cycle of Life Technologies, Inc. in
the aggregate amount of $500,000 evidenced by a promissory note. The term of the
note is six months and the interest rate is 12% per annum. The note provides
that on its maturity, Cycle of Life can elect to have the loan paid off in
either cash or a warrant to purchase 1,500,000 shares of common stock at an
exercise price of $.35 per share. However, if Cycle of Life elects to be paid
pursuant to the issuance of the warrant, the warrant would not be exercisable
until six months following the date of the warrant's issuance. On the date of
the note's issuance, the per share market price of our common stock was between
$2.75 and $3.53.
We received notice from the U.S. Department of Commerce, Patent and Trademark
Office on February 8, 2000 that our patent application for our reconstruction
algorithm had been granted. This patent assigned to us protects the proprietary
algorithms that assists in the formation of the visual images of the CTLM(TM)
breast imaging device.
Our website has been updated with the latest White Paper on "The Potential of
Fluorescent Markers in Medical Optical Imaging: Part Two." This White Paper is a
technical narrative written by our scientists and engineers which describes the
results of our experiments with fluorescent markers. In our ongoing research in
this area we plan to conduct fluorescence imaging in-vivo studies with
Indocyanine Green injections. These injections will be used in these studies to
further enhance the visual imaging of a suspicious lesion in the breast. On
February 8, 2000, we were granted FDA approval to conduct this study, using a
maximum of 50 test subjects. We have chosen the University of Virginia Health
System as the site to conduct this study.
4
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On February 22, 2000, we received notice from the U.S. Department of Commerce,
Patent and Trademark Office that our patent application for our breast perimeter
technique had been granted. The Patent No. is 6,029,077.
On March 6, 2000, we appointed Dr. Robert Kagan, John Liegey and Irving Schwab
to our board of directors. Dr. Kagan is the founder and Medical Director of the
MRI Scan Center and is Board Certified in radiology, nuclear medicine, internal
medicine and pathology. John Liegey is the founder of The Weston Group LLC, an
international investment banking firm in New York, New York, and has been
involved in international investment banking and mergers and acquisitions for
more than 20 years. Irving Schwab has over 25 years of experience in the
healthcare marketing and advertising industry, particularly in product
development and new product marketing.
On March 23, 2000, we received notice from the U.S. Department of Commerce,
Patent and Trademark Office that our patent application for another of our
breast perimeter techniques had been granted. The Patent No. is 6,044,288 and it
covers a different breast perimeter technique than the technique covered by our
Patent No. 6,029,077.
CLINICAL UPDATE
On November 16, 1999, we announced our agreement with the University of Virginia
Health System as the second approved testing site for the CTLM(TM) breast
imaging device. The University of Virginia Health System testing site will
follow an Investigational Device Exemption protocol similar to the one approved
for Nassau County Medical Center. The clinical investigational trials began on
Monday, November 15, 1999. The FDA approved protocol under the Investigational
Device Exemption provides for a total of 275 subjects to be tested at the Nassau
County Medical Center and the University of Virginia Health System sites.
On March 20, 2000, we submitted to the FDA an interim report on the clinical
investigational trials we are currently conducting at the Nassau County Medical
Center and the University of Virginia Health System sites in regard to the
CTLM(TM) breast imaging device. The report contains statistical results as well
as comparative mammography and CTLM(TM) images of malignant and benign case
studies. The case studies were acquired from our clinical sites at the Nassau
County Medical Center and the University of Virginia Health System.
5
<PAGE>
THE OFFERING
SECURITIES OFFERED BY SELLING SECURITY HOLDERS
COMMON STOCK1,3 37,085,067
EQUITY SECURITIES OUTSTANDING2
COMMON STOCK 97,219,9593
SERIES B PREFERRED 60
SERIES I PREFERRED 123
WARRANTS 1,058,1254
OPTIONS 3,912,9324
(1) According to the terms of the registration rights agreement among the
preferred stockholders, debenture holders and us, the amount of common
stock being registered and included in this prospectus is 100% of the
number of shares of common stock that would be required to be issued if
the preferred stock and debentures were converted on the day before the
filing of the registration statement. We believe that this is a good
faith estimate of the number of shares needed for conversion. In the
event that additional shares are needed to meet conversion requirements,
we will file a new registration statement to register the additional
shares.
(2) The total number of equity shares outstanding as of March 20, 2000.
(3) The total number of shares of common stock does not include shares of
common stock issuable upon conversion of the Series B and I preferred
stock and the debenture which, for the purpose of this prospectus, are
estimated to represent 188,221, 2,480,011 and 1,073,869 shares of common
stock, respectively, and warrants and options to purchase 1,058,125 and
3,912,932 shares of common stock, respectively.
(4) The options were issued in connection with our stock option plan and/or
in connection with some of our employment agreements. The exercise prices
of the options range from $.15 to $4.35 per share. The warrants were
issued to consultants, finders and private placement investors. The
exercise prices of the warrants range from $.50 to $5.00.
6
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RISK FACTORS
An investment in the common stock offered is highly speculative and
involves a high degree of risk. Accordingly, you should consider all of the risk
factors discussed below, as well as the other information contained in this
document. You should not invest in our common stock unless you can afford to
lose your entire investment and you are not dependent on the funds you are
investing.
RISKS ASSOCIATED WITH OUR FINANCIAL RESULTS
WE HAVE AND ARE INCURRING SIGNIFICANT LOSSES AND WE MAY NOT BE ABLE TO CONTINUE
OUR BUSINESS IN THE FUTURE.
At December 31, 1999, we had an accumulated deficit of approximately
$37,709,561, after discounts and dividends on preferred stock. These losses have
resulted principally from costs associated with research and development,
clinical trials and from general and administrative costs associated with our
operations. We expect operating losses will increase for at least the next
several years due primarily to the anticipated expenses associated with:
o development,
o clinical trials,
o pre-market approval process,
o anticipated commercialization of the CTLM(TM), and
o other research and development activities that may arise.
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), which has
not been approved for sale in the United States. In addition, we have not
applied to the FDA for export approval for foreign sales. Consequently, we have
little experience in manufacturing, marketing and selling our products. We
currently have no source of operating revenues and have incurred net operating
losses since inception.
OUR AUDITOR'S HAVE RAISED SUBSTANTIAL DOUBTS AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN AS WE HAVE NOT BEEN AND MAY NOT BE ABLE TO BE PROFITABLE.
We have received an opinion from our auditors stating that the fact that we have
suffered substantial losses and have yet to generate an internal cash flow
raises substantial doubt about our ability to continue as a going concern. Our
ability to achieve profitability will depend on our ability to obtain regulatory
approvals for the CTLM(TM), develop the capacity to manufacture and market the
CTLM(TM), either by our self or in collaboration with others and market
acceptance of the CTLM(TM). However, there can be no assurance we will achieve
profitability if and when we receive regulatory approvals for the development,
commercial manufacturing and marketing of the CTLM(TM).
RISKS ASSOCIATED WITH OUR LACK OF CAPITAL
WE REQUIRE ADDITIONAL CAPITAL WHICH WE MAY BE UNABLE TO RAISE WHICH MAY CAUSE US
TO STOP OR CUT BACK OUR OPERATIONS.
Through March 20, 2000 we have spent approximately $37 million, and expect to
spend another $4.2 million in order to bring the CTLM(TM) into the United States
market. After receiving pre-market approval from the FDA, we anticipate that we
will need approximately $9.0 million over the next two years to complete all
necessary stages in order to market the CTLM(TM) in the United States and
foreign countries. At present we do not have the required capital to do this and
will require substantial additional funds to market this product, including
funds for:
o clinical testing of the CTLM(TM) device,
o research, engineering and development programs,
7
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o pre-clinical and clinical testing of other proposed products,
o regulatory processes,
o inventory, such as sub-contracted components,
o manufacturing and marketing programs, and
o operating expenses (including general and administrative expenses).
Our future capital requirements depend on many factors, including the following:
o the progress of our research and development projects,
o the progress of pre-clinical and clinical testing,
o the time and cost involved in obtaining regulatory approvals,
o 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
o the development of commercialization activities and arrangements.
In addition, our fixed commitments are substantial and would increase if
additional agreements were entered into and additional personnel were retained.
We do not expect to generate a positive internal cash flow for at least several
years due to expected increases in capital expenditures, working capital needs,
and ongoing losses.
Although we have recently reviewed and may continue to review term sheets
provided to us by investment bankers or potential investors in regard to
additional equity financings, there can be no assurance that additional
financing will be available when needed, or if available, will be available on
acceptable terms. We have already granted a mortgage on our corporate property
as security for a debenture and in all likelihood, would be unable to use this
property to collateralize any additional financing. Insufficient funds may
prevent us from implementing our business strategy and will require us to
further delay, scale back or eliminate our research, product development and
marketing programs; and may require us to license to third parties rights to
commercialize products or technologies that we would otherwise seek to develop
ourselves, or to scale back or eliminate our other operations.
WE HAVE HAD AND MAY HAVE TO ISSUE SECURITIES, SOMETIMES AT PRICES SUBSTANTIALLY
BELOW MARKET PRICE, FOR SERVICES WHICH MAY FURTHER DEPRESS OUR STOCK PRICE AND
DILUTE THE HOLDINGS OF OUR SHAREHOLDERS.
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. Since
July 1, 1996, we have issued an aggregate of 1,806,500 shares of common stock
according to registration statements on Form S-8. The aggregate fair market
value of the shares when issued was $2,327,151. In addition, on January 26,
2000, we issued warrants exercisable into 500,000 shares of common stock at
substantially below the market price per share for consulting services. The
shares of common stock underlying these equities have not been registered on
registration statements. The issuance of large amounts of our common stock,
sometimes at prices well below market price, for services rendered or to be
rendered and the subsequent sale of these shares may further depress the price
of our common stock and dilute the holdings of our shareholders. In addition,
because of the possible dilution to existing shareholders, the issuance of
substantial additional shares may cause a change-in-control.
WE HAVE IN THE PAST AND MAY HAVE TO IN THE FUTURE SELL ADDITIONAL UNREGISTERED
SECURITIES, POSSIBLY WITHOUT LIMITATIONS ON THE NUMBER OF COMMON SHARES THE
SECURITIES ARE CONVERTIBLE INTO, WHICH COULD DILUTE THE VALUE OF THE HOLDINGS OF
CURRENT SHAREHOLDERS.
We have had to and have to rely on the private placement of preferred and common
stock and convertible debentures to obtain working capital and will continue to
do so in the future. As of the date of this registration statement, we have
issued 55,979,558 shares of common stock which were converted from preferred
stock and debentures that we privately placed. This number of shares of common
stock represents approximately 57.6% of the currently outstanding number of
shares of common stock.
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<PAGE>
In deciding to issue preferred stock and debentures through private placements,
we took into account:
o the number of common shares authorized and outstanding,
o the market price of the common stock at the time of each preferred or
debenture sale and
o 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 there were enough shares, based on the
price of our common stock at the time of the sale of the preferred stock 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 and the debentures prior to their sale, it was unable to do so.
Manipulation of our common stock through short sales and offers to sell our
preferred stock at a substantial discount may artificially depress our stock
price. These types of transactions are sometimes referred to as "toxic"
securities. After the stock is manipulated and the price is driven down, the
preferred stock is then converted which may give the preferred shareholder
control over a substantial percentage of the public float of our stock.
In order to obtain working capital we will continue to:
o 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, and
o try 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 may be forced to
issue convertible securities with no limitations on conversion.
In the event that we issue convertible preferred stock or convertible debentures
without a limit on the number of shares that can be issued upon conversion and
the price of our common stock decreases:
o the percentage of shares outstanding that will be held by these holders
upon conversion will increase accordingly,
o the lower the market price the greater the number of shares to be issued
to these holders upon conversion, thus increasing the potential profits
to the holder when the price per share then increases and the holder
sells the common shares,
o the preferred stockholders' and debenture holders potential for
increased share issuance and profit, including profits derived from
shorting our common stock, in addition to a stock overhang of an
indeterminable amount, may depress the price of our common stock,
o the sale of a substantial amount of preferred stock to relatively few
holders could effectuate a possible change-in-control and
o in the event of our voluntarily or involuntarily liquidation while the
preferred stock is outstanding, the holders will be entitled to a
preference in distribution of our property.
WE MAY DRAW ON OUR EQUITY CREDIT LINE WHICH MAY CAUSE THE VALUE OF OUR COMMON
STOCK TO DECLINE AND DILUTE THE HOLDINGS OF OUR SHAREHOLDERS.
We have a firm commitment for a $15.0 Million, three-year equity line of credit.
Pursuant to the equity line of credit, when we feel it necessary, we may raise
capital through the sale of our common stock to a consortium of prominent
European banking institutions. In order to use the equity credit line, our
common stock must trade above $.50 per share. We would also be required to file
a shelf registration statement or other registration that may be available to
us. We may need capital in excess of the equity line of credit or if we decline
to use the equity line of credit, we may seek additional funding through public
or private financing or collaborative, licensing and other arrangements with
corporate partners. If we utilize the equity line of credit or additional funds
are raised by issuing equity securities, especially convertible preferred stock,
dilution to existing shareholders will result and future investors may be
granted rights superior to those of existing shareholders.
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WE HAVE HAD AND MAY HAVE TO ISSUE SECURITIES, SOMETIMES AT SUBSTANTIALLY BELOW
MARKET PRICE, IN ORDER TO PAY OFF OUR DEBTS WHICH MAY FURTHER DEPRESS OUR STOCK
PRICE AND DILUTE THE HOLDINGS OF OUR SHAREHOLDERS.
Since we have generated no revenues to date, we have had difficulty in paying
off some of our debts which have become due. In order to pay these debts, we
have issued shares or warrants to purchase shares of common stock. For example,
since the beginning of December 30, 1999, we have paid off approximately
$636,868 in debt by issuing 3,746,294 shares of restricted common stock. We have
also entered into agreements whereby the lender, sometimes at its option, may be
issued other equities, such as warrants, to pay off debt. For example, pursuant
to the loan agreement with Cycle of Life, upon maturity of the loan, we have
given Cycle of Life the option of being paid in cash or pursuant to a warrant to
buy 1,500,000 shares of common stock at an exercise price of $.35. On some
occasions, we have converted debt into equity at prices that were below market
price. In addition, as we have little or no present revenues, we may have to
issue more shares of common stock or other equities, sometimes at prices well
below market price, in order to pay off current or future debts which become
due. These types of issuances of common stock and other equities to pay off debt
may further depress the price of our common stock and would dilute the holdings
of our shareholders, and if substantial dilution does occur, could also cause a
change-in-control.
CONVERSIONS OF OUR CONVERTIBLE PREFERRED STOCK AND EXERCISE OF OUR CONVERTIBLE
DEBENTURE AND WARRANTS MAY CAUSE OTHER DETRIMENTAL EFFECTS TO THE VALUE OF OUR
SHAREHOLDERS' HOLDINGS.
If the market price declines significantly, we could be required to issue a
number of shares of common stock sufficient to result in our current
stockholders not having an effective vote in the election of directors and other
corporate matters. In the event of a change-in-control, it is possible that the
new majority stockholders may take actions that may not be consistent with the
objectives or desires of our current stockholders.
We are required to convert the convertible preferred stock and convertible
debenture based on a formula that varies with the market price of our common
stock. As a result, if the market price of our common stock increases after the
issuance of our convertible preferred stock and convertible debenture, it is
possible that, upon conversion of the convertible preferred stock and
convertible debenture, we will issue shares of common stock at a price that is
less than the then-current market price of the common stock.
If the market price of our common stock decreases after we issue the convertible
preferred stock or convertible debenture, upon conversion, we will have to issue
an increased number of shares to the preferred stock and convertible debenture
holder. The sale of convertible preferred stock and debentures may result in a
very large conversion at one time. If we do not have a sufficient number of
shares to cover the conversion we may have a risk of a civil lawsuit.
In addition, the warrants we issued are exercisable at a fixed price. If the
market price of our common stock increases above the warrant exercise price, we
will be required to issue shares of common stock upon exercise of the warrants
at a price that is less than the then-current market price. Issuances at less
than market price pose a risk to investors because these issuances may drive
down the market price of our common stock.
RISKS ASSOCIATED WITH OUR INDUSTRY
WE DEPEND ON MARKET ACCEPTANCE TO SELL OUR PRODUCTS WHICH HAVE NOT BEEN PROVEN
AND MAY NOT OCCUR WHICH WOULD DEPRESS OUR SALES.
There can be no assurance that physicians or the medical community in general,
will accept and utilize the CTLM(TM) or any other products that we develop. The
extent and rate the CTLM(TM) achieves market acceptance and penetration will
depend on many variables, including, but not limited to:
o the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of the CTLM(TM),
o the advantages of the CTLM(TM)over existing technology and cancer
detection methods, including:
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- X-ray mammography,
- Ultrasound or high frequency ultrasound,
- MRI,
- Thermography,
- Diaphonography,
- Electrical impedance, and
- Transillumination devices
o third-party reimbursements practices, and
o our manufacturing, quality control, marketing and sales efforts.
There can be no assurance that the medical community and third-party payers will
accept our unique technology. Similar risks will confront any other products we
develop in the future. Failure of our products to gain market acceptance would
hinder our sales efforts resulting in a loss of revenues and net profit. It
would further prevent us from developing new products.
LACK OF THIRD-PARTY REIMBURSEMENT MAY HAVE A NEGATIVE IMPACT ON THE SALES OF OUR
PRODUCTS WHICH WOULD NEGATIVELY IMPACT OUR REVENUES.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payers (Medicare,
Medicaid, private health insurance companies, and other organizations) may
affect the pricing or relative attractiveness of our products by regulating the
level of reimbursement provided by these payers to the physicians, clinics and
imaging centers utilizing the CTLM(TM) or any other products that we may
develop, by refusing reimbursement. The level of reimbursement, if any, may
impact the market acceptance and pricing of our products, including the
CTLM(TM). Failure to obtain favorable rates of third-party reimbursement could
discourage the purchase and use of the CTLM(TM) as a diagnostic device.
In international markets, reimbursement by private third-party medical insurance
providers, including governmental insurers and independent providers varies from
country to country. In addition, such third-party medical insurance providers
may require additional information or clinical data prior to providing
reimbursement for a product. In some 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.
THERE ARE UNCERTAINTIES REGARDING HEALTHCARE REFORM INCLUDING POSSIBLE
LEGISLATION, WHEREBY OUR CUSTOMERS MAY NOT RECEIVE MEDICAL REIMBURSEMENT FOR THE
USE OF OUR PRODUCT ON THEIR PATIENTS, WHICH MAY CAUSE OUR CUSTOMERS TO USE OTHER
SERVICES AND PRODUCTS.
Several states and the United States government are investigating a variety of
alternatives to reform the health care delivery system. These reform efforts
include proposals to limit and further reduce and control health care spending
on health care items and services, limit coverage for new technology and limit
or control the price health care providers and drug and device manufacturers may
charge for their services and products, respectively. If adopted and
implemented, these reforms could cause our healthcare providers to limit or not
use the CTLM(TM) systems.
COMPETITION IN THE MEDICAL IMAGING INDUSTRY MAY RESULT IN COMPETING PRODUCTS,
SUPERIOR MARKETING AND LOWER REVENUES AND PROFITS FOR US.
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, manufacturing, human
and marketing resources and experience than we do. These companies may succeed
in developing, manufacturing and marketing products that are more effective or
less costly than our products. Physicians using imaging equipment such as x-ray
mammography equipment, ultrasound or high frequency ultrasound systems, magnetic
resonance imaging systems, and thermography, diaphonography and
transilluminational devices may not
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use our products. Currently mammography is employed widely and our ability to
sell the CTLM(TM) to medical facilities will, partially depend on our ability to
demonstrate the clinical utility of the CTLM(TM) as an adjunct to mammography
and physical examination and its advantages over other available diagnostic
tests. The competition for developing a commercial device utilizing computed
tomography techniques and laser technology is difficult to ascertain given the
proprietary nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology our CTLM(TM)
utilizes.
RISKS ASSOCIATED WITH OUR SECURITIES
OUR COMMON STOCK IS CONSIDERED "PENNY STOCK" AND MAY BE DIFFICULT TO SELL.
The SEC has adopted regulations, which generally define "penny stock" to be an
equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions.
Presently, the market price of our common stock is substantially less than $5.00
per share and therefore may be designated as a "penny stock" according to SEC
rules. This designation requires any broker or dealer selling these securities
to disclose certain information concerning the transaction, obtain a written
agreement from the purchaser and determine that the purchaser is reasonably
suitable to purchase the securities. These rules may restrict the ability of
brokers or dealers to sell our common stock and may affect the ability of
investors to sell their shares. In addition, since our common stock is traded on
the NASDAQ OTC Bulletin Board, investors may find it difficult to obtain
accurate quotations of our common stock.
THE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT YOUR INVESTMENT IN OUR
COMMON STOCK.
The price of our common stock has fluctuated substantially since it began
trading on the OTC Bulletin Board in September 1994. The market price of our
shares, like that of the common stock of many other medical device companies, is
likely to continue to be highly volatile. Factors that may have an impact on the
price of our common stock include:
o the timing and results of our clinical trials or our competitors,
o governmental regulation,
o healthcare legislation,
o equity or debt financing, and
o developments in patent or other proprietary rights pertaining to our
competitors or us, including litigation, fluctuations in our operating
results, and market conditions for medical device company stocks and
life science stocks in general.
WE MAY ISSUE PREFERRED STOCK AT ANY TIME TO PREVENT A TAKEOVER OR ACQUISITION,
ANY OF WHICH ISSUANCE COULD DILUTE THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation authorize the issuance of preferred stock with
designations, rights, and preferences that may be determined from time to time
by the board of directors. Our board of directors is empowered, without
stockholder approval, to designate and issue additional series of preferred
stock with dividend, liquidation, conversion, voting and other rights, including
the right to issue convertible securities with no limitations on conversion,
which could adversely affect the voting power or other rights of the holders of
our common stock. This could substantially dilute the common shareholder's
interest and depress the price of our common stock. In addition, the preferred
stock could be utilized, as a method of discouraging, delaying or preventing a
change-in-control. The substantial number of issued and outstanding convertible
preferred stock and the convertible debentures, and their terms of conversion
may discourage or prevent an acquisition of our company
ALTHOUGH WE HAVE INCREASED THE NUMBER OF SHARES OF OUR AUTHORIZED COMMON STOCK
IN ORDER TO HELP FACILITATE THE CONVERSION AND EXERCISE OF OUTSTANDING AND
FUTURE PREFERRED STOCK AND OTHER SECURITIES, WHICH CONVERSION AND EXERCISE WOULD
DEPRESS THE VALUE OF
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OUR COMMON STOCK AND DILUTE SHAREHOLDINGS, WE STILL MAY NOT HAVE ENOUGH
AUTHORIZED COMMON STOCK AVAILABLE TO CONVERT THE DEBENTURES AND THE OUTSTANDING
SERIES B AND I PREFERRED STOCK INTO COMMON STOCK.
According to a written action of a majority of our shareholders, we have amended
our articles of incorporation, to increase our authorized common stock from
48,000,000 shares to 100,000,000 shares in order to facilitate the conversion of
our outstanding preferred stock and debentures. Prior to the amendment, we did
not have an adequate number of shares authorized to meet our contractual
obligations due to the decrease in our stock price. Furthermore, as our stock
price continues to fluctuate, even with this increase in the authorized common
stock, we may still not be able to convert into common stock the debentures and
the Series B and I preferred stock which could cause us to accrue liquidated
damages under our registration rights agreement. The holder, Charlton Avenue
LLC, has waived its rights to any liquidated damages it may have in connection
with these securities through April 30, 2000 and, accordingly, as of March 20,
$0 of liquidated damages have accrued pursuant to Charlton's registration rights
agreement. As long as we have outstanding securities convertible into common
stock at a price dependent on the market price of the common stock, we may have
to increase our authorized common stock in order to have the available
authorized common stock for conversions of these convertible securities, which
would result in further dilution to our existing stockholders.
In addition, until the time when we are able to generate revenues, we are
dependent on equity or other financing to continue operations and the amendment
affords us common stock to finance our operations through equity financings,
which we will continue to do, as we will require substantial additional funds
for our operations. We may again be obligated to increase our authorized common
stock from 100,000,000 shares to 150,000,000 to facilitate the conversion of our
outstanding preferred stock and debentures.
Based on the closing price of our common stock as of March 20, 2000, of $3.75
per share, approximately:
o 188,221 shares would be required to convert the Series B shares, o
2,480,011 shares would be required to convert the Series I shares,
o 1,073,869 shares would be required to convert the debentures and
o although we are contractually prohibited from doing so, 5,000,000 shares
would be required to draw down the entire equity line of credit.
In addition, 4,971,057 shares would be required for the exercise of options and
warrants. Based upon this information, as of March 20, 2000, we would need in
excess of approximately 10 million authorized shares for all conversions,
complete utilization of the equity line of credit and fulfillment of our
remaining stock related obligations.
WE CURRENTLY ARE CONTROLLED BY OUR EXECUTIVE OFFICERS AND DIRECTORS, HOWEVER, IF
OUTSTANDING PREFERRED STOCK AND DEBENTURES ARE CONVERTED, A CHANGE-IN-CONTROL
MAY OCCUR.
Our management beneficially owns 21.9% including options, of our outstanding
common stock, assuming no exercise of outstanding warrants, options, or
conversion of preferred stock. Although management owns less than 50.1% of the
outstanding common stock, since we do not have cumulative voting, and since, in
all likelihood the officers will be voting as a block and will be able to obtain
proxies of other shareholders, management should continue to remain in a
position to elect all of our directors and control our policies and operations.
However, after giving effect to the conversion of the preferred stock and
debentures, management would own only 21.1% as of March 20, 2000. This
additional dilution to management's ownership percentage could cause a
change-in-control.
WE HAVE NOT PAID AND DO NOT CURRENTLY INTEND TO PAY DIVIDENDS, WHICH MAY LIMIT
THE CURRENT RETURN YOU MAY RECEIVE ON YOUR INVESTMENT IN OUR COMMON STOCK.
Since inception, we have not paid a dividend on our common stock and do not
intend to pay dividends on our common stock in the foreseeable future.
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RISKS ASSOCIATED WITH OUR TECHNOLOGY
WE DEPEND ON A PATENT LICENSED TO US BY OUR FOUNDER WITHOUT WHICH OUR OPERATIONS
WOULD CEASE.
We own the rights, through an exclusive patent licensing agreement, for the use
of the patent for the CTLM(TM) technology. Richard Grable owns the patent. In
addition, we have 9 additional United States patents pending with regard to
optical tomography, many of which are based on the original CTLM(TM) technology.
In the event that we breach the patent licensing agreement, we could lose the
licensing rights to the CTLM(TM) technology. The loss of the patent license
would have a material adverse effect on us and our continued operations.
OUR BUSINESS WOULD LOSE ITS PRIMARY COMPETITIVE ADVANTAGE IF WE ARE UNABLE TO
PROTECT OUR PROPRIETARY TECHNOLOGY, OR IF SUBSTANTIALLY THE SAME TECHNOLOGY IS
DEVELOPED BY OTHERS.
We rely primarily on a combination of trade secrets, patents, copyright and
trademark laws, and confidentiality procedures to protect our technology.
Our ability to compete effectively in the medical imaging products industry will
depend on our success in protecting our proprietary technology, both in the
United States and abroad. There can be no assurances that any patent that we
apply for will be issued, or that any patents issued will not be challenged,
invalidated, or circumvented, or that the rights granted will provide any
competitive advantage. Neither we nor Mr. Grable hold foreign patents, however,
we have applied for patents in several foreign countries. We could incur
substantial costs in defending any patent infringement suits or in asserting any
patent rights, including those granted by third parties, the expenditure of
which we might not be able to afford.
Although we have entered into confidentiality and invention agreements with our
employees and consultants, there can be no assurance that these agreements will
be honored or that we will be able to protect our rights to our non-patented
trade secrets and know-how effectively. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets and know-how. In
addition, we may be required to obtain licenses to patents or other proprietary
rights from third parties. If we do not obtain required licenses, we could
encounter delays in product development or find that the development,
manufacture, or sale of products requiring these licenses could be foreclosed.
Additionally, we may, from time to time, support and collaborate in research
conducted by universities and governmental research organizations. There can be
no assurance that we will have or be able to acquire exclusive rights to the
inventions or technical information derived from such collaborations or that
disputes will not arise with respect to rights in derivative or related research
programs that we conducted in conjunction with these organizations.
IT MAY BE NECESSARY TO ENTER INTO UNFAVORABLE AGREEMENTS OR DEFEND LAW SUITS
WHICH WOULD BE COSTLY IF WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device and related industries. We have been, and
may be in the future, notified that we may be infringing on intellectual
property rights possessed by other third parties. If any claims are asserted
against our intellectual property rights, we may seek to enter into royalty or
licensing arrangements. There is a risk in situations that no license will be
available or that a license will not be available on reasonable terms.
Alternatively, we may decide to litigate these claims or design around the
patented technology. These actions could be costly and would divert the efforts
and attention of our management and technical personnel. Consequently, any
infringement claims by third parties or other claims for indemnification by
customers resulting from infringement claims, whether or not proven to be true,
may be costly to defend and may further limit the use of our technology.
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WE MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGE IN THE MEDICAL
IMAGING INDUSTRY WHICH COULD MAKE THE CTLM(TM) OBSOLETE.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
our proposed products obsolete. Although we believe that the CTLM(TM) can be
upgraded to maintain its state-of-the-art character, the development of new
technologies or refinements of existing ones might make our existing system
technologically or economically obsolete, or cause a reduction in the value of,
or reduce the need for, our CTLM(TM). There can be no assurance that the
development and commercial availability 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. Although we are aware of no
substantial technological changes pending, should a change occur, there can be
no assurance that we will be able to acquire the new or improved systems which
may be required to update the CTLM(TM).
RISKS ASSOCIATED WITH OUR BUSINESS
WE MAY NOT FIND SUFFICIENT FACILITIES TO ADEQUATELY TEST THE CTLM(TM) AND, IN
ADDITION, CLINICAL TRIALS DONE AT ANY OF THESE FACILITIES MAY NOT BE SUCCESSFUL,
WHICH MAY KEEP US FROM RECEIVING FDA APPROVAL.
We currently have two CTLM(TM) functioning and being tested, one in Nassau
County Medical Center and one in the University of Virginia Health System,
pursuant to investigational device exemptions granted by the FDA. The testing is
designed to develop diagnostic criteria for CTLM(TM) images. We have entered
into discussions with several hospitals, which are located throughout the United
States for further potential clinical test sites. The remaining proposed sites
have indicated an interest in participating in our clinical trials, however, we
do not anticipate any formal responses until the end of March 2000 at which
point we would have to request permission from the FDA to expand our clinical
trials. The continuing delays are due to the time required for site surveys,
locating available rooms for the CTLM(TM) in the hospitals, subsequent room
renovations and the hiring and training of additional clinical application
specialists. Furthermore, as the approval boards of some hospitals only meet
once per month and must approve use of their respective hospitals as test sites,
approvals have been and may be again further delayed due the infrequency of
these meetings. At the conclusion of the clinical trials we will submit the
pre-market approval application for the CTLM(TM).
Furthermore, there can be no assurance that:
o results obtained in any additional trials will be consistent with the
results obtained in trials conducted by us to date;
o results obtained in any clinical trial or series of clinical trials will
be consistent among all study sites, or
o results obtained in clinical trials conducted with U.S. study
populations will be consistent with results obtained in studies
conducted in Europe or other locations outside of the U.S.
WE MUST COMPLY WITH EXTENSIVE GOVERNMENT REGULATION AND HAVE NO ASSURANCE OF
REGULATORY APPROVALS OR CLEARANCES WHICH COULD CAUSE US TO CUT BACK OR CEASE
OPERATIONS.
Our delay or inability to obtain any necessary United States, state or foreign
regulatory clearances or approvals for our products would prevent us from
selling the CTLM(TM) system in the U.S. and other countries.
In the United States, the CTLM(TM) is regulated as a medical device and is
subject to the FDA's pre-market clearance or approval requirements. To obtain
FDA approval of an application for pre-market approval, the pre-market approval
application must demonstrate that the subject device has clinical utility,
meaning that the device has a beneficial therapeutic effect, or that as a
diagnostic tool it provides information that measurably contributes to a
diagnosis of a disease or condition.
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We cannot file our pre-market approval application for the CTLM(TM) until our
clinical trials are completed. There can be no assurancE, that our clinical
trials will be successfully completed, or if completed, will provide sufficient
data to support a pre-market approval application for the CTLM(TM); nor can
there be any assurance that the FDA will not require us to conduct additional
clinical trials for the CTLM(TM), which would delay the CTLM(TM) coming onto the
market.
In addition, sales of medical devices outside the United States may be subject
to international regulatory requirements that vary from country to country. The
time required to gain approval for international sales may be longer or shorter
than required for FDA approval and the requirements may differ. For example, in
order to sell our products within the European economic area, companies are
required to achieve compliance with the requirements of the medical devices
directive and affix a "CE" marking on their products to attest compliance. We
are, and have been since September 1996, in preliminary preparations regarding
CE certification in Europe which certification would allow us to conduct sales
in member countries of the European Union.
As of the date of this prospectus, we have not yet obtained these international
certifications and there can be no assurance that we will be able to do so.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the CTLM(TM) may be marketed. IN addition, to obtain
these approvals, the FDA and certain foreign regulatory authorities may impose
numerous other requirements which medical device manufacturers must comply with.
FDA enforcement policy strictly prohibits the marketing of approved medical
devices for unapproved uses. Product approvals could be withdrawn for failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing.
The third-party manufacturers upon which we will depend to manufacture our
products are required to adhere to applicable FDA regulations regarding, quality
systems regulations commonly referred to as QSR,s, which include testing,
control and documentation requirements Failure to comply with applicable
regulatory requirements, including marketing and promoting products for
unapproved use, could result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant pre-market clearance or approval
for devices, withdrawal of approvals and criminal prosecution. Changes in
existing regulations or adoption of new government regulations or polices could
prevent or delay regulatory approval of our products. Material changes to
medical devices also are subject to FDA review and clearance or approval.
In addition, unapproved products subject to the pre-market approval requirements
must receive prior FDA export approval in order to be marketed outside of the
United States unless they are approved for use by any member country of the
European Union or certain other countries, including Australia, Canada, Israel,
Japan, New Zealand, Switzerland and South Africa, in which case the products can
be exported to any country provided that limited notification requirements are
met. There can be no assurance that we will meet the FDA's export requirements
or receive FDA export approval when our approval is necessary, or that countries
to which the devices are to be exported will approve the devices for import. Our
failure to meet the FDA's export requirements or obtain FDA export approval when
required to do so, or to obtain approval for import, could have a material
adverse effect on our business, financial condition, cash flows and results of
operations.
There can be no assurance that we will be able to obtain or maintain the
following:
o FDA approval of a pre-market approval application for the CTLM(TM),
o foreign marketing clearances for the CTLM(TM) or regulatory approvals or
clearances for other products that we may develop, oN a timely basis, or
at all,
o timely receipt of approvals or clearances,
o continued approval or clearance of previously obtained approvals and
clearances, and o compliance with existing or future regulatory
requirements.
If we do not obtain or maintain any of the above-mentioned standards, there may
be material adverse effects on our business, financial condition and results of
operations.
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WE MAY NOT BE ABLE TO DEVELOP OTHER PRODUCTS THAT ARE CURRENTLY IN THE EARLY
STAGES OF DEVELOPMENT DUE TO OUR NEED FOR ADDITIONAL CAPITAL.
Due to our need for additional capital, our proposed products, other than the
CTLM(TM) device, including a scanner for the early detection of colon cancer,
are at early stages of development. There can be no assurance that any of our
proposed products will be, including the CTLM(TM):
o found to be safe and effective,
o meet applicable regulatory standards or receive necessary regulatory
clearance,
o or if safe and effective, can be developed into commercial products,
manufactured on a large scale or be economical to market, or
o achieve or sustain market acceptance.
Therefore, there is substantial risk that our product development and
commercialization efforts will not prove to be successful for our products.
WE WILL DEPEND ON A SINGLE PRODUCT, THE CTLM(TM), FOR OUR REVENUES IN THE NEXT
FEW YEARS, ANY PROBLEMS WITH WHICH WOULD CAUSE ADVERSE AFFECTS TO OUR BUSINESS.
We are in the process of developing additional products based on our main
technology, including an enhancement of the CTLM(TM) device for use with
fluorescence contrast agents and photo-dynamic therapy drugs. Photo-dynamic
therapy drugs seek out cancer and are activated by light. Neither application is
expected to result in a commercial product for at least several years, if at
all. Consequently, pending its approval for commercial distribution in the
United States, the CTLM(TM) device would account for substantialLY all of our
revenues for at least the next two years. Failure to gain regulatory approvals
or market acceptance for the CTLM(TM) devicE would prevent the sale of the
CTLM(TM) device in the U.S. and other countries adhering to FDA approved
guidelines.
WE DEPEND UPON SUPPLIERS WITH WHOM WE HAVE NO CONTRACTS WHICH SUPPLIERS COULD
CAUSE PRODUCTION DISRUPTION IF THEY TERMINATED OR CHANGED THEIR RELATIONSHIPS
WITH US.
We believe that there are a number of suppliers for most of the components and
subassemblies required for the CTLM(TM). Particular components for our laser
system are provided by two unrelated suppliers. Although these components are
provided by a limited number of other suppliers, we believe our laser suppliers
and their products are the most reliable. We have no agreement with our laser
suppliers and purchase the laser components on an as needed basis. For certain
services and components, we currently rely on single suppliers. If we encounter
delays or difficulties with our third-party suppliers in producing, packaging,
or distributing components of the CTLM(TM) device, market introduction and
subsequent sales would be adversely affected.
WE HAVE NO EXPERIENCE IN SALES, MARKETING AND DISTRIBUTION WHICH COULD
NEGATIVELY IMPACT OUR ABILITY TO ENTER INTO COLLABORATIVE ARRANGEMENTS OR OTHER
THIRD PARTY RELATIONSHIPS WHICH ARE IMPORTANT TO THE SUCCESSFUL DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS AND POTENTIAL PROFITABILITY.
We have limited internal marketing and sales resources and personnel. 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. There can be no assurance that we will be able to
recruit and retain skilled sales, marketing, service or support personnel, that
agreements with distributors will be available on terms commercially reasonable
to us, or at all, or that our marketing and sales efforts will be successful.
There can be no assurance that we will be able to further develop our
distribution network on acceptable terms, if at all or that any of our proposed
marketing schedules or plans can or will be met.
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WE DEPEND ON QUALIFIED PERSONNEL TO RUN AND DEVELOP OUR SPECIALIZED BUSINESS WHO
WE MAY BE UNABLE TO RETAIN OR HIRE.
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. We have entered into employment agreements with some
of our executive officers and key employees. The loss of the services of
existing personnel, especially Mr. Grable, 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 could have an adverse
impact upon our business affairs and finances. 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.
WE HAVE A POSSIBLE CONFLICT OF INTEREST IN OUR MANAGEMENT WHICH COULD CAUSE US
TO ENTER INTO AGREEMENTS ON LESS FAVORABLE TERMS THAN WE MAY OTHERWISE GET.
Richard Grable and Linda Grable hold a majority of the seats on our board of
directors. Consequently, they are in a position to control their own
compensation and to approve affiliated transactions. For example, in June 1998,
we finalized an exclusive patent license agreement with Richard Grable. The
board's policy is to obtain unanimous consent for affiliated transactions and
compensation issues. Although our board intends to act fairly and in full
compliance with its fiduciary obligations, there can be no assurance that we
will not, as a result of the conflict of interest described above, enter into
arrangements under terms less favorable than those which we could have obtained
had we been dealing with unrelated persons.
WE HAVE A LIMITED MANUFACTURING HISTORY WHICH COULD CAUSE DELAYS IN THE
PRODUCTION AND SHIPMENT OF OUR PRODUCT.
We will have to expand our CTLM(TM) manufacturing and assembly capabilities and
contract for the manufacture of the CTLM(TM) componentS IN volumes that will be
necessary for us to achieve significant commercial sales in the event we begin
foreign sales and/or obtain regulatory approval to market our products in the
United States. We have limited experience in the manufacture of medical products
for clinical trials or commercial purposes. Should we manufacture our products,
our manufacturing facilities would be subject to the full range of the FDA's
current quality system regulations, and we would need additional capital to
establish these types of facilities. In addition, there can be no assurance that
we would be able to manufacture our products successfully or cost-effectively.
WE DEPEND ON THIRD PARTIES WHO MAY NOT BE IN COMPLIANCE WITH THE FDA'S QUALITY
SYSTEM REGULATIONS WHICH MAY DELAY THE APPROVAL OR DECREASE THE SALES OF THE
CTLM(TM).
We have used and do use third parties to manufacture and deliver the components
of the CTLM(TM) and intend to continue to use third parties to manufacture and
deliver these components and other products we may develop. There can be no
assurance that the third-party manufacturers we depend on for the manufacturing
of CTLM(TM) components will be in compliance with the quality system regulations
at the time of the pre-approval inspection or will maintain compliance
afterwards. This failure could significantly delay FDA approval of the
pre-market approval application for the CTLM(TM) device.
WE HAVE HAD AND MAY HAVE DELAYS IN GETTING OUR PRODUCTS TO MARKET BOTH
DOMESTICALLY AND INTERNATIONALLY WHICH HAVE HINDERED AND MAY HINDER OUR SALES.
Originally, we anticipated that the CTLM(TM) would be ready for distribution in
the summer of 1998, however, during the course of clinical trials, we learned of
problems with particular components of the CTLM(TM) that needed to be corrected
before distribution. Solutions to these problems had to be found and adjustments
had to be made to the CTLM(TM) to correct these problems. Specifically, tHE
laser components, the electronic technology involved in image acquisition and
the fiber optics had to be modified.
As of the date of this prospectus, our Canadian distributor has placed an order
for two CTLM(TM) systems to be
18
<PAGE>
delivered after we have received FDA export approval, and, upon final sale, we
expect these systems to be used in 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. We intend to continue to sell CTLM(TM) systems
through distributors in those countries where sales are permitted. No CTLM(TM)
systems have been sold pursuant to an investigational device exemption in the
United States market.
WE WILL RELY ON INTERNATIONAL SALES AND MAY BE SUBJECT TO RISKS ASSOCIATED WITH
INTERNATIONAL COMMERCE.
We intend to commence international sales of the CTLM(TM) in Canada, Europe and
Asia, prior to commencing commercial sales in the U.S. Until we receive
pre-market approval from the FDA to market the CTLM(TM) in the United States,
our revenues, if any, will be derived from sales to international distributors.
A significant portion of our revenues may be subject to the risks associated
with international sales, including:
o economical and political instability,
o shipping delays,
o fluctuation of foreign currency exchange rates,
o foreign regulatory requirements, and
o various trade restrictions, all of which could have a significant impact
on our ability to deliver products on a timely basis.
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. In
order to minimize the risk of doing business with distributors in countries
which are having difficult financial times, our international distribution
agreements all require payment via an irrevocable letter of credit drawn on a
United States bank prior to shipment of the CTLM(TM).
OUR BUSINESS HAS THE RISK OF PRODUCT LIABILITY CLAIMS AND PREFERRED INSURANCE
COVERAGE MAY BE EXPENSIVE OR UNAVAILABLE WHICH MAY EXPOSE US TO MATERIAL
LIABILITIES.
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 the
allegations of false negative diagnoses of cancer. While the CTLMTM device is
being developed as an adjunct to other diagnostic techniques, there can be no
assurance that we will not be subjected to future claims and potential
liability. Although the FDA does not require product liability insurance with
regard to clinical investigations, we obtained and presently carry product
liability insurance in the amount of $3,000,000, at the request of Nassau
County. While we plan to maintain insurance against product and professional
liability and defense costs, there can be no assurance that claims against us
arising with respect to our products will be successfully defended or that the
insurance to be carried by us will be sufficient to cover liabilities arising
from any claims. A successful claim against us in excess of our insurance
coverage could have a material adverse effect on us. Furthermore, there can be
no assurance that we will be able to continue to obtain or maintain product
liability insurance on acceptable terms.
WE LACK A FEASIBILITY STUDY AND DO NOT KNOW IF SUFFICIENT DEMAND EXISTS FOR OUR
PRODUCT.
We have not performed any market or feasibility study to assess the interest,
demand, or need for the CTLM(TM). There can be no assurance that a study would
support management's belief that sufficient demand will exist.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a Registration Statement on Form S-2 with all
amendments and exhibits under the Securities Act of 1933, concerning the common
stock offered in this prospectus. This prospectus does not contain all of the
information contained in the registration statement. We have omitted parts of
the registration statement in accordance with the rules and regulations of the
SEC. For further information with respect to IDSI and our
19
<PAGE>
securities, you should refer to the registration statement, including its
schedules and exhibits. Statements contained in this prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, you should refer to the copy of the filed contract or document
which is qualified in all respects by such reference. You may obtain copies of
the registration statement from the SEC's principal office in Washington, D.C.
upon payment of the fees prescribed by the SEC, or you may examine the
registration statement without charge at the offices of the SEC described below.
We have filed annual, quarterly and special reports, proxy statements, and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms at 450 Fifth Street, NW, Washington, DC 20549.
Please call the SEC at 1-800-SEC-0330 for further filing information on then
public reference rooms. Our SEC filings are also available to the public on the
SEC's website at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information that we file
with it, meaning we can disclose important information to you by referring you
to those documents already on file with the SEC. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the following documents:
1. Our annual report on Form 10-KSB for the year ended June 30, 1998, filed
on October 13, 1998, amended on April 12, 1999 and July 23, 1999.
2. Our annual report on Form 10-KSB for the year ended June 30, 1999, filed
on October 12, 1999.
3. Our quarterly reports on Form 10-QSB for the following fiscal quarters:
(a) December 31, 1999, filed on February 18, 2000;
(b) September 30, 1999, filed on November 17, 1999;
(c) March 31, 1999, filed May 20,1999 and amended on July
22, 1999;
(d) December 31, 1998, filed on February 19,1999 and amended
on May 21, 1999; and
(e) September 30, 1998, filed on November 13, 1999 and
amended on April 21, 1999.
We also incorporate by reference any future filings made with the SEC under
Sections 13 (a), 13 (c), 14 or 15 (d) of the Securities Act of 1934, as amended,
prior to the termination of the offering to which this prospectus relates.
You may request a copy of any of these filings, at no cost, by writing or
calling us at the following address:
Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, Florida 33313.
Telephone number (954) 581-9800.
Attn: Investor Relations
INFORMATION WITH RESPECT TO THE REGISTRANT
The information required to be disclosed in the registration statement
pertaining to this prospectus is incorporated by reference, including, among
other documents, our latest Form 10-KSB, as amended, and Form 10-QSB, as
amended, which are both being delivered with this prospectus. See "Documents
Incorporated by Reference", "Prospectus Summary", "Risk Factors" and "Material
Changes."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required for this Post Effective Amendment No. 5 to Form S-2,
including our financial statements and notes to the financial statements,
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the fiscal year ended June 30, 1999, is incorporated by reference
to our annual report on Form 10-KSB filed with the SEC on October 12, 1999.
MATERIAL CHANGES
EXECUTIVE COMPENSATION
The following table represents the compensation awarded to, earned by or paid to
our chief executive officer and other executive officers for services rendered
to us from 1997 to 1999. No other person during this time who served as one of
our executive officers had a total annual salary and bonus in excess of
$100,000.
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name & Principal Other Annual Restricted Securities/Underlying
Position Year Salary(2) Compensation Stock Awards Option/SARs(1)
-------- ---- --------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Richard J. Grable, CEO and 1997 $289,779 $115,000 $268,000 22,883
Director 1998 $286,225 -0- -0- 534,602
1999 $286,225 -0- -0- 458,333
Linda B Grable, President 1997 $ 97,451 $115,000 $268,000 22,883
and Director 1998 $119,070 -0- -0- 534,602
1999 $119,070 -0- -0- 458,333
Allan L. Schwartz, Exec. 1997 $111,534 $115,000 $268,000 130,410
V.P., CFO and 1998 $119,070 -0- -0- 534,602
Director 1999 $119,070 -0- -0- 458,333
</TABLE>
(1) The aggregate dollar value of the 1998 and 1999 options, based on the
averaged high and low price on June 30, 1999 are as follows: Richard J.
Grable, $341,321; Linda B. Grable, $341,321; and Allan L. Schwartz,
$341,321.
(2) The salaries include compensation, which has been accrued and not paid
as of March 20, 2000 in the amounts as follows: Richard J. Grable,
$47,704; Linda B. Grable, $19,890 and Allan L. Schwartz, $19,806.
EMPLOYMENT AGREEMENTS
We entered into five-year employment agreements with Mr. Richard J. Grable, Mr.
Allan L. Schwartz and Ms. Linda B. Grable that expire on August 29, 2004.
According to the terms of their respective employment agreements, base annual
salaries, after giving effect to cost of living adjustments, are as follows:
Richard J. Grable, $286,224.96; Linda B. Grable, $119,069.52; and Allan L.
Schwartz, $119,069.52. In addition, Messrs. Grable and Schwartz and Ms. Grable
each receive a car allowance of $500 per month. Each employment agreement
provides for bonuses, health insurance, car allowance, and related benefits, and
a cost of living adjustment of 7% per annum. No bonuses have been paid to date.
The following table explains information regarding the Options/SARs we granted
to management for the fiscal year ended June 30, 1999.
21
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No. of Securities % of Total Options
Underlying Granted to Exercise or Market Price
Options Employees In Fiscal Base Price On Date of Expiration
Name Granted Year ($/Share) Grant Date
---- ------- ---- --------- ----- ----
<S> <C> <C> <C> <C> <C>
Richard J. Grable 250,000 16% $.17 $.44 7/5/03
208,333 14% $.48 $.44 7/5/03
Linda B. Grable 250,000 16% $.17 $.44 7/5/03
208,333 14% $.48 $.44 7/5/03
Allan L. Schwartz 250,000 16% $.17 $.44 7/5/03
208,333 14% $.48 $.44 7/5/03
</TABLE>
STOCK OPTION PLANS
For the fiscal year ended June 30, 1999, 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 29, 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
must approve this plan within 1 year. The maximum number of shares that can 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 are to be determined by our board of directors. This plan also includes
any stock available for future stock rights under our 1995 stock option plan.
Under both of these plans, the exercise price of the incentive options to
employees must be equal to at least 100% of the fair market value of the common
stock, as of the date of grant. The exercise price of incentive options to
officers, or affiliated persons, must be at least 110% of the fair market value
as of the date of grant.
According to stock option 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 vest in equal
installments over a five-year period at an exercise price of $.21 per share
(110% of the fair market value of the shares on the date of grant). These stock
option agreements terminate on August 30, 2003.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership of our common stock as of
March 20, 2000 regarding:
(i) each person that we know of who beneficially owns more than 5% of the
outstanding shares of our common stock,
(ii) each current director and executive officer, and
(iii) all executive officers and directors as a group.
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 16,983,506(3) 17.5%
22
<PAGE>
c/o 6531 NW 18th Court
Plantation, FL 33313
Linda B. Grable 16,983,506(4) 17.5%
c/o 6531 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 4,320,893(5) 4.4%
c/o 6531 NW 18th Court
Plantation, FL 33313
All officers and directors 21,304,399 (6) 21.9%
as a group (3 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 97,219,959 shares of common stock
outstanding as of March 20, 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 March 20, 2000 are deemed
outstanding for computing the percentage of that person and the group.
(3) Includes 958,333 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 958,333 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 958,333 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
beneficial ownership.
(6) Includes 1,916,666 shares subject to options held by Linda and Richard
Grable and 958,333 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.
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 majority voting power of our
outstanding stock. Both parties disclaim, however, any beneficial interest or
ownership in the shares owned by the other party.
In September and October 1998, Linda Grable, our president, personally
guaranteed three promissory notes we issued to third parties. Ms. Grable
received no compensation for these guarantees. As of the date of the
registration statement, all three notes have been repaid.
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). Our 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 FDA's pre-market approval of
the CTLM(TM). In addition, following pre-market approval by the FDA of the
CTLM(TM), the Company anD Mr. Grable have agreed that Mr. Grable will be paid
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.
23
<PAGE>
Since October 1998, we have accrued $87,440 in salaries payable to our executive
officers and directors, Richard J. Grable, Allan Schwartz and Linda B. Grable,
due to our lack of working capital.
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, according to 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,
according to Rule 144 and lent the aggregate proceeds of approximately $166,618
directly to us and 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,
according to 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 rescind the
previously adopted resolution. The new resolution authorized the repayment of
the December, January, February, and March 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, Schwartz and Ms. Grable received 831,743, 820,000, and 520,000
shares of our restricted common stock, respectively, as payment in full for the
loans made 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, according to 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, according to 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, according to Rule 144 and lent the aggregate proceeds of approximately
$137,241 directly to us. The loan was evidenced by interest free promissory
notes, which were due, and payable on August 31, 1999. All of these loans were
interest free and were evidenced by promissory notes. The May, June and July
promissory notes were due on June 30, 1999, July 31, 1999 and August 31, 1999,
respectively. The net proceeds were recorded as a loan payable to each
respective lender. 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.
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 will endeavor 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 may be forced to issue convertible
securities and debentures with no limitations on
24
<PAGE>
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 has increased from $.07 per share for the fiscal
year ending June 30, 1998 to $.02 per share for the fiscal year ending June 30,
1999. The cumulative total is $.21 per share.
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
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 Series B, C, D, E, F, G, H, and I preferred stock
as of March 20, 2000.
<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 60 -0- -0- -0- -0- -0- -0- 123
- ------------------------------------------------------------------------------------------------------------------------------------
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 11,161,725 579,177
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SERIES B PREFERRED STOCK
In December 1996, Weyburn Overseas Limited and Goodland International Investment
Ltd. purchased the Series B preferred stock offering pursuant to Regulation D.
Net proceeds were used for working capital and the continuous research,
development and testing of our CTLM(TM). The conversion rate is 82% of the
average closing price over a five-day period prior to conversion.
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 below.
25
<PAGE>
SERIES C PREFERRED STOCK
On October 6, 1997, we finalized the private placement to Austost Anstalt
Schaan, UFH Endowment, Inc., Chris Baum, Avalon Capital Limited, Dominion
Capital, Ltd. and The Cuttyhunk Fund Limited, of our Series C convertible
preferred stock and warrants to purchase up to 105,000 shares of our common
stock at an exercise price of $1.63 per share and to purchase up to 50,000
warrants at an exercise price of $1.562 per share. 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 number of
fully paid and non-assessable shares of our common stock, no par value, issued
upon conversion was determined by dividing (i) the sum of $10,000 by (ii) the
conversion price in effect at the time of 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 conversion; provided,
however, in no event was the conversion price to be greater than $1.222 per
share.
According to the Regulation S sale documents, we were also required to escrow an
aggregate of 3,435,583 shares of our common stock. The shares underlying the
preferred stock and warrants were entitled to demand registration rights in the
event that Regulation S was amended prior to the conversion of the preferred
stock. This right expired upon conversion.
SERIES D PREFERRED STOCK
On January 9, 1998, we finalized the private placement to Avalon Capital Ltd. of
our Series D convertible preferred stock and warrants to purchase up to 25,000
shares of our common stock at an exercise price of $1.22 per share.
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. The shares underlying the preferred stock
and warrants were entitled to demand registration rights in the event that
Regulation S was amended prior to the conversion of the preferred stock. This
right expired upon conversion.
Net proceeds to us of $495,000 were used for working capital and the continuous
research, development and testing of the CTLM(TM).
SERIES E PREFERRED STOCK
On February 5, 1998, we finalized the private placement to Austost Anstalt
Schaan and Balmore Funds S.A. of our Series E convertible preferred stock and
warrants to purchase up to 25,000 shares of our common stock at an exercise
price of $1.093 per share
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 number of fully paid and non-assessable shares of
our common stock, no par value, issued upon conversion was determined by
dividing (i) the sum of $10,000 by (ii) the conversion price in effect at the
time of conversion. 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 conversion.
The shares underlying the preferred stock and warrants were entitled to demand
registration rights in the event that Regulation S was amended prior to the
conversion of the preferred stock. This right expired upon conversion.
Net proceeds to us of $495,000 were used for working capital and the continuous
research, development and testing of the CTLM(TM).
SERIES F PREFERRED STOCK
On February 20, 1998, we finalized a private placement to Dominion Capital Fund,
LTD and Canadian Advantage, LTD of our Series F convertible preferred stock
26
<PAGE>
The preferred shares pay a dividend of 6% per annum, payable in common stock at
the time of each conversion and were convertible, at any time, commencing May
15, 1998 and for a period of two years thereafter without additional
consideration. The number of fully paid and non-assessable shares of our common
stock, issued upon conversion was determined by dividing (i) the sum of $10,000
plus any earned dividends by (ii) the conversion price in effect at the time of
conversion. The conversion price is 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 are entitled to
demand registration rights in the event that Regulation S was amended prior the
conversion of the preferred stock. According to these demand rights the
1,971,375 shares of common stock issued upon the conversion of the Series F
preferred are being registered on behalf of the holders according to a
registration statement on Form S-2.
Net proceeds to us of $700,000 were used for working capital and the continuous
research, development and testing of the CTLM(TM).
SERIES G PREFERRED STOCK
On March 17, 1999, we finalized a private placement to Amro International, S.A.,
Nesher Inc., Hewlett Fund, and Guaranty & Finance Ltd., of our Series G
convertible preferred stock and two year warrants to purchase 65,625 shares of
our common stock at an exercise price of $.50 per share. Net proceeds of
$350,000 were used for working capital and the continuous research, development
and testing of the CTLM(TM).
The Series G convertible preferred stock has no dividend provisions. The number
of fully paid and non-assessable shares of common stock to be issued upon
conversion will be determined by dividing (i) the sum of $10,000 by (ii) the
conversion price in effect at the time of conversion. The conversion price is
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 is no floor
on the conversion price and no time limits on conversion. The shares can be
converted at any time without additional consideration According to the terms of
the registration rights agreement we were required to register 100% of the
number of shares that would be required to be issued if the preferred stock were
converted on the day before the filing of the registration statement. In the
event that the registration statement was not filed within 14 days from the
closing or that it was not declared effective within 60 days, we are required to
pay the Series G preferred holders, as liquidated damages, for failure to have
the registration statement declared effective, not as a penalty, 3% of the
principal amount of the securities sold for each 30-day period thereafter until
we procure registration of the securities. In the event that the registration
statement is not declared effective within 120 days, the Series G preferred
holders have the right to force us to redeem the Series G preferred at a
redemption price of 120% of the face value of the preferred. According to the
registration rights agreement, 100% of that number of shares that would be
required to be issued if the Series G preferred were converted on the day before
the filing of the registration statement, 1,801,803, are being registered on
behalf of the holders.
SERIES H PREFERRED STOCK
On June 2, 1998, we finalized a private placement to Austost Anstalt Schaan and
Balmore Funds S.A. of our Series H convertible preferred stock and 75,000 A
warrants and 50,000 B warrants. The A and B warrants are exercisable at $1.00
and $1.50 per share, respectively. Net proceeds of $990,000 were used for
working capital and the continuous research, development and testing of the
CTLM(TM).
The number of fully paid and non-assessable shares of common stock to be issued
upon conversion will be determined by dividing the (i) the sum of $10,000 by
(ii) the conversion price in effect at the time of conversion. The conversion
price is 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 is no floor on the conversion price and no time limits
on conversion. The shares can be converted at any time without additional
consideration. 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 are in technical
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 are 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
27
<PAGE>
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. According to the registration rights agreement,
liquidated damages of $169,000 have accrued as of March 31, 1999. We are
presently unable to comply with the liquidated damage provision payment and no
assurances can be given that we will be able to do so in the future. On March
25, 1999, we issued 424,242 shares of restricted common stock with registration
rights to the Series H preferred shareholders in lieu of cash for liquidated
damages through March 2, 1999. The value of these shares was $140,000, leaving a
balance of $29,000 due for liquidated damages through March 31, 1999. We have
the option of paying the accrued dividends and liquidated damages in common
stock.
SERIES I PREFERRED
On April 6, 1999, we also 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.
The Series I preferred pay a 7% premium, to be paid in cash or freely trading
common stock in our sole discretion, at the time of each conversion. The number
of fully paid and non-assessable shares of common stock to be issued upon
conversion will be determined by dividing (i) the sum of $10,000 by (ii) the
conversion price in effect at the time of conversion. 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.
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.
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 March
20, 2000.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CHARLTON DEBENTURES SPINNERET DEBENTURES
------------------- --------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INTEREST IN CASH
- ---------------------------------------------------------------------------------------------------------------------
OR STOCK Yes Yes
- ---------------------------------------------------------------------------------------------------------------------
4.99% OWNERSHIP LIMIT Yes Yes
- ---------------------------------------------------------------------------------------------------------------------
% OF OUTSTANDING
- ---------------------------------------------------------------------------------------------------------------------
DEBENTURES 100 100
- ---------------------------------------------------------------------------------------------------------------------
TOTAL # OF SHARES ISSUED
- ---------------------------------------------------------------------------------------------------------------------
UPON CONVERSION TO DATE 0 0
- ---------------------------------------------------------------------------------------------------------------------
AUTOMATIC CONVERSION DATE 2 years from issuance 2 years from issuance
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CONVERTIBLE DEBENTURES - CHARLTON
We also entered into a subscription agreement with Charlton, where Charlton
purchased a convertible debenture for $1,100,000. In addition, we may draw down
a second tranche in the amount of $825,000 anytime 30 days after the effective
date of the registration statement as long as we maintain an average closing bid
price of $.45 for the 10 trading days immediately prior to the date we request
the second tranche funding. We may draw down a third tranche in the amount of
$825,000 anytime 60 days after the effective date of the registration statement
as long as we maintain an average closing bid price of $.45 for the 10 trading
days immediately prior to the date we request the third tranche funding. When
concluded, assuming all the conditions set forth above are met, the proceeds
from the original debenture offering will be $2,750,000. We entered into an
additional subscription agreement with Charlton for tranches totaling $330,000.
The debentures are secured by a mortgage on our corporate office building. The
mortgage will be released after the registration statement covering the common
stock underlying the debentures has been declared effective and upon the earlier
of (a) the day we qualify for listing on AMEX or NASDAQ, as long as said listing
requirements are not being met through a reverse split of our common stock, and
(b) 180 days from the date we receive the third tranche funding, as described
above.
The number of fully paid and non-assessable shares of common stock, no par
value, to be issued upon conversion will be determined by dividing (i) the sum
of $10,000 by (ii) the conversion price in effect at the time of conversion. 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. The debentures can be converted at any time without additional
consideration.
In the event of a voluntary or involuntary liquidation while any of the
debentures are outstanding the holders are entitled to a preference in
distribution of our property available for distribution equal to the debentures
then outstanding principal and interest and will be able to foreclose against
the mortgage.
The proceeds from the sale of the Charlton convertible debenture ($1,100,000)
and any subsequent tranches of $1,980,000 totaling $3,080,000 will be used for
clinical trials expenses and working capital. As of the date of the registration
statement, no portion of the convertible debentures have been converted.
CONVERTIBLE DEBENTURE - SPINNERET
We entered into a subscription agreement with Spinneret, LTD., where Spinneret
purchased a convertible debenture for $51,000. The sum of $1,000 was paid upon
issuance of the debenture for legal fees. The sum of $50,000 was advanced as a
loan on July 12, 1999, and the debenture was issued in the principal amount of
$51,000 on August 11, 1999. The debenture is due on August 11, 2001.
The number of fully paid and non-assessable shares of common stock, no par
value, to be issued upon conversion will be determined by dividing (i) the sum
of $10,000 by (ii) the conversion price in effect at the time of conversion. 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. The debenture can be converted at any time without additional
consideration.
The proceeds from the sale of the debenture will be used for working capital. As
of the date of this report no portion of the convertible debenture has been
converted.
29
<PAGE>
PRIVATE PLACEMENT OF COMMON STOCK
In August 1998, we sold 200,000 shares of restricted common stock to Frank
Giambroni, an unaffiliated third party, pursuant to Regulation D for an
aggregate purchase price of $60,000. No placement fee was paid in connection
with this offering. Net proceeds of $59,990 were used to pay the salaries of our
non-executive employees. At the time the placement was concluded, the average
bid and ask price of our common stock was approximately $.28 per share. These
shares are being registered pursuant to the registration statement.
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 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 as follows: (i) salaries, $21,849 to executive officers and $62,447 to
employees; (ii) machinery and equipment, $5,959; (iii) operating expenses,
$55,240 for inventory parts and assemblies, employee health insurance, workers
compensation and property insurance; and (iv) working capital, $82,000. On
December 30, 1999, we repaid the promissory note in full from Settondown Capital
International, Ltd. with restricted stock. The total principal and interest
accrued was $359,203.33. On December 30, 1999, the per share market price of our
common stock was between $.56 and $.80. For the note, we issued a total of
2,112,961 shares of restricted stock.
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, according 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 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 as follows: (i)
salaries, $21,849-executive officers and $62,448-employees; and (ii) working
capital, $15,703. On December 30, 1999, we repaid the promissory note in full
from Avalon Capital, Inc. with restricted stock. The total principal and
interest accrued was $119,041.67. On December 30, 1999, the per share market
price of our common stock was between $.56 and $.80. For the note, we issued a
total of 700,245 shares of restricted stock.
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 are included in the registration statement. At
the time the placement was concluded, the average 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. Net
proceeds of $210,000 were used as follows: (i) salaries, $21,849-executive
officers and $62,448-employees; and (ii) working capital, $125,703. 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
employee. At the time the loan was concluded, the average 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. 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 as follows: (i)
salaries, $21,849-executive officers and $62,447-employees; (ii) operating
expenses, $16,345-inventory parts and assemblies, employee health insurance,
workers compensation and property insurance; and (iv) working capital, $14,359.
On April 8, 1999, we paid the balance due on the loan of $47,396 to the lender.
These shares are included in the registration statement.
30
<PAGE>
As of June 25, 1999, July 12, 1999 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 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 J. Grable and by Linda B. Grable. On December 30, 1999, we agreed to
pay all the promissory notes in full from Balmore funds S.A. with restricted
stock. The total principal and interest accrued was $104,802.08. On December 30,
1999, the per share market price of our common stock was between $.56 and $.80.
For the notes, we issued a total of 616,483 shares of restricted stock. As of
June 29, 1999 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 bid and ask prices of our common stock were approximately $.38 per share
and $.30 per share. These notes were also guaranteed by Richard J. Grable and by
Linda B. Grable. On December 30, 1999, we agreed to pay all the promissory notes
in full from Austost Anstalt Schaan with restricted stock. The total principal
and interest accrued was $53,822.92. On December 30, 1999, the per share market
price of our common stock was between $.56 and $.80. For the notes, we issued a
total of 316,605 shares of restricted stock.
On January 26, 2000, we entered into a consulting agreement with Anthony
Giambrone, an unaffiliated third party, which provided payment for services in
warrants exercisable into 500,000 shares of common stock at a price of $0.93 per
share. On the date of the execution of the agreement, the per share market price
of our common stock was between $1.81 and $2.00. The agreement provides that Mr.
Giambrone, an investment banker with 30 years of experience in the financial
sector, including fund management and public relations, will 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 in regard to our products and company.
PRICE RANGE ON COMMON STOCK
Our common stock is traded on the NASDAQ OTC Bulletin Board 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/low and low/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.
<TABLE>
<CAPTION>
QUARTER ENDING HIGH/LOW BID LOW/LOW BID
<S> <C> <C>
FISCAL YEAR 1996
September 1995 $1.69 $0.56
December 1995 $4.31 $0.56
March 1996 $8.00 $2.56
June 1996 $7.38 $2.50
FISCAL YEAR 1997
September 1996 $3.93 $2.25
March 1997 $4.00 $2.50
December 1996 $4.50 $1.44
June 1997 $3.06 $2.44
FISCAL YEAR 1998
September 1997 $2.69 $1.44
December 1997 $1.56 $0.60
March 1998 $1.23 $0.61
June 1998 $1.39 $0.40
FISCAL YEAR 1999
September 1998 $0.56 $0.21
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
December 1998 $1.00 $0.35
March 1999 $0.59 $0.34
June 1999 $0.47 $0.28
FISCAL YEAR 2000
September 1999 $0.33 $0.11
December 1999 $0.80 $0.08
</TABLE>
On March 20, 2000, the closing trade price of the common stock as reported on
the OTC Bulletin Board was $3.75 per share. As of such date, there were
approximately 745 holders of record of our common stock.
DIVIDEND POLICY
To date, we have not declared or paid any dividends with respect to our capital
stock, and the current policy of our board of directors is to retain any
earnings to provide for our growth. Consequently, no cash dividends are expected
to be paid on our common stock in the foreseeable future.
SELLING SECURITY HOLDERS
The selling security holders consist of common stock holders, the Series B, G, H
and I preferred holders and the holder of the convertible debentures. The
registration statement is a part of the prospectus being filed. The shares
offered in this prospectus are based on the various registration rights in the
subscription agreement and registration rights agreements between the selling
security holders and us. We are unable to determine the exact number of shares
that will actually be sold according to this prospectus due to:
o the ability of the selling security holders to determine when and whether
they will sell any shares under this prospectus; and
o the uncertainty as to how many of the warrants will be exercised and how
many shares of common stock will be issued upon conversion of the
convertible debenture and the Series B, G, H and I preferred stock.
The number of fully paid and non-assessable shares of common stock, no par
value, to be issued upon conversion of the convertible debenture and the
unconverted outstanding preferred stock will be determined by dividing (i) the
sum of $10,000 by (ii) the conversion price in effect at the time of conversion.
The conversion prices are as follows:
(i) Series B, 82% of the five-day average closing price;
(ii) Series I, 75% of the five-day average closing price; and
(iii) the debentures, 75% of the five-day average closing price.
Since the conversion price of each of the preferred shares is based on the
market price of our common stock prior to the date of conversion, the number of
shares subject to registration rights will increase if the market price of our
common stock decreases, and also will decrease if the market price increases.
See "Sale of Unregistered Securities-Financing/Equity Line of Credit.
The following table identifies each selling security holder based upon
information provided to us as of July 27, 1999, with respect to the shares
beneficially held by or acquirable by, each selling security holder, and the
shares of common stock beneficially owned by the selling security holders which
are not covered by this prospectus. No selling security holder or its
affiliates, except for Deborah O'Brien, have held any position, office, or other
material relationship with us. Ms. O'Brien is one of our employees and the niece
of Linda Grable. Ms. O'Brien's shares were issued as partial compensation for a
$115,000 loan to us.
32
<PAGE>
<TABLE>
<CAPTION>
SELLING SECURITY HOLDERS' TABLE
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Common Shares
Common Shares Underlying Total Number
Owned Prior to Preferred Preferred/ Common Shares Of Shares To Be
Name of Investor Offering Shares Owned Debenture(1) Underlying Warrants Registered(2)
- ---------------- -------- ------------ ------------ ------------------- -------------
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
<S> <C> <C> <C> <C> <C>
Balmore Funds SA
c/o Trident Trust Company 422,601 H-30 1,340,303 50,000 1,600,783
(BVI) Limited
Trident Chambers
Road Town
Tortola, British Virgin
Islands (3)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Austost Anstalt Schaan
Ladstrasse 163 422,601 H-30 1,340,303 50,000 1,600,783
9494 Furstentums
Vaduz, Liechtenstein(4)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Amro International, S.A.
c/o Ultra Finanz 0 G-15 711,238 28,125 739,363
Grossmunsterplatz 6
Zurich CH 8022, Switzerland
(5)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Nesher Inc.
Ragnalt Houise 0 G-8 379,327 15,000 394,327
18 Peel Road
Douglas, Isle of Man
1M14U2, United Kingdom (6)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Hewlett Fund
20 Adele Road 0 G-5 237,079 9,375 246,454
Brooklyn, New York (7)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Guaranty & Finance Ltd.
Vallarino PH 0 G-7 331,911 13,125 345,036
Calle 52, Panama (8)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Libra Finance SA
Trident Chambers 0 G-2 94,832 0 94,832
PO Box 146, Road Town
Tortola, British Virgin
Islands (9)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Dominion Capital Fund C/o
Thomas Kernaghan & Co. Ltd. 1,334,996 0 0 0 1,334,996
365 Bay Street
Toronto, Ontario (10)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Canadian Advantage Ltd.
Partnership 636,379 0 0 0 636,379
C/o Thomas Kernaghan & Co.
Ltd.
365 Bay Street
Toronto, Ontario (11)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Scott Hugh Goldstein
C/o 65 Broadway 10th floor 25,000 0 0 0 25,000
New York, NY 10006
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Sheldon E. Goldstein
C/o 65 Broadway 10th Floor 25,000 0 0 0 25,000
New York, NY 10006
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Deborah O'Brien
C/o 6531 NW 18th Court 287,800 0 0 0 286,000
Plantation FL 33313
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
GCA Strategic Investment
Fund Ltd (12) 210,000 0 0 0 210,000
106 Colony Park Drive
Suite 900 Cumming, GA 30040
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Avalon Capital, Inc.
487 Sherwood Drive 80,000 0 0 0 80,000
Sausalito, CA 94965 (13)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Common Shares
Common Shares Underlying Total Number
Owned Prior to Preferred Preferred/ Common Shares Of Shares To Be
Name of Investor Offering Shares Owned Debenture(1) Underlying Warrants Registered(2)
- ---------------- -------- ------------ ------------ ------------------- -------------
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
<S> <C> <C> <C> <C> <C>
Frank Giambroni
118 Park Ave. 200,000 0 0 0 200,000
Bay Head, NJ 08742
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Charlton Avenue, LLC
c/o Citco Trustees (Cayman) 1,931,123 Series B-390 16,016,427 0 28,636,284
Limited Series I 138 5,947,763
P.O. Box 31106 SMB Debenture 4,740,971
Grand Cayman
Cayman Island, British West
Indies(14)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
Settondown Capital
International, Ltd 200,000 H-8 357,414 25,000 629,830
Charlotte House, Charlotte G-1 47,416
Street
P.O. Box N 9204
Nassau, Bahamas (15)
- ----------------------------- --------------- --------------- ------------------- ----------------------- ----------------
</TABLE>
(1) Based on the number of shares that would be required to be issued if
the preferred stock and debenture were converted as follows: Series B
at $.2435, Series G at $.2109, Series H at $.22383, Series I at
$.23202 and the debenture at $.23202 per share.
(2) Where applicable, the amount being registered is 100% of the number of
common shares that would be required to be issued if the preferred
stock or debenture was converted on the day before the filing of the
registration statement plus common stock and the shares underling the
warrants.
(3) Of the 422,601 common shares, only 210,480 are being registered.
Francois Morax and Matityahu Kaniel are the directors of and have
voting control over Balmore Funds S.A.
(4) Of the 422,601 shares, only 210,480 are being registered. Thomas Hackl
and Peter Nakowitz are the directors of and have voting control over
Austost Anstalt Schaan.
(5) H.U. Bachofen is the director of and has voting control over AMRO
International, S.A.
(6) David Grin and John Clark are the directors of and have voting control
over Nesher, Inc.
(7) Jenifer Spinner is the director of and has voting control over Hewlett
Fund.
(8) Dr. Durling is the director of and has voting control over Guaranty &
Finance Ltd.
(9) Seymour Braun is the director of and has voting control over Libra
Finance SA.
(10) Livingston Asset Management Ltd. has voting control over Dominion
Capital Fund. David Sims has voting control over Livingstone.
(11) VHM Management Ltd. holds the voting shares of Canadian Advantage Ltd.
Ian McKinnon and Mark Valentine have voting control over VMH.
(12) Prime Management LTD. has voting control of GCA Strategic Investment
Fund LTD. John Kelly is the sole shareholder of and has voting control
over Prime Management LTD.
(13) Wayne Coleson is the sole shareholder of and has voting control over
Avalon Capital, Inc.
(14) Minglewood Capital LLC holds the voting shares of Charlton Avenue LLC.
CTC Corporation LTD is the director of Minglewood. Michael Francombe
is a director of and has voting control over CTC Corporation LTD.
(15) Anthony L.M. Inder Rieden is the director of and has voting control
over Settondown Capital International, Ltd.
USE OF PROCEEDS
The selling security holders are selling all of the shares covered by this
prospectus for their own accounts. Accordingly, we will not receive any proceeds
from the resale of the shares. We will receive proceeds from the exercise of the
warrants, but, to date, none of the warrants have been exercised. However, if
all the warrants of which we are registering the underlying shares on this
prospectus were exercised as of March 20, 2000, we would receive approximately
$182,813 in proceeds. We would use any of these net proceeds from the sale of
these warrants for general corporate purposes, including working capital. We
will bear all expenses relating to this registration.
34
<PAGE>
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling security
holders or by pledgees, donees or transferees of, or successors in interest to,
the selling security holders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the shares
may be effected in one or more of the following methods:
o ordinary brokers transactions, which may include long or short sales,
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
o purchases by brokers, dealers or underwriters as principal and resale
by such purchasers for their own accounts pursuant to this prospectus,
o "at the market" to or through market makers or into an existing market
for the common stock,
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
In addition, the selling security holders may enter into hedging transactions
with broker-dealers who may engage in short sales of shares in the course of
hedging the positions they assume with the selling security holders. The selling
security holders may also enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the distribution of
the shares may receive compensation in the form of discounts, concessions or
commissions from the selling security holders and/or the purchasers of shares
for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). The selling security holders and any
broker-dealers acting in connection with the sale of the shares hereunder may be
deemed to be underwriters within the meaning of Section 2(11) of the Securities
Act of 1933, and any commissions received by them and any profit realized by
them on the resale of shares as principals may be deemed underwriting
compensation under the Securities Act of 1933, as amended. Neither we nor the
selling security holders can presently estimate the amount of such compensation.
We know of no existing arrangements between the selling security holders and any
other security holders, broker, dealer, underwriter or agent relating to the
sale or distribution of the shares.
We will not receive any proceeds from the sale of the common shares pursuant to
this prospectus. We have agreed to bear the expenses of the registration of the
shares, including legal and accounting fees, and such expenses are estimated to
be $30,874.
We have informed the selling stockholders that certain anti-manipulative rules
contained in Regulation M under the Securities Exchange Act of 1934, as amended,
may apply to their sales in the and have informed them of the need for delivery
of copies of this prospectus.
The selling security holders may also use Rule 144 under the Securities Act, to
sell the shares if they meet the criteria and conform to the requirements of
such rule.
35
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 102,000,000 shares of capital stock of
which 100,000,000 shares are common stock, no par value, and 2,000,000 shares
are preferred stock, no par value. As of March 20, 2000, there were issued and
outstanding 97,219,959 shares of common stock, 60 shares of Series B convertible
preferred stock and 123 shares of Series I convertible preferred stock, options
to purchase 3,912,932 shares of common stock and warrants to purchase 1,058,125
shares of common stock. In addition, Charlton has subscribed for $3,080,000 in
convertible debentures, $3,080,000 of which have been issued to date, and
Spinneret has a convertible debenture convertible into $51,000 of shares of our
common stock.
COMMON STOCK
Holders of the common stock are entitled to one vote for each share held in the
election of directors and in all other matters to be voted on by shareholders.
There is no cumulative voting in the election of directors. Holders of common
stock are entitled to receive dividends as may be declared from time to time by
our board of directors out of funds legally available. In the event of
liquidation, dissolution or winding up, holders of common stock are to share in
all assets remaining after the payment of liabilities. The holders of common
stock have no preemptive or conversion rights and are not subject to further
calls or assessments. There are no redemption or sinking fund provisions
applicable to the common stock. The rights of the holders of the common stock
are subject to any rights that may be fixed for holders of preferred stock. All
of the outstanding shares of common stock are fully paid and non-assessable.
PREFERRED STOCK
Our articles of incorporation authorize the issuance of preferred stock with
designations, rights, and preferences as may be determined from time to time by
the board of directors. The board of directors is empowered, without stockholder
approval, to designate and issue additional series of preferred stock with
dividend, liquidation, conversion, voting or other rights, including the right
to issue convertible securities with no limitations on conversion, which could
adversely affect the voting power or other rights of the holders of our common
stock, substantially dilute a common shareholder's interest and depress the
price of our common stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Section 607.0850 of the Florida General Corporation Act allows companies to
indemnify their directors, officers and agent against expenses, judgments, fines
and amounts paid in settlement under that conditions and limitations described
in that law.
Article VII of our Articles of Incorporation authorizes us to
indemnify our directors and officers in the following manner:
o To the extent permitted by law, none of our directors or
officers will be personally liable to us or our
shareholders for damages for breach of any duty owed by the
directors and officers to us or our shareholders; provided,
that, to the extent required by law, the directors and
officers will not be relieved from liability for any breach
of duty based upon an act or omission (i) in breach of such
person's duty of loyalty to us or our shareholders, (ii)
not in good faith or involving a knowing violation of law
or (iii) resulting in receipt by a director or an officer
of an improper personal benefit. No amendment to or repeal
of this Article and no amendment, repeal or termination of
effectiveness of any law authorizing this Article shall
apply to or effect adversely any right or protection of any
of our directors or officers for or with respect to any
acts or omissions of the directors or officers occurring
prior to amendment, repeal or termination of effectiveness.
o To the extent that any of our directors, officers or other
corporate agents have been successful on the merits or
otherwise in defense of any civil or criminal action, suit,
or proceeding referred to above, or
36
<PAGE>
in defense of any claim, issue, or matter therein, any
director, officer or corporate agent will be indemnified
against any expenses (including attorneys' fees) actually
and reasonably incurred by the director, officer or
corporate agent in connection therewith.
o Expenses incurred by a director, officer, or other
corporate agent in connection with a civil or criminal
action, suit, or proceeding may be paid by the Company in
advance of the final disposition of the action suit, or
proceeding as authorized by our board of directors upon
receipt of an undertaking by or on behalf of the corporate
agent to repay the amount if it shall ultimately be
determined that the director, officer or corporate agent is
not entitled to be indemnified. The officers and directors
have indemnification agreements and are covered by
Directors and Officers Liability Insurance in the amount of
1 million dollars.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER
THE SECURITIES ACT OF 1933 MAY BE PERMITTED TO OUR
DIRECTORS, OFFICERS AND CONTROLLING PERSONS PURSUANT TO
THESE PROVISIONS, OR OTHERWISE, WE HAVE BEEN ADVISED THAT,
IN THE OPINION OF THE SEC, THIS TYPE OF INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT
AND IS, THEREFORE, UNENFORCEABLE.
EXPERTS
Our audited financial statements incorporated by reference have been examined by
Margolies, Fink and Wichrowski, independent certified public accountants, for
the periods and extent in their respective report and are used in reliance upon
their authority as experts in accounting and auditing.
LEGAL OPINIONS
For the purpose of this offering, Christopher S. Auguste, Esq., Parker Chapin
LLP, is our counsel in regard to this amendment to the registration statement.
FINANCIAL INFORMATION
The following financial statements should be read in conjunction with the
financial statement information contained in and incorporated by reference from
our most recent report on Form 10-KSB, which is being furnished with this
prospectus.
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT
WE FILED WITH THE SEC. YOU SHOULD RELY ON THE
INFORMATION OR REPRESENTATIONS PROVIDED IN THIS
PROSPECTUS. WE HAVE AUTHORIZED NO ONE TO PROVIDE YOU 37,085,067 SHARES
WITH DIFFERENT INFORMATION. THE SELLING SECURITY
HOLDERS DESCRIBED IN THIS PROSPECTUS ARE NOT MAKING IMAGING DIAGNOSTIC SYSTEMS, INC.
AN OFFER IN ANY JURISDICTION WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE COMMON STOCK
INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE OF THIS PROSPECTUS.
----------------
TABLE OF CONTENTS
----------------
----------------
Page
Forward-Looking Statements...........................3 PROSPECTUS
Prospectus Summary...................................3 ----------------
Recent Developments..................................4
The Offering.........................................6
Risk Factors.........................................7
Where You Can Find More Information.................19
Incorporation of Certain Documents by Reference.....20
Information With Respect to the Registrant..........20
Management's Discussion and Analysis
of Financial Condition and Results of Operation..21
Material Changes....................................21
Summary of Compensation Table.......................21
Option/SAR Grants in Last Fiscal Year...............22
Security Ownership of Certain Beneficial
Owners and Management............................22
Certain Relationships and Related Transactions......23 IMAGING DIAGNOSTIC SYSTEMS, INC.
Sale of Unregistered Securities.....................24 6531 NW 18TH COURT
Price Range of Common Stock.........................31 PLANTATION, FLORIDA 33313
Dividend Policy.....................................32 (954) 581-9800
Selling Security Holders............................32
Use of Proceeds.....................................35
Plan of Distribution................................35
Description of Securities...........................36
Disclosure of Commission Position on
Indemnification for Securities and Liabilities...36
Experts ...........................................37
Legal Opinion.......................................37
Financial Information...............................37
March 28, 2000
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the estimated expenses in connection with the issuance
and distribution of the securities being registered:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fees ................................................................$ 4,284.00
Legal fees and expenses...............................................................$ 15,000.00
Accounting fees and expenses..........................................................$ 3,000.00
Miscellaneous.........................................................................$ 100.00
Edgar formatting fees.................................................................$ 8,490.00
-----------
TOTAL $ 30,874.00
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida General Corporation Act permits a Florida corporation to indemnify a
present or former director or officer of the corporation (and certain other
persons serving at the request of the corporation in related capacities) for
liabilities, including legal expenses, arising by reason of service in such
capacity if such person shall have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and in any criminal proceeding if such person had no reasonable
cause to believe his conduct was unlawful. However, in the case of actions
brought by or in the right of the corporation, no indemnification may be made
with respect to any matter as to which such director or officer shall have been
adjudged liable, except in certain limited circumstances.
Article VII of our Articles of Incorporation authorizes us to indemnify
directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal or
termination of effectiveness.
2. So long as permitted by law, no officer of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such officer occurring prior to such amendment, repeal or
termination of effectiveness.
3. To the extent that a Director, Officer, or other corporate agent of
this corporation has been successful on the merits or otherwise in
defense of any civil or criminal action, suit, or proceeding referred
to in sections (a) and (b), above, or in defense of any claim, issue,
or matter therein, he shall be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Expenses incurred by a Director, Officer, or other corporate agent
in connection with a civil or criminal action, suit, or proceeding may
be paid by the corporation in advance of the final disposition of such
action
II-1
<PAGE>
suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the corporate agent to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified.
INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT OF 1933 MAY BE
PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING US ACCORDING TO THE
PROVISIONS IN OUR ARTICLES OF INCORPORATION, WE HAVE BEEN INFORMED THAT IN THE
OPINION OF THE SEC, THIS INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED
IN THE ACT AND IS THEREFORE UNENFORCEABLE
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of IDSI's Form 10-KSB for the fiscal year ending June 30,
1995
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to Exhibit 3.
(i). 6 of IDSI's Form 10-KSB for the fiscal year ending June 30, 1996.
File number 033-04008.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to IDSI's
Registration Statement on Form S-1 dated July 1, 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference to IDSI's Form
8-K dated October 15, 1997.
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference to IDSI's Form
8-K dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference to IDSI's Form
8-K dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference to IDSI's Form
8-K dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). Incorporated by reference to IDSI's
Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of IDSI's Form 10-KSB for the fiscal year ending June 30, 1995.
3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated
by reference to Exhibit 3 (i) of IDSI's Form 10-SB, as amended, file
number 0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11 Certificate and Plan of Merger - is incorporated by reference to
Exhibit 3(i) of the Form 10-SB. 3.12 Certificate of Amendment - is
incorporated by reference to Exhibit 3(i) of the Form 10-SB.
3.13 Amended Certificate of Amendment-Series G Designation.
3.14 Certificate of Amendment-Series I Designation
3.15 Amended Certificate of Amendment-Series B Designation
4.1 Instruments Defining the Rights of Security Holders - Designation of
Series B Convertible Preferred Shares. (See Exhibit 3.3, above).
4.2 Instruments Defining the Rights of Security Holders - Designation of
Series C Convertible Preferred Shares. (See Exhibit 3.4, above).
4.3 Instruments Defining the Rights of Security Holders -Designation of
Series D Convertible Preferred Shares. (See Exhibit 3.5, above).
4.4 Instruments Defining the Rights of Security Holders - Designation of
Series E Convertible Preferred Shares. (See Exhibit 3.6, above).
4.5 Instruments Defining the Rights of Security Holders - Designation of
Series F Convertible Preferred Shares. (See Exhibit 3.7, above).
II-2
<PAGE>
EXHIBIT (CONT.) DESCRIPTION (CONT.)
4.6 Instruments Defining the Rights of Security Holders - Designation of
Series H Convertible Preferred Shares. (See Exhibit 3.8, above).
4.7 Instruments Defining the Rights of Security Holders - Amended
Designation of Series G Convertible Preferred Shares. (See Exhibit
3.13, above).
4.8 Instruments Defining the Rights of Security Holders - Designation of
Series I Convertible Preferred Shares. (See Exhibit 3.14, above).
4.9 Instruments Defining the Rights of Security Holders - Amended
Designation of Series B Convertible Preferred Shares. (See Exhibit
3.15, above).
4.10 Convertible Debenture
5 Legal opinion of Rebecca J. Del Medico, Esq., dated July 26, 1999.
Incorporated by reference to ISDI's Registration Statement on Form S-2,
File Number 333-59539.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to IDSI's
Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the IDSI's
Registration Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to
Exhibit 10(c) of the Form 10-SB.
10.5 Lock Up Agreement By and Between IDSI and Richard J. Grable, Linda B.
Grable, and Allan L. Schwartz, is incorporated by reference to Exhibit
10.5 of IDSI's Form 10-KSB for the fiscal year ending June 30, 1996.
File number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to IDSI's Registration Statement on Form S-2, File Number
333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to IDSI's Registration Statement on Form S-2, File Number
333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of IDSI's Form
10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of IDSI's Form 10-KSB for the fiscal year ending June 30,
1998.
10.10 Focus Distribution Agreement (United Kingdom and Ireland). Incorporated
by reference to IDSI's Form 10-QSB/A filed on April 2, 1999.
10.11 Focus Distribution Agreement (Benelux countries). Incorporated by
reference to IDSI's Amendment number 1 to Registration on Form S-2,
File Number 333-60405.
10.12 Syncor Distribution Agreement. Incorporated by reference to IDSI's
Amendment number 1 to Registration on Form S-2, File Number 333-60405.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
IDSI's Form 10-KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference to
IDSI's Form 10-KSB/A filed on April 9, 1999.
10.16 Form of Series I Preferred Stock Subscription Documents. Incorporated
by reference to IDSI's Amendment number 1 to Registration on Form S-2,
File Number 333-60405.
10.17 Form of Debenture Subscription Documents. Incorporated by reference to
IDSI's Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.18 Form of Mortgage. Incorporated by reference to IDSI's Amendment number
1 to Registration on Form S-2, File Number 333-60405.
10.19 Form of Series G Subscription Documents. Incorporated by reference to
IDSI's Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.20 Form of Registration Rights Agreement. Incorporated by reference to
IDSI's Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.21 Form of Debenture in the amount of $825,000. Incorporated by reference
to our Form 10-KSB for the fiscal year ending June 30, 1999 filed on
October 12, 1999.
10.22 Registration Rights Agreement $825,000 Convertible Debenture.
Incorporated by reference to our Form 10-KSB for the fiscal year ending
June 30, 1999 filed on October 12, 1999.
II-3
<PAGE>
EXHIBIT (CONT.) DESCRIPTION (CONT.)
10.23 Subscription Agreement $825,000 Convertible Debenture. . Incorporated
by reference to our Form 10-KSB for the fiscal year ending June 30,
1999 filed on October 12, 1999.
10.24 1999 Equity Incentive Plan. Incorporated by reference to our Form
10-KSB for the fiscal year ending June 30, 1999 filed on October 12,
1999.
10.25 Distribution Agreement by and between IDSI and Cycle of Life
Technologies, Inc., dated November 29, 1999.
10.26 Promissory Note by and between IDSI and Cycle of Life Technologies,
Inc, dated February 1, 2000.
10.27 Consulting Agreement by and between IDSI and Anthony Giambrone, dated
January 26, 2000.
10.28 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable signed August 30, 1999.
24.2 Consent of Independent Certified Public Accountants.
(B) REPORTS ON FORM 8-K
None
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in the volume
of securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424 (b) if, in the aggregate the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer of controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
II-4
<PAGE>
precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bonafide offering thereof.
II-5
<PAGE>
SIGNATURES
According to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets the
requirement for filing on Form S-2 and has duly caused this Amended Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plantation, State of Florida, on the 28th day of
March 2000.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/ Linda B. Grable
-----------------------
Linda B. Grable, Chairman of the Board
Director, and President
According to the requirements of the Securities Act of 1933, as amended, this
Amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: March 28, 2000 By: /s/ Linda B. Grable
-----------------------
Linda B. Grable, Chairman of the Board
Director and President
Dated: March 28, 2000 By: /s/ Richard J. Grable
---------------------
Richard J. Grable, Director
and Chief Executive Officer
Dated: March 28, 2000 By: /s/ Allan L. Schwartz
---------------------
Allan L. Schwartz, Director
and Executive Vice-President
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
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EXHIBIT 24.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Post-Effective
Amendment No. 5 to the Registration Statement on Form S-2 of Imaging Diagnostic
Systems, Inc. of our report dated August 31, 1999, which appears on Page F-1 of
Form 10-KSB for the year ended June 30, 1999, and to the reference to our firm
under the caption "Experts" in the Prospectus.
/s/ Margolies, Fink and Wichrowski
-----------------------------------
MARGOLIES, FINK and WICHROWSKI
Pompano Beach, Florida
March 28, 2000
