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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 7,089,685 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.
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TABLE OF CONTENTS
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________________
Page
Forward-Looking Statements........................3 PROSPECTUS
Prospectus Summary................................3 ________________
Recent Developments...............................4
The Offering......................................5
Risk Factors......................................6
Where You Can Find More Information..............19
Incorporation of Certain Documents by Reference..19
Information With Respect to the Registrant.......19
Financing/Equity Line of Credit..................20
Private Placement of Warrants....................23
Selling Security Holders.........................24
Use of Proceeds..................................25
Plan of Distribution.............................25
Description of Securities........................27
Disclosure of Commission Position on
Indemnification for Securities and Liabilities 28 IMAGING DIAGNOSTIC SYSTEMS, INC.
Experts ........................................28 6531 NW 18TH COURT
Legal Matters....................................28 PLANTATION, FLORIDA 33313
Financial Information............................29 (954) 581-9800
December 12, 2000
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PROSPECTUS
IMAGING DIAGNOSTIC SYSTEMS, INC.
7,089,685 Shares
Common Stock
This prospectus is part of the registration statement we filed with the
Securities and Exchange Commission using a "shelf" registration
process. This means:
o We may issue up to 7,089,685 shares of our common stock pursuant
to a $25 million Private Equity Credit Agreement (the "Private
Equity Agreement") between us and the selling stockholder,
Charlton Avenue LLC ("Charlton"), for which we would receive
gross proceeds of approximately $10 million upon the exercise of
our put options. See "Financing/Equity Line of Credit".
o In the event that we sell shares pursuant to the Private Equity
Agreement, we intend to use $5,052,500 of the net proceeds to
redeem our Series K preferred stock held by Charlton.
o Proceeds from our exercise of the put options would be used for
general corporate purposes as well as the redemption of the
outstanding Series K preferred stock held by Charlton. Charlton
is an "underwriter" within the meaning of the Securities Act of
1933 in connection with its sales of our common stock acquired
under the Private Equity Agreement.
o Our common stock is traded on the OTC Bulletin Board under the
symbol "IMDS".
o On December 8, 2000, the closing bid price of our common stock on
the OTC Bulletin Board was $1.59.
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 OF 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 December 12, 2000
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Table Of Contents
Forward-Looking Statements...........................................3
Prospectus Summary...................................................3
Recent Developments..................................................4
The Offering.........................................................5
Risk Factors.........................................................6
Where You Can Find More Information.................................19
Incorporation of Certain Documents by Reference.....................19
Information With Respect to the Registrant..........................19
Financing/Equity Line of Credit.....................................20
Private Placement of Warrants.......................................23
Selling Security Holders............................................24
Use of Proceeds.....................................................25
Plan of Distribution................................................25
Description of Securities...........................................27
Disclosure of Commission Position on Indemnification
for Securities and Liabilities.................................28
Experts ...........................................................28
Legal Matters.......................................................28
Financial Information...............................................29
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Forward-Looking Statements
This prospectus contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among others,
statements relating to our business strategy, which is based upon our
interpretation and analysis of trends in the healthcare treatment industry,
especially those related to the diagnosis and treatment of breast cancer, and
upon management's ability to successfully develop and commercialize its
principal product, the CTLM(R). This strategy assumes that the CTLM(R) will
prove superior, from both a medical and an economic perspective, to alternative
techniques for diagnosing breast cancer. This strategy also assumes that we will
be able to promptly obtain from the FDA and the relevant foreign governmental
agencies the approvals which are needed to market the CTLM(R) in the United
States and key foreign markets and that we will be able to raise the capital
necessary to finance the completion of the development and commercialization of
the CTLM(R). Many known and unknown risks, uncertainties and other factors,
including, but not limited to, technological changes and competition from new
diagnostic equipment and techniques, changes in general economic conditions,
healthcare reform initiatives, legal claims, regulatory changes and risk factors
detailed from time to time in our Securities and Exchange Commission filings may
cause these assumptions to prove incorrect and may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Prospectus Summary
This summary highlights information in this document and the documents
incorporated by reference in this document. You should carefully review the more
detailed information and financial statements included in this document or
incorporated by reference 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 and the documents
incorporated by reference, 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(R)) for detecting breast cancer through the
skin in a non-invasive procedure. The CTLM(R) 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(R) by us. The CTLM(R) is designed to be
used as an adjunct to traditional breast imaging devices, such as mammography
and ultrasound machines, to assist in the detection of breast cancer. We expect
medical personnel to use the CTLM(R) 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 and
later found our company's predecessor in December 1993. 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 one outside
facility, we learned what changes were required to improve performance and
stability of the CTLM(R). These changes included technological advances made
with lasers and other components. In July 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 in November 1999.
In connection with the CTLM(R) clinical trials, we are developing a clinical
atlas of the optical properties of benign and malignant tissues. The CTLM(R) is
designed to provide the physician with objective visual data for interpretation
and further clinical analysis. Accordingly, we believe that the CTLM(R) will
improve early diagnosis, reduce diagnostic uncertainty and decrease the number
of biopsies performed on benign breast lesions.
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Due to the delays in obtaining the new laser system, the delays in the
modification and redesign of the CTLM(R) and delays beyond our control regarding
hospital-based clinical trials, we are unable to determine when, if ever, we
will receive FDA marketing clearance. In addition, due to these delays, we are
currently unable to accurately determine when, if ever, we will begin to
generate revenues. We expect to generate revenues of at least $500,000 in the
quarter following our receipt of FDA export approval to send CTLM(R) systems to
Canada. As of the date of this prospectus, we have not generated any revenues.
Our executive offices are located at 6531 NW 18th Court, Plantation, Florida
33313. Our telephone number is (954) 581-9800.
Recent Developments
In September 2000, we started the application process for Pre-Market Approval
("PMA") of our CTLM(R) system by submitting our first module to the U.S. Food
and Drug Administration (the "FDA"). Under the modular approach, we will
periodically submit a portion of the data needed for FDA review as the required
documentation is completed.
In October 2000, we contracted Underwriters Laboratories ("UL") to perform
safety testing and assist us in achieving regulatory certifications necessary to
begin selling the CTLM(R) system outside the United States. We are working with
UL to achieve the ISO 9000 Certification and CE marking that we need to begin
selling the CTLM(R) in Europe and certain other countries. We also chose UL as
our Notified Body to certify our compliance with EN2900/4600/ISO900 quality
assurance standards. The certifications and CE marking, if obtained, will
signify that the product and its design, manufacturing and quality systems
comply with international standards. The UL safety testing is also necessary in
order for the CTLM(R) system to be sold in the United States once we receive FDA
approval. In November 2000, we were advised by UL that we have been recommended
for CE Marking but it is subject to review of the Notified Body Certification
Committee.
On Monday, November 20, 2000 we held our Annual Meeting of stockholders for the
fiscal year ending June 30, 2001, at our corporate offices in Plantation,
Florida. At the meeting, our stockholders elected seven directors to serve until
the next annual meeting, ratified the executive officers; employment and stock
option agreements and ratified the appointment of Margolies, Fink and
Wichrowski, CPAs' as our independent auditors for the fiscal year ending June
30, 2001.
We have received notification from the U.S. Patent Office that our patent for
Detector Array with Variable Gain Amplifiers for Use in a Laser Imaging
Apparatus was issued on November 21, 2000 as Patent No. 6,150,649.
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The Offering
Securities Offered by Selling Security Holders
Common Stock(2) 7,089,685
Equity Securities Outstanding
Common Stock(1),(2) 109,672,166
Series K Preferred 475
Warrants 458,125
Options(3) 2,548,261
(1) The total number of equity shares outstanding as of December 8, 2000.
(2) The total number of shares of common stock does not include (i) shares of
common stock issuable upon the exercise of our put options from our Private
Equity Agreement for which we would receive gross proceeds of approximately
$10 million which, for the purpose of this prospectus are estimated to
represent 7,089,685 shares of common stock, (ii) shares of common stock
issuable upon conversion of the Series K preferred stock which are
estimated to represent 3,682,171 shares of common stock, and (iii) warrants
and options to purchase 3,006,386 shares of common stock.
(3) The options were issued in connection with our stock option plans and/or in
connection with some of our employment agreements. The exercise prices of
the options range from $.35 to $4.38 per share. The warrants were issued to
consultants, finders and private placement investors. The exercise prices
of the warrants range from $.50 to $1.63.
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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 incurred and are incurring significant losses and we may not be able to
continue our business in the future.
At September 30, 2000, we had an accumulated deficit of $45,302,045 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 of the CTLM(R),
o clinical trials,
o pre-market approval process,
o anticipated commercialization of the CTLM(R), 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(R), 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 substantial net
operating losses since inception.
Our auditors 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(R), develop the capacity to manufacture and market the
CTLM(R), either by ourselves or in collaboration with others, and achieve market
acceptance of the CTLM(R). 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(R).
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 November 2000 we have spent approximately $39 million, and we estimate
that of our estimated $7.0 million annual fixed commitment, $2.3 million will be
required to complete FDA clinical trials through pre-market approval ("PMA")
submission and to prepare for the manufacture of the CTLM(R). After receiving
the PMA from the FDA, we anticipate that we will need approximately $5.0 million
over the next year to complete all necessary stages in order to manufacture and
market the CTLM(R) in the United States and foreign countries. We plan on using
the net proceeds raised from the sale of the Series K Convertible Preferred and
the sale of Common Stock through our Private Equity Line to develop and market
this product, including funds for:
o clinical testing of the CTLM(R)device,
6
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o research, engineering and development programs,
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 12
months 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. 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. 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
convertible 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 convertible
preferred 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 62,438,198 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% of the currently outstanding number of shares
of common stock.
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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 stock or
debenture sale and
o the number of common shares the preferred stock or debentures 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 or
debentures to satisfy the conversion requirements. Although our board of
directors tried to negotiate a floor on the conversion price of each series of
preferred stock and debentures prior to their sale, it was unable to do so.
Trading in our common stock through short sales and offers by us to sell our
preferred stock and debentures at a substantial discount may artificially
depress our stock price. If the price is depressed when the preferred stock or
debentures are then converted, this may give the preferred shareholder or
debenture holder control over a substantial percentage of the public float of
our stock. Similarly, if our common stock price is depressed, then in order to
draw on our equity credit line with Charlton Avenue LLC ("Charlton"), we will
have to issue proportionately more shares to Charlton in order to obtain the
funds we need. See "Financing, Equity Line of Credit".
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 debentures or 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.
Nonetheless, 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 later 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 or debentures to
relatively few holders could effectuate a possible change-in-control and
o in the event of our voluntary or involuntary liquidation while the
preferred stock or debentures are outstanding, the holders of those
securities will be entitled to a preference in distribution of our
property.
We may draw on our new 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 new $25 million private equity line of credit.
Pursuant to the equity line of credit, when we feel it necessary, we may raise
capital through the private sale of our common stock to Charlton at a price
equal to 91% of the then bid price. In the event of sales under the equity line,
we would also be required to file an S-3 registration statement or other
registration that may be available to us to register the shares for resale by
Charlton. 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
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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.
The Equity Credit Line may not be available when we need it, thus limiting our
ability to bring our CTLM(R)to market.
The Equity Credit Line contains various conditions to our being able to use it,
including effectiveness of the required registration statement and the absence
of any material adverse change in our business or financial condition. Further,
Charlton is an offshore investment company and if it were unable or unwilling to
fulfill it obligations, our legal remedies would be limited. Thus, we may be
unable to draw down on the equity credit line when we need the funds, and that
could severely harm our business and financial condition and our ability to
bring the CTLM(R) to market.
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 and/or warrants to purchase shares of common stock. For
example, since December 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. On some occasions, we have
converted debt into equity at prices that were well below the market price. In
addition, as we have 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 that 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
debentures 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
debentures 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 debentures, it is
possible that, upon conversion of the convertible preferred stock and
convertible debentures, we will issue shares of common stock at a price that is
far 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 debentures, upon conversion, we will have to
issue an increased number of shares to the preferred stock and convertible
debenture holders. 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 issue 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.
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Risks associated with our industry
We depend on market acceptance to sell our products, which have not been proven,
and a lack of acceptance would depress our sales.
There can be no assurance that physicians or the medical community in general
will accept and utilize the CTLM(R) or any other products that we develop. The
extent and rate the CTLM(R) 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(R),
o the advantages of the CTLM(R)over existing technology and cancer detection
methods, including:
- 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(R) 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(R). Failure to
obtain favorable rates of third-party reimbursement could discourage the
purchase and use of the CTLM(R) 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
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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(R) 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 use our products. Currently mammography is
employed widely and our ability to sell the CTLM(R) to medical facilities will
partially depend on our ability to demonstrate the clinical utility of the
CTLM(R) 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(R) utilizes.
Risks associated with our securities
Our common stock is considered "a 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. For example, in the fiscal
year ended June 30, 2000, the bid price ranged from a low of $.08 in the second
quarter to a high of $5.75 in the third quarter .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 those of 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.
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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 shareholders'
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 our common stock and dilute shareholdings, we still may not
have enough authorized common stock available to convert the outstanding Series
K preferred stock into common stock or to utilize our new equity credit line.
According to vote of a majority of our shareholders, we have amended our
articles of incorporation to increase our authorized common stock from
100,000,000 shares to 150,000,000 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 Series K
preferred stock which could cause us to accrue liquidated damages under our
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, again, 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 to facilitate the conversion of our outstanding preferred stock and to
utilize our new private equity credit line or to accommodate other future
issuances of equity securities.
Based on the closing bid price of our common stock as of December 8, 2000, of
$1.59 per share and the maximum Series K conversion price of $1.29 per share,
approximately:
o 3,682,171 shares of common stock would be required to convert the 475
Series K shares outstanding, and
o although it is highly unlikely that we would do so, approximately
17,724,211 shares would be required to be issued for the entire $25.0
million new equity line of credit.
In addition, 3,006,386 shares would be required for the exercise of outstanding
options and warrants. Based upon this information, as of December 8, 2000, we
would need in excess of approximately 24,400,000 authorized shares for all
conversions, complete utilization of the equity line of credit and fulfillment
of our remaining stock-related obligations. In the event that, as a result of a
decrease in the price of our common stock we have to sell shares under the
Private Equity Agreement at the $.455 per share minimum price specified by the
agreement:
o we would have to sell 21,978,021 shares to achieve the
$10,000,000 minimum total of sales of common stock required under
the agreement; and
o we would have to sell 54,945,054 shares to reach the $25,000,000
maximum of sales of common stock under the agreement.
See "Financing/Equity Line of Credit."
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We currently are controlled by our executive officers and directors; however, if
outstanding preferred stock is converted or if draws are made under the Private
Equity Agreement, a change-in-control may occur.
Our management beneficially owns 21% (assuming exercise of their currently
exercisable options), of our outstanding common stock, assuming no exercise of
outstanding warrants, options, or conversion of preferred stock. Although
management owns less than a majority 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. Based on the current market price of
our common stock, we would have to issue approximately 7,089,685 shares to draw
the $10 million minimum under the Private Equity Agreement and approximately
17,724,211 shares to draw the $25 million maximum. The amounts of shares
issuable under the Private Equity Agreement could increase substantially if our
common stock price declines. Dilution to management's ownership percentage as a
result of share issuances under the Private Equity Agreement or conversion of
the Series K Preferred Stock 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.
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(R) technology. Richard Grable, one of our founders,
owns the patent. In addition, we own 6 patents and have 6 additional United
States patents pending with regard to optical tomography, many of which are
based on the original CTLM(R) technology. In the event that we breach the patent
licensing agreement, we could lose the licensing rights to the CTLM(R)
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,
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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 lawsuits
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.
We may not be able to keep up with the rapid technological change in the medical
imaging industry which could make the CTLM(R) 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(R) 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(R). 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(R).
Risks associated with our business
We may not find sufficient facilities to adequately test the CTLM(R) 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(R) devices 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(R) 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 latter part
of 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(R) in the hospitals,
subsequent room renovations and the hiring and training of additional clinical
application specialists. Furthermore, as the approval boards of some hospitals
meet only once per month and must approve use of their respective hospitals as
test sites, approvals have been and may be again further delayed due to the
infrequency of these meetings. At the conclusion of the clinical trials we will
submit the pre-market approval application for the CTLM(R).
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;
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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(R) system in the U.S. and other countries.
In the United States, the CTLM(R) 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.
We cannot file our pre-market approval application for the CTLM(R) 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(R); nor can there
be any assurance that the FDA will not require us to conduct additional clinical
trials for the CTLM(R), which would delay the CTLM(R) 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 ("EEA"), companies
are required to achieve compliance with the requirements of the medical devices
directive and affix a "CE" marking on their products to attest 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 EEA.
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(R) 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 QSRs, 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 EEA
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.
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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 from the relevant countries
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(R),
o foreign marketing clearances for the CTLM(R)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.
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(R) 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, including the CTLM(R), will:
o be found to be safe and effective,
o meet applicable regulatory standards or receive necessary regulatory
clearance,
o be safe and effective, 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 prove to be unsuccessful.
We will depend on a single product, the CTLM(R), for our revenues in the next
few years, any problems with which would cause material 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(R) 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(R) device would account for substantially all of our
revenues, if any, for at least the next two years. Failure to gain regulatory
approvals or market acceptance for the CTLM(R) device would prevent the sale of
the CTLM(R) 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(R). 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(R) device, market introduction and
subsequent sales would be adversely affected.
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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.
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 two of the seats on our board of directors.
Consequently, they are in a position to influence the compensation committee and
to influence the other board members to approve affiliated transactions.
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(R) manufacturing and assembly capabilities and
contract for the manufacture of the CTLM(R) 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(R).
We have used and do use third parties to manufacture and deliver the components
of the CTLM(R) 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(R) components will be in compliance with the quality system regulations
at the time of the pre-approval inspection or will maintain compliance
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afterwards. This failure could significantly delay FDA approval of the
pre-market approval application for the CTLM(R) 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(R) 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(R) that needed to be corrected
before distribution. Solutions to these problems had to be found and adjustments
had to be made to the CTLM(R) 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(R) systems to be 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(R) 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 sell CTLM(R) systems
through distributors in various countries once sales are permitted. No CTLM(R)
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(R) 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(R) 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(R).
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 CTLM(R) 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.
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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(R). 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 us and our 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 and
locations of 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, 2000,
filed on September 15, 2000.
2. Our quarterly report on Form 10-QSB for the quarter ended September
30, 2000, file on November 13, 2000.
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 and our latest Form 10-QSB which are
being delivered with this prospectus. See "Documents Incorporated by Reference",
"Prospectus Summary", and "Risk Factors".
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Financing/Equity Line of Credit
We will require substantial additional funds for working capital, including
operating expenses, clinical testing, regulatory processes and manufacturing and
marketing programs and our continuing research and development programs. Our
capital requirements will depend on numerous factors, including the progress of
our research and development programs, results of pre-clinical and clinical
testing, the time and cost involved in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and changes in our existing research, licensing and other relationships and the
terms of any new collaborative, licensing and other arrangements that we may
establish. Moreover, our fixed commitments, including salaries and fees for
current employees and consultants, and other contractual agreements are likely
to increase as additional agreements are entered into and additional personnel
are retained.
On July 17, 2000 we sold to Charlton in a private placement 400 shares of our
Series K convertible preferred stock for $4 million. We issued an additional 95
Series K shares to Charlton for $950,000 on November 7, 2000. The total of
$4,950,000 was designed to serve as bridge financing pending draws on the
Charlton private equity line. We paid Spinneret Financial Systems Ltd. $200,000
as a consulting fee for the first tranche of Series K shares and five Series K
shares as a consulting fee for the second tranche. We are obligated to pay a 9%
dividend on the Series K convertible preferred in cash or common stock at our
option semi-annually on June 30 and December 31 of each calendar year or upon
the conversion date. On November 10, 2000, Charlton converted 25 Series K shares
plus accrued dividends into 197,349 restricted shares of common stock. Under the
Series K Certificate of Designations, we have the option of redeeming the
remaining convertible preferred (except for the Spinneret shares) solely through
the use of the private equity line by paying cash with the following redemption
premiums.
Days from closing 0-120 121-180 180
Redemption price
As a % of Principal 105% 107.5% 110%
In the event that, for whatever reason, we do not redeem the convertible
preferred according to the above schedule, the holder has the right to convert
the convertible preferred into common stock at a per share price equal to the
lower of $1.29 (115% of the closing bid price on the day prior to the initial
issuance) or 87.5% of the average of the three lowest closing bid prices (which
need not be consecutive) of the 20 consecutive trading days prior to the
conversion date. The agreement further provides that we must register the common
shares underlying the Series K convertible preferred stock in a registration
statement as soon as possible after the closing date. We must use our best
efforts to file timely within 45 days (which has now been extended to 70 days by
the holder) after closing and cause the registration statement to become
effective within 120 days (which has been extended to 145 days by the holder)
from the closing date. In the event that the registration statement does not
become effective, we will be liable for liquidated damages in the amount of 2%
of the purchase price of the unredeemed convertible preferred stock for the
first 30 days and 2% for every 30 day period thereafter until the registration
statement has been filed and/or declared effective. The liquidated damages will
be payable upon demand in cash or stock at our option. Charlton agreed to extend
the deadline for filing the Registration Statement to September 25, 2000, and
the deadline for effectiveness to December 9, 2000. In addition, Charlton also
extended the redemption periods by 25 days each so that, for example, the 105%
period extended 145 days from closing, i.e., to December 9, 2000. Based on the
formula for conversion as of December 8, 2000, approximately 3,682,171 shares
would be required to convert all of the 475 outstanding shares of Series K
convertible preferred stock. There are no other convertible securities
outstanding as of the date of this report.
On August 17, 2000, we entered into a $25 million Private Equity Credit
Agreement with Charlton Avenue LLC ("Charlton"). On November 29, 2000, prior to
any draws under the initial private equity agreement, we terminated that
agreement and the initial agreement was replaced by an Amended Private Equity
Credit Agreement dated November 30, 2000 (the "Private Equity Credit
Agreement"). The Private Equity Agreement commits Charlton to purchase up to $25
million of common stock subject to certain conditions pursuant to Regulation D
over the course of 12 months after an effective registration of the Private
Equity Agreement common shares. The timing and amounts of the purchase by the
investor are at our sole discretion. We do, however, have to draw down a minimum
of $10 million from the credit line over the 12-month period. The purchase price
of the shares of common stock is set at 91% of the market price. The market
price, as defined in the agreement, is the average of the three lowest closing
bid prices of the common stock over the ten day trading period beginning on the
put date and ending on the trading day prior to the relevant closing date of the
particular tranche. We expect to redeem the bridge financing of $4,700,000 in
Series K convertible preferred stock with the proceeds of the sale of common
20
<PAGE>
stock under the equity credit line. We will be obligated to pay a redemption
premium as stated in the redemption table above. In order to use the equity
credit line we must use our best efforts to file and cause our registration
statement to become effective as soon as possible. If, subsequent to
effectiveness, the registration statement is suspended at any time, we are
obligated to pay liquidated damages of 1.5% of the cost of all common stock then
held by the investor for each fifteen-day period or portion thereof, beginning
on the date of the suspension. If such suspension is cured within the first
fifteen days, the damages shall not apply. This financing agreement has no
warrants attached to either the bridge financing or the private equity line. The
only fees associated with the private equity financing will be a 5% consulting
fee payable to Spinneret Financial Ltd. We are registering an estimated amount
of common stock underlying $10 million out of the $25 million available in the
Private Equity Agreement in the registration statement of which this prospectus
is a part. Based on the formula for the puts in the Private Equity Agreement
applied as of December 1, 2000, 6,973,987 shares underlying the Private Equity
Agreement are included in this prospectus.
The principal conditions to our ability to draw under the private equity line
are that (i) during the 15 trading days immediately preceding each of the put
notice date and the corresponding closing date (11 trading days after the put
notice date) the average bid price of our common stock must be at least $.50 and
the average daily trading volume must be at least $100,000, (ii) no more than
19.9% of our outstanding common stock (21,824,761 shares as of the date of the
Private Equity Agreement) may be issued under the agreement without shareholder
approval if such approval is required by our principal trading market (it is not
required by our current market, the OTC Bulletin Board),, (iii) the purchase
cannot cause Charlton to beneficially own more than 9.9% of our outstanding
common stock (it beneficially owns an approximate 2% interest in the common
stock as of the date of this prospectus based on its ownership of the Series K
Preferred Stock), and (iv) there be no material adverse change in our business
or financial condition since our most recent filing with the SEC. These
conditions may materially limit our ability to make draws under the Private
Equity Agreement.
Upon effectiveness of the registration statement of which this prospectus is a
part, we intend to sell shares of common stock under the Private Equity
Agreement in an amount sufficient to raise net proceeds of $4,700,000 plus the
redemption premium, which is the total amount needed to redeem the Series K
preferred stock held by Charlton. We intend to make additional sales under the
Agreement from time to time in order to raise working capital on an "as needed"
basis. Based on our current assessment of our financing needs, we intend to draw
only the $10,000,000 minimum under the Private Equity Agreement; however, if
those needs change we may draw up to the $25,000,000 maximum.
The Series K preferred stock was issued in order to obtain a total of $4,950,000
in bridge financing pending finalization and implementation of the Private
Equity Agreement. After Charlton's conversion of 25 shares of Series K preferred
stock plus accrued dividends into 197,349 restricted shares of common stock on
November 10, 2000, $4,700,000 of the financing remains outstanding. We intend to
use draws under the Private Equity Agreement to redeem the Series K preferred
stock because we believe that the overall cost of the $4,700,000 in financing
will be lower under the Private Equity Agreement. By exercising our right of
redemption utilizing funds available under the Private Equity Agreement, we will
be able to raise $4,700,000 based on 91% of the common stock market price in
order to redeem stock convertible at the lower of $1.29 or 87.5% of the market
price. That 3.5% spread is worth at least approximately $164,500 given the
$4,700,000 stated value of the Series K preferred stock. At the $1.29 maximum
conversion price which is currently applicable given the market price of our
common stock, the spread is worth $463,890 based on the market price of our
stock through December 8, 2000. If we redeem on or before December 9, 2000, we
will have to pay a $235,000 (5%) redemption premium, and that premium increases
to $352,500 (7.5%) and $470,000 (10%) on December 10, 2000, and February 7,
2001; however, by redeeming the preferred stock with common stock we will save
$423,000 annually by eliminating the 9% dividend. Further, by utilizing the
equity line to redeem the preferred stock, we can take advantage of a relatively
high stock price and issue a relatively small amount of common stock to obtain
the redemption funds. On the other hand, if the preferred stock is not redeemed,
we face the risk that the preferred stock will be converted by the holder when
the price of common stock is depressed, requiring the issuance of a relatively
large amount of common stock as well as payments of dividends until conversion.
There can be no assurance that adequate financing will be available when needed,
or if available, will be available on acceptable terms. Insufficient funds may
prevent us from implementing our business plan or may require us to delay, scale
back, or eliminate certain of our research and product development programs or
to license to third parties rights to commercialize products or technologies
that the we would otherwise seek to develop ourselves. If we utilize the Private
21
<PAGE>
Equity Line of Credit or additional funds are raised by issuing equity
securities, especially Convertible Preferred stock, dilution to existing
shareholders will result and future investors may be granted rights superior to
those of existing shareholders. Moreover, substantial dilution may result in a
change in our control.
22
<PAGE>
Private Placement of Warrants
Below is a table containing outstanding warrants issued in connection with the
sale of Series C, D, and E, convertible preferred stock and loans:
<TABLE>
<CAPTION>
Potential
Date of Term Warrant Warrant Cash Proceeds
Warrant of Warrant Series Holder Shares Price to the Company
------- ---------- ------ ------ ------ ----- --------------
<S> <C> <C> <C> <C> <C> <C>
9/30/97 5 Year Series C Concorde 50,000 $ 1.562 $ 78,100.00
9/30/97 3 Year Series C Austost 17,500 $ 1.630 $ 28,525.00
9/30/97 3 Year Series C UFH End. 17,500 $ 1.630 $ 28,525.00
9/30/97 3 Year Series C Chris Baum 5,000 $ 1.630 $ 8,150.00
9/30/97 3 Year Series C Dominion 25,000 $ 1.630 $ 40,750.00
9/30/97 3 Year Series C Settondown 55,000 $ 1.630 $ 89,650.00
12/31/97 3 Year Series D Aspen Intl. 25,000 $ 1.220 $ 30,500.00
2/4/98 3 Year Series E Austost 12,500 $ 1.093 $ 13,662.50
2/4/98 3 Year Series E Balmore 12,500 $ 1.093 $ 13,662.50
1/20/99 3 Year Loan GCA Global Adv. 50,000 $ 1.000 $ 50,000.00
6/8/00 2 Year Loan Aspen Intl. 50,000 $ 1.450 $ 72,500.00
------------ ----------------
Total 320,000 $ 454,025.00
</TABLE>
23
<PAGE>
Selling Security Holder
The selling security holder, Charlton Avenue LLC, is the potential purchaser of
stock under the Private Equity Agreement. The shares offered in this prospectus
are based on the Private Equity Agreement and the registration rights agreement
between the selling security holder 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 holder to determine when and whether it
will sell any shares under this prospectus; and
o the uncertainty as to the number of shares of common stock which will be
issued upon exercise of our put options under the Private Equity Agreement.
The put option price is 91% of the three lowest closing bid prices in the ten
day trading period beginning on the put date and ending on the trading day prior
to the relevant closing date of the particular tranche.
Since the purchase price under the Private Equity Agreement is based on the
market price of our common stock after exercise of our put option, the number of
shares subject to registration rights will increase if the market price of our
common stock decreases, and will decrease if the market price increases. See
"Financing/Equity Line of Credit".
Neither Charlton nor any of its affiliates has held any position, office, or
other material relationship with us in the past three years except that Charlton
has acquired a total of 38,226,111 shares of common stock through conversion of
$9,210,000 of our preferred stock and debentures that it purchased. Charlton has
sold all but 197,349 of those shares in open market transactions.
o In April 1999, Charlton bought from Weyburn Overseas Ltd. and Goodland
International Investment Ltd. 450 shares of our Series B Convertible
Preferred Stock with a face value of $4.5 million. Charlton converted
the Series B Preferred Stock into 30,444,719 shares of our common
stock from April 1999 to December 1999.
o In April 1999, Charlton bought 138 shares of our Series I Convertible
Preferred Stock with a face value of $1,380,000. As payment of the
face value of the Series I Stock and in settlement of its claims
(acquired from the original holders) against us arising from our
failure to convert the Series B Stock in accordance with its terms,
Charlton (i) waived its right to payment of $725,795 in accrued Series
B dividends, (ii) cancelled warrants to purchase 112,500 shares of our
common stock at a price of $5.00 per share, (iii) accepted an
amendment of the Series B Certificate of Designations to limit the
holder to a 4.99% beneficial interest in our common stock and (iv)
dismissed prejudice all litigation by the Series B holders against us,
including the holders' claim for reimbursement of substantial legal
fees. The Series I Preferred Stock was converted into 3,675,160 shares
of our common stock from December 1999 to May 2000.
o From April 1999 to January 2000, Charlton bought from us convertible
debentures with an aggregate face amount of $3,080,000. Those
debentures were converted into 3,908,883 shares of our common stock in
May 2000.
o In July 2000, we sold 400 shares of our Series K Convertible Preferred
Stock to Charlton for a price of $4,000,000.
o In November 2000, we sold an additional 95 shares of Series K
Preferred Stock to Charlton for $950,000.
o In November 2000, Charlton converted 25 shares of Series K Preferred
Stock into 197,349 shares our common stock.
The following table identifies the selling security holder based upon
information provided to us as of December 8, 2000, with respect to the shares
beneficially held by or acquirable by, the selling security holder, and the
shares of common stock beneficially owned by the selling security holder which
are not covered by this prospectus.
24
<PAGE>
<TABLE>
<CAPTION>
Selling Security Holder Table
<S> <C> <C> <C> <C> <C> <C>
-------------------- ------------- ------------ ------------ ------------ ----------- ------------
Registrant's Common Preferred Common Total Percentage
Name and Relationship Shares Shares Shares Number Owned
Address With Selling Owned Owned Underlying Of Shares (if more
Of Security Prior To Prior To Preferred(1) Owned by than 1%)
Security Holder Holder Offering Offering or Security by Security
--------------- Within The -------- -------- Private Holder Holder
Past Equity After After
Three Line(2) Offering Offering
Years ---------- --------- --------
-----
-------------------- ------------- ------------ ------------ ------------ ----------- ------------
Charlton Avenue,
LLC Investor 197,349 Series K-470 3,643,411(1) 3,840,790 3.2%
c/o Citco Trustees
(Cayman) Limited 7,089,685(2)
P.O. Box 31106 SMB
Grand Cayman
Cayman Island,
British West
Indies
-------------------- ------------- ------------ ------------ ------------ ----------- ------------
</TABLE>
David Sims is the director of and has sole voting and investment control over
Charlton Avenue LLC.
Use Of Proceeds
The selling security holder is selling all of the shares covered by this
prospectus for its own account. Accordingly, we will not receive any proceeds
from the resale of the shares. Each time we sell our common stock, we will
provide a prospectus supplement. We will receive proceeds from any sales of
common stock under the Private Equity Agreement to Charlton. We intend to use
the net proceeds from sales under the Private Equity Agreement for general
corporate purposes, including working capital. We will bear all expenses
relating to this registration.
In the event that we sell shares pursuant to the Private Equity Agreement, we
intend to use $4.7 million of net proceeds plus the redemption premium to redeem
our Series K preferred stock, and the balance for general corporate purposes.
See "Financing/Equity Line of Credit".
Plan Of Distribution
Charlton is offering the shares of common stock purchased by it under the
Private Equity Agreement for its account as statutory underwriter, and not for
our account. We will not receive any proceeds from the sale of common stock by
Charlton. Charlton has agreed to be named as a statutory underwriter within the
meaning of the Securities Act of 1933 in connection with such sales of common
stock and will be acting as an underwriter in its resales of the common stock
under this prospectus. Charlton has, prior to any sales, agreed not to effect
any offers or sales of the common stock in any manner other than as specified in
the prospectus and not to purchase or induce others to purchase common stock in
violation of any applicable state and federal securities laws, rules and
regulations and the rules and regulations of the principal trading market of our
common stock.
To permit Charlton to resell the shares of common stock issued to it under the
Private Equity Agreement, we agreed to register those shares and to maintain
that registration. To that end, we agreed with Charlton that we will prepare and
file such amendments and supplements to the registration statement and the
prospectus as may be necessary in accordance with the Securities Act and the
related rules and regulations, in order to keep it effective until the earliest
of any of the following dates:
o The date that is one year after the completion of the last closing
under the Private Equity Agreement.
25
<PAGE>
o the date after which all of the common stock held by Charlton or its
transferees that are covered by the registration statement have been
transferred to persons who may trade such shares without restriction
under the Securities Act of 1933 or without volume limitations under
SEC rule 144;
o the date after which all of the shares of common stock held by
Charlton or its transferees that are covered by the registration
statement have been sold by Charlton or its transferees pursuant to
the registration statement;
The shares offered by this prospectus may be sold or distributed from time to
time by the selling security holder or by pledgees, donees or transferees of, or
successors in interest to, the selling security holder, 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 holder 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 holder. The selling
security holder 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 holder 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 holder 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 holder
can presently estimate the amount of such compensation. We know of no existing
arrangements between the selling security holder and any other security holder,
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 $11,030.
26
<PAGE>
We have informed the selling stockholder 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 holder 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.
Description Of Securities
Our authorized capital stock consists of 152,000,000 shares of capital stock of
which 150,000,000 shares are common stock, no par value, and 2,000,000 shares
are preferred stock, no par value. As of December 8, 2000, there were issued and
outstanding 109,672,166 shares of common stock, 475 shares of Series K
Convertible Preferred Stock, options to purchase 2,548,261 shares of common
stock and warrants to purchase 458,125 shares of 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.
27
<PAGE>
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 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 Matters
The validity of the common stock offered in this prospectus will be passed upon
for the Company by Robert B. Macaulay, Esq., Mitrani, Rynor, Adamsky, Macaulay &
Zorrilla, P.A., Miami, Florida.
28
<PAGE>
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.
29
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Report of Independent Certified Public Accountants F-1
Financial Statements
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5-10
Statement of Cash Flows F-11-12
Notes to Financial Statement F-13-49
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheets of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 2000 and 1999, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 2000 and 1999 and for the period December 10, 1993 (date of
inception) to June 30, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 2000 and 1999 and the results
of its operations and its cash flows for the years ended June 30, 2000 and 1999
and for the period December 10, 1993 (date of inception) to June 30, 2000 in
conformity with generally accepted accounting principles.
The Company is in the development stage as of June 30, 2000 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.
F-1
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses and
has yet to generate an internal cash flow that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 4. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 11, 2000
F-2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheets
June 30, 2000 and 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 159,126 $ 70,037
Loans receivable - employees 3,000 30,950
Inventory 2,595,878 3,698,343
Prepaid expenses 37,339 58,250
------ ------
Total current assets 2,795,343 3,857,580
--------- ---------
Property and equipment, net 2,525,287 2,707,994
Other assets 593,800 561,158
------- -------
$ 5,914,430 $ 7,126,732
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 995,954 $ 1,597,083
Loans payable 1,755,716 1,232,271
Current maturities of capital lease obligations 11,505 10,572
Other current liabilities 2,021,147 529,880
------- -------
Total current liabilities 4,784,322 3,369,806
--------- ---------
Convertible debenture -- 1,100,000
Long-term capital lease obligations 4,057 15,561
----- ------
Total liabilities 4,788,379 4,485,367
--------- ---------
Commitments and contingencies
Redeemable convertible preferred stock (Series G),
no par value; authorized 38 shares,
issued 0 and 38 shares , respectively -- 477,117
------- -------
Stockholders' equity:
Convertible preferred stock (Series B),
7% cumulative annual dividend, no par value;
authorized 450 shares,
issued 0 and 390 shares, respectively -- 3,900,000
Convertible preferred stock (Series H),
no par value; authorized 108 shares,
issued 0 and 68 shares, respectively -- 680,000
Convertible preferred stock (Series I),
7% cumulative annual dividend, no par value;
authorized 138 shares,
issued 0 and 138 shares, respectively -- 1,380,000
Common stock, no par value; authorized 150,000,000
shares, issued 105,511,678
and 49,297,675 shares, respectively 42,818,057 29,820,729
Additional paid-in capital 1,597,780 1,490,827
Deficit accumulated during the development stage (43,261,878) (35,092,999)
----------- -----------
1,153,959 2,178,557
Less: subscriptions receivable (27,908) (14,309)
------- -------
Total stockholders' equity 1,126,051 2,164,248
--------- ---------
$ 5,914,430 $ 7,126,732
============ ============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 2,982,966 $ 1,477,296 $ 10,935,500
Research and development 852,701 944,500 3,542,290
Research and development expenses 2,525 71,508 2,992,927
Advertising and promotion expenses 31,932 27,273 933,046
Selling, general and administrative expenses 388,789 385,824 2,076,750
Clinical expenses 68,198 16,764 445,637
Consulting expenses 148,972 89,637 3,175,193
Insurance costs 174,806 172,416 676,013
Inventory valuation adjustments 776,157 -- 776,157
Inventory restocking costs 377,006 -- 377,006
Professional fees 227,345 292,828 1,872,008
Stockholder expenses 62,506 65,165 224,181
Trade show expenses 155,536 151,403 812,397
Travel and subsistence costs 255,304 111,361 823,824
Rent expense 15,539 28,808 291,808
Interest expense 967,652 688,644 1,738,892
Loan placement expenses and fees 205,000 201,494 406,494
Depreciation and amortization 304,582 312,956 1,293,400
Amortization of deferred compensation -- 1,510,437 4,064,250
Liquidated damages costs 31,000 260,000 291,000
Interest income (5,587) (1,120) (204,124)
------------ ------------ ------------
8,022,929 6,807,194 37,544,649
------------ ------------ ------------
Net loss (8,022,929) (6,807,194) (37,544,649)
Dividends on cumulative preferred stock:
From discount at issuance -- (619,974) (4,694,583)
Earned (145,950) (329,176) (1,022,646)
------------ ------------ ------------
Net loss applicable to common shareholders $ (8,168,879) $ (7,756,344) $(43,261,878)
============ ============ ============
Net loss per common share:
Basic
Net loss per common share $ (.10) $ (.20) $ (1.30)
============ ============ ============
Weighted average number of common shares 79,222,066 39,333,668 33,160,714
============ ============ ============
Diluted
Net loss per common share $ (.10) $ (.20) $ (1.30)
============ ============ ============
Weighted average number of common shares 79,222,066 39,333,668 33,160,714
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity
From December 10, 1993 (date of inception) to June 30, 2000
Preferred Stock (**) Common Stock Additional
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 10, 1993 (date of inception) 0 $- 0 $ -- $ --
Issuance of common stock, restated for reverse
stock split -- -- 510,000 50,000 --
Acquisition of public shell -- -- 178,752 --
Net issuance of additional shares of stock -- -- 15,342,520 16,451
Common stock sold -- -- 36,500 36,500
Net loss -- -- --
----------- --- ----------- ----------- -----------
Balance at June 30, 1994 -- -- 16,067,772 102,951 --
Common stock sold -- -- 1,980,791 1,566,595 --
Common stock issued in exchange for services -- -- 115,650 102,942 --
Common stock issued with employment agreements -- -- 75,000 78,750 --
Common stock issued for compensation -- -- 377,500 151,000 --
Stock options granted -- -- -- -- 622,500
Amortization of deferred compentsation -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 50,333
Net loss -- -- -- -- --
----------- --- ----------- ----------- -----------
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
----------- --- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 10, 1993 (date of inception) $ -- $ -- $ -- $ --
Issuance of common stock, restated for reverse
stock split -- -- -- 50,000
Acquisition of public shell -- -- -- --
Net issuance of additional shares of stock -- -- -- 16,451
Common stock sold -- -- -- 36,500
Net loss -- (66,951) -- (66,951)
----------- ----------- ----------- -----------
Balance at June 30, 1994 (66,951) -- -- 36,000
Common stock sold -- (523,118) -- 1,043,477
Common stock issued in exchange for services -- -- -- 102,942
Common stock issued with employment agreements -- -- -- 78,750
Common stock issued for compensation -- -- -- 151,000
Stock options granted -- -- (622,500) --
Amortization of deferred compentsation -- -- 114,375 114,375
Forgiveness of officers' compensation -- -- -- 50,333
Net loss (1,086,436) -- -- (1,086,436)
----------- ----------- ----------- -----------
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
Preferred Stock (**) Common Stock Additional
-----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
----------- ----------- ----------- ----------- -----------
Preferred stock sold, including dividends 4,000 3,600,000 -- -- 1,335,474
Common stock sold -- -- 700,471 1,561,110 --
Cancellation of stock subscription -- -- (410,500) (405,130) --
Common stock issued in exchange for services -- -- 2,503,789 4,257,320 --
Common stock issued with exercise of stock options -- -- 191,500 104,375 --
Common stock issued with exercise of options
for compensation -- -- 996,400 567,164 --
Conversion of preferred stock to common stock (1,600) (1,440,000) 420,662 1,974,190 (534,190)
Common stock issued as payment of preferred
stock dividends -- -- 4,754 14,629 --
Dividends accrued on preferred stock not
yet converted -- -- -- -- --
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compentsation -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 100,667
Net loss (restated) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ----------- ----------- -----------
Preferred stock sold, including dividends (1,335,474) -- -- 3,600,000
Common stock sold -- -- -- 1,561,110
Cancellation of stock subscription -- 405,130 -- --
Common stock issued in exchange for services -- -- -- 4,257,320
Common stock issued with exercise of stock options -- (4,375) -- 100,000
Common stock issued with exercise of options
for compensation -- -- -- 567,164
Conversion of preferred stock to common stock -- -- -- --
Common stock issued as payment of preferred
stock dividends (14,629) -- -- --
Dividends accrued on preferred stock not
yet converted (33,216) -- -- (33,216)
Collection of stock subscriptions -- 103,679 -- 103,679
Amortization of deferred compentsation -- -- 232,500 232,500
Forgiveness of officers' compensation -- -- -- 100,667
Net loss (restated) (6,933,310) -- -- (6,933,310)
----------- ----------- ----------- -----------
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
Preferred Stock (**) Common Stock Additional
----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
----------- ----------- ----------- ----------- -----------
Preferred stock sold, including dividends 450 4,500,000 -- -- 998,120
Conversion of preferred stock to common stock (2,400) (2,160,000) 1,061,202 2,961,284 (801,284)
Common stock issued in exchange for services -- -- 234,200 650,129 --
Common stock issued for compensation -- -- 353,200 918,364 --
Common stock issued with exercise of stock options -- -- 361,933 1,136,953 --
Common stock issued to employee -- -- (150,000) (52,500) --
Common stock issued as payment of preferred
stock dividends -- -- 20,760 49,603 --
Dividends accrued on preferred stock not
yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,891,500
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compentsation -- -- -- -- --
Net loss (restated) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
----------- ----------- ----------- -----------
Preferred stock sold, including dividends (998,120) -- -- 4,500,000
Conversion of preferred stock to common stock -- -- -- --
Common stock issued in exchange for services -- -- -- 650,129
Common stock issued for compensation -- -- -- 918,364
Common stock issued with exercise of stock options -- (33,750) -- 1,103,203
Common stock issued to employee -- -- -- (52,500)
Common stock issued as payment of preferred
stock dividends (16,387) -- -- 33,216
Dividends accrued on preferred stock not
yet converted (168,288) -- -- (168,288)
Stock options granted -- -- (1,891,500) --
Collection of stock subscriptions -- 16,875 -- 16,875
Amortization of deferred compentsation -- -- 788,000 788,000
Net loss (restated) (7,646,119) -- -- (7,646,119)
----------- ----------- ----------- -----------
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
Preferred Stock (**) Common Stock Additional
----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
----------- ----------- ----------- ----------- -----------
Preferred stock sold, including dividends
and placement fees 501 5,010,000 -- -- 1,290,515
Conversion of preferred stock to common stock (340) (3,400,000) 6,502,448 4,644,307 (1,210,414)
Common stock sold -- -- 500,000 200,000 --
Common stock issued in exchange for services -- -- 956,000 1,419,130 --
Common stock issued for compensation -- -- 64,300 54,408 --
Common stock issued with exercise of stock options -- -- 65,712 22,999 --
Common stock issued in exchange for
licensing agreement -- -- 3,500,000 1,890,000 (3,199,000)
Dividends accrued on preferred stock not
yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,340,625
Collection of stock subscriptions -- -- -- 12,500 --
Amortization of deferred compentsation -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 611 6,110,000 36,493,544 23,983,073 1,884,846
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
----------- ----------- ----------- -----------
Preferred stock sold, including dividends
and placement fees (1,741,015) -- -- 4,559,500
Conversion of preferred stock to common stock -- -- -- 33,893
Common stock sold -- -- -- 200,000
Common stock issued in exchange for services -- -- -- 1,419,130
Common stock issued for compensation -- -- -- 54,408
Common stock issued with exercise of stock options -- -- -- 22,999
Common stock issued in exchange for
licensing agreement -- -- -- (1,309,000)
Dividends accrued on preferred stock not
yet converted (315,000) -- -- (315,000)
Stock options granted -- -- (1,340,625) --
Collection of stock subscriptions -- 21,250 -- 33,750
Amortization of deferred compentsation -- -- 1,418,938 1,418,938
Net loss (6,981,710) -- -- (6,981,710)
----------- ----------- ----------- -----------
Balance at June 30, 1998 (27,336,655) (14,309) (1,300,812) 3,326,143
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
Preferred Stock (**) Common Stock Additional
----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 611 6,110,000 36,493,544 23,983,073 1,884,846
----------- ----------- ----------- ----------- -----------
Preferred stock issued - satisfaction of debt 138 1,380,000 -- -- (161,348)
Conversion of preferred stock to common stock (153) (1,530,000) 4,865,034 1,972,296 (442,296)
Common stock sold -- -- 200,000 60,000 --
Common stock issued - exchange for services
and compensation -- -- 719,442 301,210 --
Common stock issued - repayment of debt -- -- 2,974,043 1,196,992 --
Common stock issued in exchange for loan fees -- -- 480,000 292,694 --
Common stock issued with exercise of stock options -- -- 65,612 124,464 --
Common stock issued in satisfaction of
licensing agreement payable -- -- 3,500,000 1,890,000 --
Redeemable preferred stock sold, deemed dividend -- -- -- -- --
Dividends accrued-preferred stock not yet converted -- -- -- -- --
Stock options granted -- -- -- -- 209,625
Amortization of deferred compentsation -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 596 5,960,000 49,297,675 29,820,729 1,490,827
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1998 (27,336,655) (14,309) (1,300,812) 3,326,143
----------- ----------- ----------- -----------
Preferred stock issued - satisfaction of debt (492,857) -- -- 725,795
Conversion of preferred stock to common stock -- -- -- --
Common stock sold -- -- -- 60,000
Common stock issued - exchange for services
and compensation -- -- -- 301,210
Common stock issued - repayment of debt -- -- -- 1,196,992
Common stock issued in exchange for loan fees -- -- -- 292,694
Common stock issued with exercise of stock options -- -- -- 124,464
Common stock issued in satisfaction of
licensing agreement payable -- -- -- 1,890,000
Redeemable preferred stock sold, deemed dividend (127,117) -- -- (127,117)
Dividends accrued-preferred stock not yet converted (329,176) -- -- (329,176)
Stock options granted -- -- (209,625) --
Amortization of deferred compentsation -- -- 1,510,437 1,510,437
Net loss (6,807,194) -- -- (6,807,194)
----------- ----------- ----------- -----------
Balance at June 30, 1999 (35,092,999) (14,309) -- 2,164,248
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2000
Preferred Stock (**) Common Stock Additional
-----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999 596 5,960,000 49,297,675 29,820,729 1,490,827
------------ ------------ ------------ ------------ ------------
Conversion of convertible debentures -- -- 4,060,398 3,958,223 --
Conversion of preferred stock to common, net (596) (5,960,000) 45,415,734 7,313,334 (648,885)
Common stock sold -- -- 100,000 157,000 --
Common stock issued - exchange for services
and compensation, net of cancelled shares -- -- 137,000 (18,675) --
Common stock issued - repayment of debt
and accrued interest -- -- 5,061,294 1,067,665 --
Common stock issued in exchange for
interest and loan fees -- -- 7,297 2,408 --
Common stock issued with exercise of stock options -- -- 1,281,628 395,810 157,988
Common stock issued with exercise of warrants -- -- 150,652 121,563 97,850
Issuance of note payable with warrants at a discount -- -- -- -- 500,000
Dividends accrued-preferred stock not yet converted -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 -- $ -- 105,511,678 $ 42,818,057 $ 1,597,780
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1999 (35,092,999) (14,309) -- 2,164,248
------------ ------------ --- ------------
Conversion of convertible debentures -- -- -- 3,958,223
Conversion of preferred stock to common, net -- -- -- 704,449
Common stock sold -- -- -- 157,000
Common stock issued - exchange for services
and compensation, net of cancelled shares -- -- -- (18,675)
Common stock issued - repayment of debt
and accrued interest -- -- -- 1,067,665
Common stock issued in exchange for
interest and loan fees -- -- -- 2,408
Common stock issued with exercise of stock options -- (13,599) -- 540,199
Common stock issued with exercise of warrants -- -- -- 219,413
Issuance of note payable with warrants at a discount -- -- -- 500,000
Dividends accrued-preferred stock not yet converted (145,950) -- -- (145,950)
Net loss (8,022,929) -- -- (8,022,929)
------------ ------------ --- ------------
Balance at June 30, 2000 $(43,261,878) $ (27,908) $-- $ 1,126,051
============ ============ === ============
</TABLE>
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F-10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- -------------- --------------
<S> <C> <C> <C>
Net loss $ (8,022,929) $ (6,807,194) $(37,544,649)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 304,582 312,956 1,293,400
Amortization of deferred compensation -- 1,510,437 4,064,250
Noncash interest, compensation and consulting expenses 1,811,817 593,904 9,793,868
(Increase) decrease in loans receivable - other 14,351 (44,310) (41,686)
(Increase) decrease in inventory 1,102,465 (484,298) 462,385
(Increase) decrease in prepaid expenses 20,911 (24,711) (37,339)
(Increase) decrease in other assets 1,870 91,758 (13,835)
Increase (decrease) in accounts payable and
accrued expenses (749,699) 887,828 1,030,334
Increase (decrease) in other current liabilities 1,491,267 263,902 2,021,147
---------- ------------ ------------
Total adjustments 3,997,564 3,107,466 18,572,524
----------- ------------ ------------
Net cash used for operating activities (4,025,365) (3,699,728) (18,972,125)
------------ ------------ ------------
Cash flows from investing activities:
Prototype equipment -- -- (2,799,031)
Capital expenditures (84,956) (64,423) (3,810,373)
------------ ------------ ------------
Net cash used for investing activities (84,956) (64,423) (6,609,404)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (10,571) (9,716) (34,727)
Proceeds from convertible debenture 2,140,000 1,100,000 3,240,000
Proceeds from loan payable, net 1,395,608 1,869,324 3,550,339
Proceeds from issuance of preferred stock -- 380,000 13,039,500
Net proceeds from issuance of common stock 674,373 184,464 5,945,543
------------ ------------ ------------
Net cash provided by financing activities 4,199,410 3,524,072 25,740,655
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 89,089 (240,079) 159,126
Cash and cash equivalents at beginning of period 70,037 310,116 -0-
------------ ------------ ------------
Cash and cash equivalents at end of period $ 159,126 $ 70,037 $ 159,126
============ ============ ============
</TABLE>
(Continued)
See accompanying notes to the financial statements.
F-11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 21,077 $ 16,628 $ 67,863
============== ========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ - $ 221,788 $ 4,837,747
============== ========== ===========
Issuance of common stock as loan fees in
connection with loans to the Company $ 1,000 $ 292,694 $ 293,694
============== ========== ===========
Issuance of common stock as satisfaction of
loans payable and accrued interest $ 1,066,665 $ 939,100 $ 2,005,765
============== ========== ===========
Issuance of common stock as satisfaction of
certain accounts payable $ - $ 257,892 $ 257,892
============== ========== ===========
Issuance of common stock in
exchange for property and equipment $ - $ - $ 89,650
============== ========== ===========
Issuance of common stock and other current liability
in exchange for patent licensing agreement $ - $ - $ 581,000
============== ========== ===========
Issuance of common stock for
compensation $ 79,175 $ 79,422 $ 1,849,533
============== ========== ===========
Issuance of common stock through
exercise of incentive stock options $ 157,988 $ - $ 1,261,191
============== ========== ===========
Issuance of common stock as
payment for preferred stock dividends $ 236,993 $ - $ 301,225
============== ========== ===========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ - $ - $ 50,289
============== ========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc.("IDSI-Fl."). IDSI-Fl. was formed
on December 10, 1993.(see Note 3) Effective July 1, 1995 the Company changed its
corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial Computed Tomography Laser Mammography ("CTLM(TM)")
prototype has been developed with the use of "Ultrafast Laser Imaging
Technology"TM, and this technology was first introduced at the "RSNA" scientific
assembly and conference during late November 1994. The completed CTLM(TM) device
was exhibited at the "RSNA" conference November 26-30, 1995. The Company has
continued to exhibit its latest technology and clinical images at the RSNA
conferences held annually in Chicago during the last week of November.
The initial CTLM(TM) prototype produced live images of an augmented breast on
February 23, 1995. From the experience gained with this initial prototype, the
Company continued its research and development resulting in new hardware and
software enhancements. During 1999, the FDA granted the Company's request to
expand the clinical investigational trials to Nassau County Medical Center
("NCMC") in East Meadow, NY and University of Virginia Health Systems ("UVA") in
Charlottesville, VA.
On June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995 was granted with 7 independent
and 16 subordinate claims. Foreign patent applications have been filed and are
pending. On September 14, 1999, the Company was advised by patent counsel that a
patent for laser imaging apparatus using biomedical markers that bind to cancer
cells was issued.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
CTLM(TM) device is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(Continued)
F-13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Cash and cash equivalents
Holdings of highly liquid investments with original maturities
of three months or less and investment in money market funds are
considered to be cash equivalents by the Company.
(c) Inventory
Inventories, consisting principally of raw materials,
work-in-process and completed units under testing, are carried
at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
(d) Prototype equipment
The direct costs associated with the final CTLM(TM) prototypes
have been capitalized. On June 17, 1996 the Company's Director
of Research and Development and the Director of Engineering
decided to discontinue with the development of the then current
generation proprietary scanner and data collection system
(components of the prototype CTLM(TM) device) and to begin
development of a third generation scanner and data collection
system. As a result, certain items amounting to $677,395 were
reclassified as follows: $512,453 as research and development
expense and $164,942 as computer and lab equipment. The original
amortization period of two years was increased to five years to
provide for the estimated period of time the clinical equipment
would be in service to gain FDA approval.
During the fiscal year ended June 30, 1998, the costs associated
with the various pre-production units available for sale have
been reclassified as inventory and the remaining costs which
will no longer benefit future periods were expensed to research
and development costs.
(Continued)
F-14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using straight-line methods over the estimated useful
lives of the related assets.
Under the criteria set forth in Statement of Financial
Accounting Standards No. 86, capitalization of software
development costs begins upon the establishment of technological
feasibility for the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgement by management with
respect to certain external factors, including, but not limited
to, anticipated future gross product revenues, estimated
economic life and changes in software and hardware technology.
After considering the above factors, the Company has determined
that software development costs, incurred subsequent to the
initial acquisition of the basic software technology, should be
properly expensed. Such costs are included in research and
development expense in the accompanying statements of
operations.
(f) Research and development
Research and development expenses consist principally of
expenditures for equipment and outside third-party consultants
which are used in testing and the development of the Company's
CTLM(TM) device, product software and compensation to specific
company personnel. The non-payroll related expenses include
testing at outside laboratories, parts associated with the
design of initial components and tooling costs, and other costs
which do not remain with the developed CTLM(TM) device. The
software development costs are with outside third-party
consultants involved with the implementation of final changes to
the developed software. All research and development costs are
expensed as incurred.
(g) Net loss per share
In 1998, the Company adopted SFAS No. 128, ("Earnings Per
Share"), which requires the reporting of both basic and diluted
earnings per share. Basic net loss per share is determined by
dividing loss available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that
could occur if options or other contracts to issue common stock
were exercised or converted into common stock, as long as the
effect of their inclusion is not anti-dilutive.
(Continued)
F-15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Patent license agreement
The patent license agreement will be amortized over the
seventeen year life of the patent, the term of the agreement.
(i) Stock-based compensation
The Company adopted Statement of Financial Accounting Standards
No. 123. "Accounting for Stock-Based Compensation" ("SFAS 123"),
in fiscal 1997. As permitted by SFAS 123, the Company continues
to measure compensation costs in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", but provides pro forma disclosures of net loss and
loss per share as if the fair value method (as defined in SFAS
123) had been applied beginning in fiscal 1997.
(j) Long-lived assets
Effective July 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121. "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). This statement requires
companies to write down to estimated fair value long-lived
assets that are impaired. The Company reviews its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable. In performing the review of recoverability
the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the
sum of the expected future cash flows is less than the carrying
amount of the assets, an impairment loss is recognized. The
Company has determined that no impairment losses need to be
recognized through the fiscal year ended June 30, 2000.
(k) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of
Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires an asset and liability
approach for financial accounting and reporting for income
taxes. Under SFAS 109, the effect on deferred taxes of a change
in tax rates is recognized in income in the year that includes
the enactment date.
(Continued)
F-16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Deemed preferred stock dividend
The accretion resulting from the incremental yield embedded in
the conversion terms of the convertible preferred stock is
computed based upon the discount from market of the common stock
at the date the preferred stock was issued. The resulting deemed
preferred stock dividend subsequently increases the value of the
common shares upon conversion.
(m) Discount on convertible debt
The discount which arises as a result of the allocation of
proceeds to the beneficial conversion feature upon the issuance
of the convertible debt increases the effective interest rate of
the convertible debt and will be reflected as a charge to
interest expense. The amortization period will be from the date
of the convertible debt to the date the debt first becomes
convertible.
(n) Comprehensive income
SFAS 130, "Reporting Comprehensive Income", requires a full set
of general purpose financial statements to be expanded to
include the reporting of "comprehensive income". Comprehensive
income is comprised of two components, net income and other
comprehensive income. For the period from December 10, 1993
(date of inception) to June 30, 2000, the Company had no items
qualifying as other comprehensive income.
(o) Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to conform with the current period
presentation.
(Continued)
F-17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(3) MERGER
On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and
outstanding shares of Alkan Corp. The transaction was accounted for as a reverse
merger in accordance with Accounting Principles Board Opinion #16, wherein the
shareholders of IDSI-Fl.retained the majority of the outstanding stock of Alkan
Corp. after the merger.(see Note 16)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(4) GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. To date, management has been able to
raise the necessary capital to reach this stage of product development and has
been able to fund any capital requirements. However, there is no assurance that
once the development of the CTLM(TM) device is completed and finally gains
Federal Drug Administration marketing clearance, that the Company will achieve a
profitable level of operations.
(Continued)
F-18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(5) INVENTORIES
Inventories consisted of the following:
June 30,
-------------------------------
2000 1999
-------------- -------------
Raw materials $ 2,156,329 $ 2,125,035
Work-in process 15,487 391,875
Completed units under testing 424,062 1,181,433
------------ ------------
$ 2,595,878 $ 3,698,343
=========== ============
(6) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
June 30,
---------------------------
2000 1999
------------ -------------
Furniture and fixtures $ 261,625 $ 246,730
Building and land (See Note 11) 2,084,085 2,084,085
Clinical equipment 30,714 30,714
Computers and equipment 584,768 516,551
CTLM(TM) software costs 352,932 352,932
Trade show equipment 154,468 154,468
Laboratory equipment 193,392 191,548
----------- -----------
3,661,984 3,577,028
Less: accumulated depreciation (1,136,697) (869,034)
----------- -----------
Totals $ 2,525,287 $ 2,707,994
=========== ===========
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM(TM) software costs 5 years
(Continued)
F-19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(6) PROPERTY AND EQUIPMENT (Continued)
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM(TM) software at June 30, 2000 and 1999 are $16,241 and $67,666,
respectively, which represents the net realizable value of the CTLM(TM) software
at the end of each period presented.
Amortization expense related to the CTLM(TM) software for each period presented
in the statement of operations is as follows:
Period ended Amount
------------ ---------
6/30/00 $ 51,425
6/30/99 70,514
6/30/98 70,587
Prior 144,165
---------
Total $ 336,691
=========
(7) OTHER ASSETS
Other assets consist of the following:
June 30,
--------------------
2000 1999
-------- --------
Patent license agreement, net of accumulated
amortization of $68,353 and $34,176, respectively $512,647 $546,824
UL and CE approvals, net of accumulated
amortization of $4,113 and $1,371, respectively 4,113 6,854
Unamortized debt discount (See Note 10) 71,430 -
Security deposits 5,610 7,480
-------- --------
Totals $593,800 $561,158
======== ========
During June 1998, the Company finalized an exclusive Patent License Agreement
with its chief executive officer. The officer is the owner of patents issued on
December 2, 1997 which encompasses the technology of the CTLM(TM) . Pursuant to
the terms of the agreement, the Company was granted the exclusive right to
modify, customize, maintain, incorporate, manufacture, sell, and otherwise
utilize and practice the Patent, all improvements thereto and all technology
related to the process, throughout the world. The license shall apply to any
extension or re-issue of the Patent. The term of license is for the life of the
Patent and any renewal thereof, subject to termination, under certain
conditions. As consideration for the License, the Company issued to the officer
7,000,000 shares of common stock (See Note 16). The License agreement has been
recorded at the historical cost basis of the chief executive officer, who owns
the patent.
(Continued)
F-20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
-------------------------------
2000 1999
------------- -----------
Accounts payable - trade $ 561,947 $ 773,827
Preferred stock dividends payable -- 86,669
Accrued property taxes payable 14,085 15,585
Accrued compensated absences 39,725 30,297
Accrued interest payable 82,041 461,462
Liquidated damages payable (see Note 15) 151,000 120,000
Accrued wages payable 89,839 109,243
Other 57,317 --
---------- ----------
Totals $ 995,954 $1,597,083
========== ==========
(9) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
June 30,
--------------------------------
2000 1999
-------------- ---------------
Accrued compensation-stock options $ 2,021,147 $ 529,880
------------- -------------
$ 2,021,147 $ 529,880
============= =============
(10) LOANS PAYABLE
Loans payable consisted of the following:
June 30,
-------------------------
2000 1999
----------- ----------
Loans and note payable $ 910,407 $ 300,407
Loans payable to officers, net of loan receivable
of $11,712 and 13,359, respectively 345,309 443,864
Loans payable to related parties 500,000 488,000
------------- ----------
$ 1,755,716 $ 1,232,271
=========== ===========
(Continued)
F-21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(10) LOANS PAYABLE (Continued)
The Company has borrowed a total of $475,407, from an unrelated third-party on
an unsecured basis. The loan accrues interest at a rate of 6% per annum and is
payable on demand. The Company has repaid $175,000 as of June 30, 2000. Accrued
interest of $54,452 is reflected in accrued expenses on the balance sheet.
Additionally, on January 27, 2000 the Company borrowed $500,000 from an
unrelated third-party on an unsecured basis. The holder had the option to be
repaid in warrants, at an exercise price of $.35 per share. As the Company's
common stock was trading in excess of the $.35 at the date of the note, a
discount of $500,000 was recorded on the transaction, in accordance with the
guidelines of EITF Abstract No. 96-13. The discount is being amortized over the
term of the note (see Note 7). The note and accrued interest ($530,000) was
repaid on July 18, 2000. Finally, on June 8, 2000, the Company issued a 10%
convertible promissory note in the amount of $110,000. The note was to be repaid
on July 10, 2000, or it would be converted into convertible preferred stock at
the option of the holder. If the closing of the pending convertible preferred
stock issuance did not take place on July 10, 2000, the Company would issue to
the note holder, a warrant to purchase 50,000 shares of the Company's common
stock at an exercise price equal to 110% of the closing price of the common
stock at such date provided under the terms of the agreement. On August 23,
2000, the Company repaid the $110,000 debenture, including accrued interest of
$2,291, and issued a warrant to purchase 50,000 shares of the Company's stock at
an exercise price of $1.452 per share.
During the year ended June 30, 1999, the officers of the Company made loans
totaling $1,433,487. The loans were non-interest bearing and originally due by
August 31, 1999. On May 18, 1999 the officers were issued a total of 2,171,743
shares of stock as full satisfaction ($874,100) of the loans outstanding at that
date. During the year ended June 30, 2000, the officers loaned an additional
$352,241. During the year ended June 30, 2000 a portion of the loans were
repaid, $21,633 in cash and $430,795 in common stock of the Company .
The Company had received various loans from related parties (stockholders of the
Company) during the year ended June 30, 1999 totaling $1,093,000. A total of
$605,000 had been repaid as of June 30, 1999. These loans bore interest at rates
varying from 6% to 15%, and accrued interest as of June 30, 1999 amounted to
$38,921. An additional $600,000 was loaned by related parties during the year
ended June 30, 2000. The Company repaid a total of $588,000 ( $35,000 in cash
and $553,000 in common stock of the Company) during the year ended June 30,
2000, including accrued interest of $85,945 ($5,000 in cash and $80,945 in
common stock). The remaining balance of $500,000 was repaid on July 18, 2000.
(Continued)
F-22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) CONVERTIBLE DEBENTURES
The Company entered into a Subscription Agreement with the Purchaser of the
Series B Convertible Preferred Stock on April 6, 1999 (see Note 15). The
Purchaser agreed to purchase $2,750,000 of the Company's Debentures. The
Debentures had a 7% premium, to be paid in cash, or freely trading common stock
in the Company's sole discretion, at the time of each conversion ("the Dividend
Payment Date"). The Debentures were subject to automatic conversion at the end
of the two years from the date of issuance, at which time all Debentures
outstanding would be converted based upon a formula detailed within the
Debenture document.
The Debentures were secured by a mortgage on the Company's land and building
(see Note 6). The mortgage shall only be released upon the Company meeting
certain conditions described in the mortgage document. The funds were available
to the Company as follows:
1. The Purchaser irrevocably agreed to purchase $1,100,000 of
the Debentures, which will net the Company proceeds of
$1,000,000 after fees.
2. The Company may draw a second $825,000 ($750,000 net of fees)
anytime thirty days after the effective date of the S-2
Registration Statement (July 29, 2000), as long as the Company
maintains an average bid price of $.45 for the ten trading days
immediately prior to the Company's request for the funding.
3. The Company may draw a final $825,000 ($750,000 net of fees)
anytime sixty days after the effective date of the Registration
Statement, as long as the Company maintains an average bid price
of $.45 for the ten trading days immediately prior to the
Company's request for the funding.
The Series I Preferred and the Debenture also limited the Holders to ownership
of not more than 4.99% of the Company's outstanding common stock at any one
time. The shares underlying the Series B Preferred, the Series I Preferred and
the Debentures had registration rights and were registered in the Company's S-2
Registration Statement.
The Company was able to borrow a revised total of $3,080,000 under the
debenture. The entire amount, including interest of $171,205, was converted
during the year ended June 30, 2000 into 3,908,883 shares of the Company's
common stock. The interest relating to the discount at issuance of $367,972 was
expensed during the year ended June 30, 1999, as the debenture could have been
converted immediately, and would ultimately have no conversion period.
(Continued)
F-23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) CONVERTIBLE DEBENTURES (Continued)
During the year ended June 30, 2000, the Company issued additional convertible
debentures totaling $161,000. In August 1999, the Company received $51,000 (net
proceeds to the Company of $50,000), which was converted into 158,812 shares of
stock on December 31, 1999. The debenture had provided for a 40% discount on the
conversion price per share, and as a result the Company had recorded a discount
of $15,938 at the issuance of the debenture and expensed the discount during
that quarter. A total of $1,408 of accrued interest was included in the shares
issued at conversion.
(12) LEASES
The Company has entered into a lease arrangement which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 6) and the obligation has been
recorded as debt. At June 30, 2000, approximate future minimum lease payments
under capitalized lease obligations were as follows:
Year ending June 30,
-------------------
2001 $ 12,384
2002 4,128
--------
Total minimum lease payments 16,512
Less amount representing interest (950)
--------
Present value of net minimum lease payments 15,562
Less current portion (11,505)
--------
Long-term portion $ 4,057
========
The Company also leases certain office equipment under an operating lease
expiring in June 2002.
Minimum future lease payments under the non-cancelable operating lease having a
remaining term in excess of one year as of June 30, 2000 are as follows:
Year ending June 30, Amount
-------------------- --------
2001 $ 3,676
2002 3,676
---------
Total minimum future lease payments $ 7,352
=========
(Continued)
F-24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $27,796,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $9,451,000 and $7,716,000 at June 30, 2000 and 1999, respectively.
The Company has reduced the deferred tax asset resulting from its tax loss
carryforwards by a valuation allowance of an equal amount as the realization of
the deferred tax asset is uncertain. The net change in the deferred tax asset
and valuation allowance from July 1, 1999 to June 30, 2000 was an increase of
approximately $1,735,000.
(14) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 17, 1999, the Company finalized the private placement to foreign
investors of 35 shares of its Series G Redeemable Convertible Preferred Stock at
a purchase price of $10,000 per share and two year warrants to purchase 65,625
shares of the Company's common stock at an exercise price of $.50 per share. The
agreement was executed pursuant to Regulation D as promulgated by the Securities
Act of 1933, as amended. A total of 43,125 warrants were exercised during the
year ended June 30, 2000, and an additional 9,375 warrants were exercised
subsequent to June 30, 2000.
The Series G Preferred Stock had no dividend provisions. The preferred stock was
convertible, at any time, for a period of two years thereafter, in whole or in
part, without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula stated that the holder of the
Series G Preferred Stock would receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to the lesser of $.54 or seventy-five
percent (75%) of the Average Closing Price of the Company's common stock for the
ten-day trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued three preferred shares to an
unaffiliated investment banker for placement and legal fees, providing net
proceeds to the Company of $350,000. The shares underlying the preferred shares
and warrant are entitled to demand registration rights under certain conditions.
(Continued)
F-25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) REDEEMABLE CONVERTIBLE PREFERRED STOCK (Continued)
Pursuant to the Registration Rights Agreement ("RRA") the Company was required
to register 100% of the number of shares that would be required to be issued if
the Preferred Stock were converted on the day before the filing of the S-2
Registration Statement. In the event the Registration Statement was not declared
effective within 120 days, the Series G Holders had the right to force the
Company to redeem the Series G Preferred Stock at a redemption price of 120% of
the face value of the preferred stock. The Registration Statement was declared
effective on July 29, 2000. During the year ended June 30, 2000, the Series G
Preferred Stock was converted into 3,834,492 shares of the Company's common
stock.
(15) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock. All Series of the convertible preferred stock are not redeemable and
automatically convert into shares of common stock at the conversion rates three
years after issuance.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000 per
share, with net proceeds to the Company, after commissions and issuance costs,
amounting to $3,600,000.
The holders of the Series A Preferred Stock could have converted up to 50% prior
to May 28, 1996, and may convert their remaining shares subsequent to May 28,
1996 without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Preferred Stock will receive shares determined by dividing (i) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.
(Continued)
F-26
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Series A Convertible Preferred
Stock.The holders of the Series A Preferred Stock are also entitled to receive a
five percent (5%) per share, per annum dividend out of legally available funds
and to the extent permitted by law. These dividends are payable quarterly on the
last business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series A Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series A Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
A Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.
The holders of the Series B Preferred Stock could have converted up to 34% of
the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may
convert their remaining shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration, into fully paid and nonassessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (i) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty-two percent (82%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than $3.85. The warrants are exercisable at
any time for an exercise price of $5.00 and will expire five years from the date
of issue.
(Continued)
F-27
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
On September 4, 1998, the Company received a notice of conversion from the
Series B Holders. The Series B Holders filed a lawsuit against the Company on
October 7, 1998. The Company was served on October 19, 1998. The lawsuit alleged
that the Company has breached its contract of sale to the Series B Holders by
failing to convert the Series B Holders and failure to register the common stock
underlying the Preferred Stock. The Series B Holders demanded damages in excess
of $75,000, to be determined at trial, together with interest costs and legal
fees. On April 6, 1999, the Series B Holders sold their preferred stock to an
unaffiliated third party ("the Purchaser") with no prior relationship to the
Company, or the Series B Holders. As part of the purchase agreement, the Series
B Holders were required to dismiss the lawsuit with prejudice and the Company
and the Series B Holders exchanged mutual general releases (see Series I).
As of June 30, 2000, the Series B Preferred Stock has been converted into
30,463,164 shares of the Company's common stock, and 60 shares were canceled at
the request of the holder.
During the years ended June 30, 1999 and 1998 the Company issued a total of six
Private Placements of convertible preferred stock (see schedule incorporated
into Note 15). The Private Placements are summarized as follows:
(Continued)
F-28
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
Series C Preferred Stock
On October 6, 1997, the Company finalized the private placement to foreign
investors of 210 shares of its Series C Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 160,000
shares of the Company's common stock at an exercise price of $1.63 per share,
and warrants to purchase up to 50,000 shares of the Company's common stock at an
exercise price of $1.562 per share. The agreement was executed pursuant to
Regulation S as promulgated by the Securities Act of 1933, as amended. As of
June 30, 2000 none of the warrants had been exercised.
The Series C Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in whole
or in part, without the payment of any additional consideration, into fully paid
and nonassessable shares of the Company's no par value common stock based upon
the "conversion formula". The conversion formula states that the holder of the
Series C Preferred Stock will receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock; however, in no event will
the "Conversion Price" be greater than $1.222. Pursuant to the Regulation S
documents, the Company was also required to escrow an aggregate of 3,435,583
shares of its common stock (200% of the number of shares the investor would have
received had the shares been converted on the closing date of the Regulation S
sale).
In connection with the sale, the Company paid an unaffiliated investment banker
$220,500 for placement and legal fees, providing net proceeds to the Company of
$1,879,500.
Series D Preferred Stock
On January 9, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series D Convertible Preferred Stock at a purchase
price of $10,000 per share and warrants to purchase up to 25,000 shares of the
Company's common stock at an exercise price of $1.22 per share. The agreement
was executed pursuant to Regulation S as promulgated by the Securities Act of
1933, as amended. As of June 30, 2000 none of the warrants had been exercised.
(Continued)
F-29
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The Series D Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in whole
or in part, without the payment of any additional consideration, into fully paid
and nonassessable shares of the Company's no par value common stock based upon
the "conversion formula". The conversion formula states that the holder of the
Series D Preferred Stock will receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of $5,000,
providing net proceeds to the Company of $495,000. The shares underlying the
preferred shares and warrant are entitled to demand registration rights under
certain conditions.
Series E Preferred Stock
On February 5, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series E Convertible Preferred Stock at a purchase
price of $10,000 per share and warrants to purchase up to 25,000 shares of the
Company's common stock at an exercise price of $1.093 per share. The agreement
was executed pursuant to Regulation S as promulgated by the Securities Act of
1933, as amended. As of June 30, 2000 none of the warrants had been exercised.
The Series E Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in whole
or in part, without the payment of any additional consideration, into fully paid
and nonassessable shares of the Company's no par value common stock based upon
the "conversion formula".
The conversion formula states that the holder of the Series E Preferred Stock
will receive shares determined by dividing (i) the sum of $10,000 by the (ii)
"Conversion Price" in effect at the time of conversion. The "Conversion Price"
shall be equal to seventy-five percent (75%) of the Average Closing Price of the
Company's common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of $5,000,
providing net proceeds to the Company of $495,000. The shares underlying the
preferred shares and warrant are entitled to demand registration rights under
certain conditions.
(Continued)
F-30
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
Series F Preferred Stock
On February 20, 1998, the Company finalized the private placement to foreign
investors of 75 shares of its Series F Convertible Preferred Stock at a purchase
price of $10,000 per share. The agreement was executed pursuant to Regulation S
as promulgated by the Securities Act of 1933, as amended.
The Series F Preferred Shares pay a dividend of 6% per annum, payable in Common
Stock at the time of each conversion and are convertible, at any time,
commencing May 15, 1999 and for a period of two years thereafter, in whole or in
part, without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Series F Preferred Stock will receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to seventy percent (70%) of the Average
Closing Price of the Company's common stock.
In connection with the sale, the Company paid an unaffiliated investment banker
$50,000 for placement and legal fees, providing net proceeds to the Company of
$700,000. The shares underlying the preferred shares and warrant are entitled to
demand registration rights under certain conditions.
Series H Preferred Stock
On June 2, 1998, the Company finalized the private placement to foreign
investors of 100 shares of its Series H Convertible Preferred Stock at a
purchase price of $10,000 per share and Series H-"A" warrants to purchase up to
75,000 shares of the Company's common stock at an exercise price of $1.00 per
share, and Series H-"B" warrants to purchase up to 50,000 shares of the
Company's common stock at an exercise price of $1.50 per share. The agreement
was executed pursuant to Regulation D as promulgated by the Securities Act of
1933, as amended. As of June 30, 2000 none of the warrants had been exercised.
The Series H Preferred Stock is convertible, at any time, for a period of two
years thereafter, in whole or in part, without the payment of any additional
consideration, into fully paid and nonassessable shares of the Company's no par
value common stock based upon the "conversion formula". The conversion formula
states that the holder of the Series H Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in
effect at the time of conversion. The "Conversion Price" shall be equal to the
lesser of $.53 or seventy-five percent (75%) of the Average Closing Price of the
Company's common stock for the ten-day trading period ending on the day prior to
the date of conversion.
(Continued)
F-31
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
In connection with the sale, the Company issued eight preferred shares and paid
$10,000 to an unaffiliated investment banker for placement and legal fees,
providing net proceeds to the Company of $990,000. The shares underlying the
preferred shares and warrant are entitled to demand registration rights under
certain conditions.
The Company was in technical default of the Registration Rights Agreement
("RRA"), which required the S-2 Registration Statement to be declared effective
by October 2, 1998. Pursuant to the RRA, the Company was required to pay the
Series H holders, as liquidated damages for failure to have the Registration
Statement declared effective, and not as a penalty, 2% of the principal amount
of the Securities for the first thirty days, and 3% of the principal amount of
the Securities for each thirty day period thereafter until the Company procures
registration of the Securities. On March 25, 1999, the Company issued 424,242
shares of common stock as partial payment of the liquidated damages. The total
expense for the years ended June 30, 2000 and 1999 amounted to $31,000 and
$260,000, respectively, and a balance of $151,000 remains outstanding as of June
30, 2000 (See Note 8).
Series I Preferred Stock
On April 6, 1999, the Company entered into a Subscription Agreement with the
Purchaser of the Series B Preferred Stock whereby the Company agreed to issue
138 shares of its Series I, 7% Convertible Preferred Stock ($1,380,000). The
consideration for the subscription agreement was paid as follows:
1. Forgiveness of approximately $725,795 of accrued interest
(dividends) in connection with the Series B Convertible Preferred
stock. The Company recorded the forgiveness of the accrued interest
(dividends) by reducing the accrual along with a reduction in the
accumulated deficit.
2. Settlement of all litigation concerning the Series B Convertible
Preferred stock.
3. Cancellation of 112,500 warrants that were issued with the Series B
Convertible Preferred stock.
4. A limitation on the owner(s) of the Series B Convertible Preferred
stock to ownership of not more than 4.99% of the Company's outstanding
common stock at any one time.
The Series I Preferred stock pays a 7% premium, to be paid in cash or freely
trading common stock at the Company's sole discretion, upon conversion.
(Continued)
F-32
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The Series I Preferred Stock is convertible, at any time, in whole or in part,
without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Series I Preferred Stock will receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
Pursuant to the Series I designation and the Subscription Agreement, the Series
I Holder, or any subsequent holder of the Preferred Shares, is prohibited from
converting any portion of the Preferred Stock which would result in the Holder
being deemed the beneficial owner of 4.99% or more of the then issued and
outstanding common stock of the Company.
The agreements provided that no fractional shares shall be issued. In addition,
provisions were made for any stock dividends or stock splits that the Company
may issue with respect to their no par value common stock. The Company was also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.
The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 2000, including
certain additional information with respect to the deemed preferred stock
dividends that were calculated as a result of the discount from market for the
conversion price per share:
(Continued)
F-33
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) Convertible Preferred Stock (Continued)
Series A Series B Series C Series D Series E Series F
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
----------------- ----------------- ----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - - $ - - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------ ----------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
------ ----------
Balance at June 30, 1997 - - 450 4,500,000
Sale of preferred stock
(Series C - H) 210 2,100,000 54 540,000 54 540,000 75 750,000
Conversion of preferred stock (210) (2,100,000) (25) (250,000) (30) (300,000) (75) (750,000)
---- ---------- --- -------- --- -------- --- --------
Balance at June 30, 1998 - - 450 4,500,000 - - 29 290,000 24 240,000 - -
Sale of Series I
Conversion of preferred stock (60) (600,000) (29) (290,000) (24) (240,000)
--- -------- --- -------- --- --------
Balance at June 30, 1999 - - 390 3,900,000 - - - - - - - -
Conversion of preferred
stock, net (390) (3,900,000)
---- ----------
Balance at June 30, 2000 - $ - - $ - - $ - - $ - - $ - - $ -
====== ======= ======= ======= ====== ======= ===== ======= ====== ======= ===== =======
Additional information:
Discount off market price 25% 18% 25% 25% 25% 30%
== == == == == ==
Fair market
value-issue rate $ 8.31 $ 3.25 $ 1.63 $ 0.99 $ 1.07 $ 1.24
====== ====== ====== ====== ====== ======
Deemed preferred
stock dividend $1,335,474 $ 998,120 $ 705,738 $182,433 $182,250 $318,966
========== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Series H Series I Total
Shares Amount Shares Amount Shares Amount
------ -------- ------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------ ----------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
Balance at June 30, 1997 450 4,500,000
Sale of preferred stock
(Series C - H) 108 1,080,000 501 5,010,000
Conversion of preferred stock (340) (3,400,000)
---- ----------
Balance at June 30, 1998 108 1,080,000 611 6,110,000
Sale of Series I 138 1,380,000 138 1,380,000
Conversion of preferred stock (40) (400,000) (153) (1,530,000)
--- -------- ---- ----------
Balance at June 30, 1999 68 680,000 138 1,380,000 596 5,960,000
Conversion of preferred
stock, net (68) (680,000) (138) (1,380,000) (596) (5,960,000)
--- -------- ---- ---------- ---- ----------
Balance at June 30, 2000 - $ - - $ - - $ -
===== ======== ======= ======== ====== =========
Additional information:
Discount off market price 25% 25%
== ==
Fair market
value-issue rate $ 0.57 $ 0.38
====== ======
Deemed preferred
stock dividend $351,628 $ 492,857
======== =========
</TABLE>
(Continued)
F-34
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company (See
Statement of Stockholders' Equity).
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. During the year
ended June 30, 1996, 410,500 shares of the common stock related to these
receivables were canceled and $103,679 was collected on the receivable. The
unpaid balance on these original sales and other subsequent sales of common
stock, in the amount of $35,559, as of June 30, 1997, is reflected as a
reduction to stockholder's equity on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $102,942, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.
In addition, during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000, were satisfied with the issuance of
377,500 shares of restricted common stock. Compensation expenses has been
recorded during the fiscal year pursuant to the employment agreements with the
officers. In addition, during the year ended June 30, 1995, 75,000 shares of
restricted common stock was issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(Continued)
F-35
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $2,397,258
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the fair market
value at the various grant dates for the transactions. Compensation, aggregating
$2,298,907, has been recorded at the excess of the fair market value of the
transaction over the exercise price for each of the transactions.
As of June 30, 1996, there were a total of 425,416 shares of common stock issued
as a result of the conversion of the Series A Convertible Preferred Stock and
the related accumulated dividends (See Note 15).
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock option plan and were
exercised in a "cash-less" transaction, resulting in compensation to the
officers of $567,164. Compensation cost was measured as the excess of fair
market value of the shares received over the value of the stock options tendered
in the transaction. The excess of fair market value at July 15, 1995
approximated $.57 per share on the 996,400 shares issued.
During the year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($5,461,589) of its common stock. The conversion of Series A Convertible
Preferred Stock, including accrued dividends, accounted for the issuance of
1,081,962 shares ($2,808,643). The remaining 799,333 shares were issued as
follows:
1. Services rendered by independent consultants in exchange for
31,200 shares. Research and development expenses of $90,480 was
charged as the fair market value at November 20, 1996 was $2.90
per share.
2. On December 20, 1996, bonus stock was issued to Company
employees, 3,200 shares. Compensation expense of $10,463 was
charged as the fair market value at that date was $3.27 per
share.
3. On January 3, 1997 bonus stock was issued to the officers of
the Company, 350,000 shares. Compensation expense of $907,900 was
charged, as the fair market value at that date was $2.59 per
share.
F-36
(Continued)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
4. On February 13, 1997, 4,000 shares were issued to an outside
consultant in exchange for services performed. Consulting
services of $11,500 were recorded, representing the fair market
value ($2.88 per share) on that date.
5. Services rendered by an independent consultant during June
1997 in exchange for 199,000 shares. Consulting expenses of
$548,149 was charged, as the fair market value on the date of
the transaction was approximately $2.75 per share.
6. Exercise of incentive stock options comprised of 27,000
shares ($33,750) exercised and paid for at $1.25 per share, and
334,933 shares ($1,103,203) acquired in the exchange for options
tendered in a cash less transaction .
7. The Company repurchased 150,000 shares ($52,500), which had
been previously acquired by one of its employees.
During the year ended June 30, 1998, the Company issued a total of 11,588,460
shares ($8,583,721) of its common stock. The conversion of Convertible Preferred
Stock (see Note 16) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for
100,000 shares. Consulting expenses of $221,900 was charged as
the fair market value at July 10, 1997 was $2.22 per share.
2. Services rendered by an independent consultant in exchange
for 200,000 shares. Consulting expenses of $400,000 was charged
as the fair market value at August 20, 1997 was $2.00 per share.
3. Services rendered by an independent consultant in exchange
for 40,000 shares. Consulting expenses of $67,480 was charged as
the fair market value at September 4, 1997 was $1.69 per share.
4. Services rendered by a public relations company in exchange
for 166,000 shares. Public relations expenses of $269,750 was
charged as the fair market value at October 24, 1997 was $1.63
per share.
5. On December 15, 1997, bonus stock was issued to Company
employees, for 39,300 shares. Compensation expense of $41,658
was charged as the fair market value at that date was $1.06 per
share.
(Continued)
F-37
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
6. Services rendered by an independent consultant in exchange
for 250,000 shares. Consulting expenses of $320,000 was charged
as the fair market value at January 7, 1998 was $1.28 per share.
7. Services rendered by an independent consultant during May
1998 in exchange for 200,000 shares. Consulting expenses of
$140,000 was charged, as the fair market value on that date was
$.70 per share.
8. The Company sold 500,000 shares on May 15, 1998 in a
Regulation D offering at $.40 per share, and received cash
proceeds of $200,000.
9. On June 5, 1998, the Company issued to its chief executive
officer 3,500,000 shares ($1,890,000) as consideration for an
exclusive Patent License Agreement (see Note 7). The market
value of the stock on this date was $.54 per share. The excess
of the fair market value of the common stock over the historical
cost basis of the patent license was recorded as a distribution
to the shareholder; recorded as a reduction to additional
paid-in capital of $3,199,000.
10. On June 11, 1998, the Company issued 25,000 shares to its
corporate counsel as additional bonus compensation. Legal
expenses of $12,750 were recorded as the market value of the
stock on that date was $.51 per share.
11. A total of 65,712 non-qualified stock options were exercised
and proceeds of $22,999 ($.35 per share) was received by the
Company.
On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Majority Shareholders consent with respect to the Amendment was effective on
February 18, 1999. The number of authorized shares was further increased to
150,000,000 shares during the shareholders annual meeting held on May 10, 2000.
During the year ended June 30, 1999, the Company issued a total of 12,804,131
shares ($5,837,656) of its common stock. The conversion of Convertible Preferred
Stock (see Note 15) accounted for the issuance of 4,865,034 shares ($1,972,296).
The remaining 7,939,097 shares were issued as follows:
(Continued)
F-38
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
1. The Company sold 200,000 shares on August 5, 1998 in a
Regulation D offering at $.30 per share, and received cash
proceeds of $60,000.
2. In June 1999, the Company issued to its chief executive
officer 3,500,000 shares ($1,890,000), representing the balance
of shares to be issued as consideration for the exclusive Patent
License Agreement (see Note 7).
3. On November 9, 1998, the Company issued 15,000 shares to its
corporate counsel as additional bonus compensation. Legal
expenses of $10,800 were recorded as the market value of the
stock on that date was $.72 per share.
4. A total of 65,612 non-qualified stock options were exercised
and proceeds of $22,964 ($.35 per share) was received by the
Company. An additional $101,500 was received this year for stock
sold in the prior year.
5. A total of 480,000 shares were issued in connection with
loans that were received by the Company. The total loan fee
expenses (based on the market value of the stock at the date of
issuance) charged to the statement of operations for the year
was $292,694, or an average of $.61 per share.
6. A total of 2,974,043 share were issued as repayment of
various accounts payable and loans payable during the year. A
total of $1,196,992 (average of $.40 per share) of debts were
satisfied through the issuance of the stock.
7. On December 11, 1998, bonus stock was issued to Company
employees, for 130,200 shares. Compensation expense of $79,422
was charged as the fair market value at that date was $.61 per
share.
8. On March 26, 1999, the Company issued 424,242 shares of stock
as partial-payment ($140,000) on the liquidated damages in
connection with Series H Preferred Stock. The fair market value
at that date was $.33 per share.
9. During the year a total of 150,000 shares was issued for to
various independent parties for services rendered to the
Company. Expenses of $81,788 were charged, or an average price
of $.50 per share.
(Continued)
F-39
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
During the year ended June 30, 2000, the Company issued a total of 56,214,003
shares ($12,997,328) of its common stock. The conversion of Convertible
Debentures (see Note 11) accounted for the issuance of 4,060,398 shares
($3,958,223), the conversion of Redeemable Convertible Preferred Stock (see Note
14) accounted for the issuance of 3,834,492 shares ($507,115), and the
conversion of Convertible Preferred Stock (see Note 15) accounted for the
issuance of 41,581,242 shares ($6,806,219). The remaining 6,737,871 shares were
issued as follows:
1. The Company sold 100,000 shares on April 27, 2000 in a
Regulation D offering at $1.57 per share, and received cash
proceeds of $157,000.
2. A total of 5,061,294 shares were issued as repayment of
various loans payable during the year. A total of $1,067,665
(average of $.21 per share) of debts were satisfied through the
issuance of the stock.
3. On November 12, 1999, bonus stock was issued to Company
employees, for 145,000 shares. Compensation expense of $12,325
was charged as the fair market value at that date was $.09 per
share. The company also canceled 8,000 shares which had been
previously issued to an independent contractor for consulting
services. A reduction of $31,000 was recorded to consulting
expenses for the year.
4. A total of 7,297 shares were issued in connection with a loan
that was received by the Company. The total loan fee expense and
interest charged to income amounted to $2,408 during the year.
5. During the year at total of 150,652 shares were issued for
the exercise of warrants. On March 21, 2000, the Company
received $100,000 for the exercise of 107,527 warrants at an
exercise price of $.93 per share. The Company recorded a charge
to consulting expense, as the fair market value at the date the
warrants were issued was $1.84. The Company also received
$21,563 from the exercise of 43,125 of Series G Preferred Stock
warrants during the last quarter of the fiscal year.
6. Exercise of 1,281,628 incentive stock options, ($395,810)
exercised and paid for at prices ranging from $.13 per share to
$1.13 per share.
(Continued)
F-40
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan and pursuant to
their employment contracts, an officer may be granted non-qualified options to
purchase shares of common stock over the next five calendar years, at a minimum
of 250,000 shares per calendar year. The exercise price shall be thirty-five
percent of the fair market value at the date of grant. On July 5, 1995 the Board
of Directors authorized an amendment to the Plan to provide that upon exercise
of the option, the payment for the shares exercised under the option may be made
in whole or in part with shares of the same class of stock. The shares to be
delivered for payment would be valued at the fair market value of the stock on
the day preceding the date of exercise. The plan was terminated effective July
1, 1996, however the officers will be issued the options originally provided
under the terms of their employment contracts.
On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This original
plan was revised and on January 3, 2000 the Board of Directors adopted the
Company's "2000 Non-Statutory Plan", and the plan was subsequently approved by
the shareholders on May 10, 2000 at the annual meeting. This plan provides for
the granting, exercising and issuing of incentive stock options pursuant to
Internal Revenue Code Section 422. The Company may grant incentive stock options
to purchase up to 4,850,000 shares of common stock of the Company. The Board of
Directors or a company established compensation committee has direct
responsibility for the administration of this plan.
The exercise price of the non-statutory stock options shall be equal to no less
than 50% of the fair market value of the common stock on the date such option is
granted.
In accordance with the provisions of APB No. 25, the Company records the
discount from fair market value on the non-qualified stock options as a charge
to deferred compensation at the date of grant and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as
follows:
(Continued)
F-41
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17 ) STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Options
-------------------------- ----------------------------
Shares Wtd. Avg. Price Shares Wtd. Avg. Price
-------- --------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 75,000 $ 1.40 1,500,000 $ 1.12
Exercised -- --
--------- ----------
Outstanding at June 30, 1995 75,000 1.40 1,500,000 1.12
Granted 770,309 1.66 750,000 1.44
Exercised (164,956) .92 (1,800,000) 1.50
-------- ----------
Outstanding at June 30, 1996 680,353 1.81 450,000 .13
Granted 371,377 3.27 750,000 3.88
Exercised (395,384) 1.10 --
-------- ----------
Outstanding at June 30, 1997 656,346 3.07 1,200,000 2.47
Granted 220,755 1.95 750,000 2.75
Exercised -- (65,712) .35
Canceled (175,205) 4.25 --
-------- ----------
Outstanding at June 30, 1998 701,896 2.42 1,884,288 2.66
Granted 786,635 .48 750,000 .43
Exercised -- (65,612) .35
Canceled (82,500) 3.37 --
------- ----------
Outstanding at June 30, 1999 1,406,031 .53 ** 2,568,676 2.24
Granted 3,139,459 .34 --
Exercised (770,702) .37 (318,676) .35
Canceled (64,334) .47 --
--------- ----------
Outstanding at June 30, 2000 3,710,454 .42 2,250,000 2.35
========= ==========
</TABLE>
**On June 25, 1999, the exercise price of 502,225 outstanding incentive
stock options was restated to $.60 per share. The Company has recorded
compensation of $330,569 during the fiscal year ended June 30, 1999 as a
result of this repricing, in accordance with the guidelines discussed in
the proposed FASB interpretation of APB Opinion No. 25.
At June 30, 2000 and 1999, 3,372,505 and 1,096,825, respectively, of the
incentive stock options were vested and exercisable and 2,250,000 and 2,568,676,
respectively, of the non-qualified stock options were fully vested and
exercisable. The stock options vest at various rates over periods up to ten
years. Shares of authorized common stock have been reserved for the exercise of
all options outstanding. The following summarizes the option transactions that
have occurred:
(Continued)
F-42
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35% of
the fair market value at the date of grant. Compensation expense of $567,164 was
recorded during the year ended June 30, 1996 as a result of the discount from
the market value.
On November 7, 1994, the Company granted 300,000 non-qualified options to its
general counsel, currently a vice-president of the Company, at an exercise price
of $0.50 per share. Deferred compensation of $150,000 was recorded on the
transaction and is being amortized over the vesting period. The options were all
exercised as of June 30, 1997.
On March 30, 1995, the Company granted to the director of engineering, a
non-qualified option to purchase up to 150,000 shares of common stock per year,
or a total of 450,000 shares, during the period March 30, 1995 and ending March
31, 1999. The exercise price shall be $0.35 per share. The options do not "vest"
until one year from the anniversary date. Deferred compensation of $472,500 was
recorded on the transaction and is being amortized over the vesting period. The
Company also granted the individual, incentive options to purchase 75,000 shares
of common stock at an exercise price of $1.40 per share. The options originally
expired on March 30, 1998, but were reissued on March 30, 1998 for two years.
On July 5, 1995 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35% of
the fair market value at the date of grant. Compensation expense was recorded
during the year ended June 30, 1996 as a result of the discount from the market
value.
On September 1, 1995, the Company issued to its three officers and directors
incentive options to purchase 107,527 shares, individually, at an exercise price
of $0.93 per share (110% of the fair market value). The options expire on
September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to
purchase 119,047 shares of common stock at an exercise price of $0.84 per share.
The options expire on September 1, 1999
At various dates during the fiscal year ended June 30, 1996, the Company issued
to various employees incentive options to purchase 328,681 shares of common
stock at prices ranging from $0.81 to $8.18. In all instances, the exercise
price was established as the fair market value of the common stock at the date
of grant, therefore no compensation was recorded on the issuance of the options.
In most cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
(Continued)
F-43
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
On July 4, 1996, the Company issued to its three officers and directors
incentive options to purchase 22,883 shares, individually, at an exercise price
of $4.37 per share (110% of the fair market value). The options expire on July
4, 2001.
On July 5, 1996 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35% of
the fair market value at the date of grant. Deferred compensation of $1,891,500
was recorded on the transaction and is being amortized over the remaining term
of the employment contracts (three years).
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 264,778 shares of common stock
at prices ranging from $2.56 to $3.81. In all instances, the exercise price was
established as the fair market value of the common stock at the date of grant,
therefore no compensation was recorded on the issuance of the options. In most
cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
On July 4, 1997, the Company granted to its three officers and directors
incentive options to purchase 34,000 shares, individually, at an exercise price
of $2.94 per share (110% of the fair market value). The options expire on July
4, 2002.
On July 5, 1997, the Company issued non-qualified options to its officers and
directors to purchase 750,000 shares of common stock at 35% of the fair market
value at the date of grant. Deferred compensation of $1,340,625 was recorded on
the transaction and is being amortized over the remaining term of the employment
contract (two years).
At various dates during the year ended June 30, 1998, the Company issued to
various employees incentive options to purchase 204,905 shares of common stock
at prices ranging from $.55 to $2.60. In all instances, the exercise price was
established as the fair market value of the common stock at the date of grant,
therefore no compensation was recorded on the issuance of the options. In most
cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
On July 5, 1998, the Company issued non-qualified options to its officers and
directors to purchase 750,000 shares of common stock at 35% of the fair market
value at the date of grant. Deferred compensation of $622,500 was recorded on
the transaction and is being amortized over the remaining term of the employment
contract (one year).
(Continued)
F-44
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
At various dates during the year ended June 30, 1999, the Company issued to
various employees incentive options to purchase 786,635 shares of common stock
at prices ranging from $.46 to $.60. In all instances, the exercise price was
established as the fair market value of the common stock at the date of grant,
therefore no compensation was recorded on the issuance of the options. In most
cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
At various dates during the year ended June 30, 2000, the Company issued to its
officers and various employees incentive options to purchase 3,139,459 shares of
common stock at prices ranging from $.23 to $4.38. The exercise price was
established as the fair market value of the common stock at the date of grant
for employees, and 110% of the fair market value at the date of the grant for
officers, therefore no compensation was recorded on the issuance of the options.
The officers options vested immediately, while the employees options vest
one-third from the grant date, with one-third vesting each of the next two
years. The options expire in five years from the grant date.
The following table summarizes information about all of the stock options
outstanding at June 30, 2000:
Outstanding options Exercisable options
------------------------------------------- -------------------
Weighted
average
Range of remaining Weighted Weighted
exercise prices Shares life (years) avg. price Shares avg. price
--------------- ----------- ------------ ---------- --------- ----------
$ .23 - 1.25 5,101,304 4.89 $ .44 4,934,321 $ .42
1.36 - 2.99 839,350 6.79 1.38 750,000 1.22
3.00 - 4.38 19,800 5.00 4.38
-------------- ---------- ---- ------ --------- ------
$ .23 - 4.38 5,960,454 5.16 $ .58 5,684,321 $ .55
============ ========= ==== ====== ========= ======
At June 30, 2000, the Company has two stock-based compensation plans, which have
been previously described. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans with respect to its
employees, however compensation has been recorded with respect to its officers
due to their provisions of utilizing "additional incentive stock options" to
exercise their incentive stock options, and acquire shares of common stock. The
compensation cost that has been charged against income for the officers was
$1,649,255 and $(66,667) for 2000 and 1999, respectively.
(Continued)
F-45
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
The weighted average Black-Scholes value of options granted during 2000 and 1999
was $2.22 and $.42 per option, respectively. Had compensation cost for the
Company's fixed stock-based compensation plan been determined based on the fair
value at the grant dates for awards under this plan consistent with the method
of SFAS 123, the Company's pro forma net loss and pro forma net loss per share
would have been as indicated below:
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
Net loss to common shareholders -
As reported $ (8,168,879) $ (7,756,344) $ (43,261,878)
============== ============= ==============
Pro forma $ (13,935,057) $ (7,469,637) $ (49,028,056)
============== ============= ==============
Basic loss per share -
As reported $ (.10) $ (.20) $ (1.30)
============== ============= ==============
Pro forma $ (.18) $ (.19) $ (1.48)
============== ============= ==============
Diluted loss per share -
As reported $ (.10) $ (.20) $ (1.30)
============== ============= ==============
Pro forma $ (.18) $ (.19) $ (1.48)
============== ============= ==============
</TABLE>
For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2000 and 1999, respectively: no dividend yield;
volatility of 78.8% and 28.2%; risk-free interest rate of 6.5% and 6.0%; and an
expected term of five years.
(18) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at June 30,
2000 was $88,393.
(Continued)
F-46
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximated their fair values due to the short maturity
of these instruments. The fair value of the Company's debt obligations is
estimated based on the quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
At June 30, 2000 and 1999, the aggregate fair value of the Company's debt
obligations approximated its carrying value.
(20) COMMITMENTS AND CONTINGENCIES
On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements expired on July 6, 1999 and new employment agreements were entered
into on August 30, 1999. The new agreements will be for a term of five years and
provide for compensation to these individuals at the annual rate of $286,225,
$119,070, and $119,070, respectively. The agreements provide for annual
increases based upon changes in the Consumer Price Index, but in no event shall
the cost of living increase be less than seven percent. The agreements provide
for bonus arrangements and other normal benefits.
As additional consideration for his development efforts in the CTLM(TM) device,
the chief executive officer has been granted a "development royalty" which will
be paid based upon the net foreign and domestic sales, after direct costs and
commissions, of the CTLM(TM) device. The royalty percentages in the revised
patent licensing agreement, entered into on June 2, 1998, and approved at the
shareholders' annual meeting start at 10% and decrease to 6% as gross sales
volumes increase.
On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The agreement
was extended for an additional two years during 1998 at an annual salary of
$110,000. The contract also provided for the issuance of 75,000 restricted
shares of the Company's common stock. Compensation expense ($1.05 per share), in
the amount of $78,750 was recorded on the transaction. On April6, 2000, the
contract was further extended for fifteen months at an annual salary of
$110,000. During the year the Director also received 36,300 incentive stock
options at an exercise price of $1.66 per share, the fair market value at the
date of the grant.
The Company has entered into agreements with various distributors located
throughout Europe, Asia, Canada and South America to market the CTLM(TM) device.
The terms of these agreements range from eighteen months to three years. The
Company has the right to renew the agreements, with renewal periods ranging from
one to three years.
(Continued)
F-47
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(20) COMMITMENTS AND CONTINGENCIES (Continued)
The Company entered into an agreement for a fifteen million dollar, three year
equity line of credit, during the year ended June 30, 1998. The Company, as it
deems necessary, may raise capital through the sale of its common stock to a
consortium of prominent European banking institutions. This agreement was
superceded on August 17, 2000, with a new $25 million equity financing with a
private institutional equity investor (see Note 21).
(21) SUBSEQUENT EVENTS
On August 17, 2000 the Company finalized a financing agreement with a private
institutional equity investor which contains two component parts, a $25 million
Private Equity Agreement and a private placement of 400 shares of Series K
convertible preferred stock as bridge financing in the amount of $4,000,000. The
Company is obligated to pay a 9% dividend on the convertible preferred in cash
or common stock at its option semi-annually, on June 30 and December 31, of each
calendar year or upon conversion date. The Company also has the option of
redeeming the convertible preferred solely through the use of the private equity
line by paying cash with the following redemption premiums:
Days from closing 0-120 121-180 180
Redemption price as a % of Principal 105% 107.5% 110%
If the Company, for whatever reason, is unable to redeem the convertible
preferred according to the above schedule, the holder has the right to convert
the convertible preferred into common stock at a price equal to 87.5% of the
average of the three lowest closing bid prices (which need not be consecutive)
of the twenty consecutive trading days prior to the conversion date. The
agreement further provides that the Company register the underlying common
shares in a registration statement as soon as possible after the closing date,
and must use their best efforts to file timely and cause the registration
statement to become effective within 120 days from the closing date. In the
event that the registration statement does not become effective, the Company
will be liable for liquidated damages in the amount of 2% of the purchase price
of the unredeemed convertible preferred stock for the first 30 days and 2% for
every 30 day period thereafter until the registration statement has been filed
and/or declared effective. The liquidated damages will be payable upon demand in
cash or stock at the Company's option.
(Continued)
F-48
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) SUBSEQUENT EVENT (Continued)
The Private Equity Agreement commits the investor to purchase up to $25 million
of common stock subject to certain conditions pursuant to Regulation D over the
course of 12 months after an effective registration of the shares. The timing
and amounts of the purchase by the investor are at the sole discretion of the
Company. However, they do have to draw down a minimum of $10 million from the
credit line over the twelve-month period. The purchase price of the shares of
common stock are set at 91% of the market price. The market price, as defined in
the agreement, is the average of the three lowest closing bid prices of the
common stock over the ten day trading period beginning on the put date and
ending on the trading day prior to the relevant closing date of the particular
tranche. The Company expects to redeem the bridge financing of $4,000,000 in
convertible preferred stock with the proceeds of the sale of common stock in the
equity credit line. In order to use the equity credit line, the Company must use
their best efforts to file and cause the registration statement to become
effective as soon as possible. If subsequent to the registration statement
becoming effective, it is suspended at any time, the Company is obligated to pay
damages of 1.5% of the cost of all common stock then held by the investor for
each fifteen-day period or portion thereof, beginning on the date of the
suspension. If such suspension is cured within the first fifteen days, the
damages shall not apply. This financing agreement has no warrants attached to
either the bridge financing or the private equity line. Furthermore, the Company
was not required to pay the investor's legal fees, but the Company did pay a 5%
consulting fee for the money funded in this transaction.
F-49
<PAGE>
