FORM 10-KSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended June 30, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
COMPUTERIZED THERMAL IMAGING, INC.
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(Exact name of registrant as specified in its charter)
000-23955
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Commission File No.
NEVADA 87-0458721
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
467 Heritage Park Blvd. Ste 210, Layton, Utah 84041
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 776-4700
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) Yes [x]
No [ ], and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The registrant's revenues for its most recent fiscal year were $0.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the Company's stock was last sold
on June 30, 1999, being $.7344 per share, was $32,979,288
The number of shares outstanding of the registrant's only outstanding
class of common equity, as of its fiscal year ended June 30, 1999, was
62,275,560. The number of the registrant's only outstanding class of common
equity as of September 16, 1999 was 64,998,840.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933.
Prospectus on 424(b) in Part I and Part II and Part III.
______________________________________________________________________________
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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ITEM 1. BUSINESS
(a) BUSINESS DEVELOPMENT
General
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Computerized Thermal Imaging, Inc. (the "Company") was incorporated on
June 10, 1987 in the State of Nevada as Business Helpers, Inc. In 1988 the
Company acquired all of the assets of Thermal Imaging, Inc., an Oregon
corporation, through the issuance of shares of its common stock, which assets
consisted primarily of certain intellectual property regarding thermal
imaging. The Company amended its Articles of Incorporation on August 25, 1989
to effect a name change to DTI Dorex, Ltd. and again on November 3, 1989 to
its current name. In April 1992,the Company further amended its Articles of
Incorporation to provide for a capital structure of 100,000,000 shares of
common stock, par value of $0.001 per share, and 3,000,000 shares of preferred
stock with such designations, preferences and other features as may be
required by the Company's Board of Directors. In 1997, the Company acquired
80% of the issued and outstanding shares of Computerized Thermal Imaging
Company, a Nevada corporation ("CTICO"), which was then known as Thermal
Medical Imaging, Inc. CTICO was organized in October of 1995 (with the
Company as a 20% shareholder) to separately fund the development, marketing,
and distribution of the Company's thermal imaging systems (as further defined
and described in the next paragraph.) A failed underwriting of CTICO in led
1996 led to its reorganization, with the Company increasing its position in
CTICO to 80% as a result of certain cash advances made by it to CTICO through
December of 1996. On March 16, 1998, the Company further amended its Articles
of Incorporation which described in more detail the authority of the Board of
Directors with respect to any shares of the preferred stock which may be
issued by the Company. In addition, such amendment denied preemptive rights to
all stockholders of the Company from and after such date.
Summary of Business
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The Company is a development stage company that is a medical imaging
systems integrator producing a computerized clinical thermal imaging
diagnostic and patient management system (the "CTI System") that has been
trademarked under the name Computerized Thermal Imaging. The Company plans to
license the CTI System to various health care providers such as hospitals,
HMOs and freestanding image centers through "Use Agreements". Revenues will be
generated under the Use Agreements by charging the health care providers
monthly for time usage and for the disposable supplies purchased in
conjunction with the CTI System. The Company also plans to sell the CTI System
to certain countries in Asia, such as the People's Republic of China (the
"PRC"), where use of thermal imaging for medical use is more prevalent than in
the United States. The CTI System is currently composed of four elements: (1)
the climate-controlled lab; (2) the examination unit, consisting of an
infrared camera, imaging monitor, high-resolution printer, computer and
proprietary software and telemedicine interface; (3) a digital health card
that encodes a patient's thermal image for subsequent comparison by
physicians, or even the patient's entire medical record, in a digital format
on a plastic card the size of a credit card; and (4) a proprietary medical
protocol. The Company's 80 percent owned subsidiary, Computerized Thermal
Imaging, Co. ("CTICO"), utilizes the CTI System specially configured as a
breast cancer system which is a non-invasive, non-contact procedure that does
not involve breast compression or exposure to radiation, and which is
comprised of an infra-red camera, a central processing unit, a display unit,
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examination equipment, and a power distribution unit (the "CTI Breast Imaging
System"). (See this ITEM 1, BUSINESS OF THE COMPANY, The Company's Principal
Products and Their Markets.)
As of the date of this report, neither the CTI System nor the CTI Breast
Imaging System as configured by the Company's subsidiary (sometimes
hereinafter referred to together as the "Systems"), has been formally approved
by the United States Food and Drug Administration (the "FDA"). Management
believes that the CTI System has clearance to be sold in the United States
without obtaining further government approval from the FDA because its
components have been cleared for use for medical purposes by the FDA at the
request of the component manufacturers notwithstanding the fact that the
Company will likely be required to seek FDA approval for certain applications
of the CTI System when and if configured for specific medical diagnostic
purposes. The sale of the CTI Breast Imaging System in the United States for
use in the detection of breast cancer requires FDA approval and is presently
undergoing clinical testing by physicians at five independent hospital sites
in accordance with a protocol which management expects to lead to pre-market
approval (hereinafter sometimes referred to as "PMA") by the FDA. (For a full
discussion of the Company's business, See this PART I, ITEM 1. BUSINESS OF THE
COMPANY and its various subheadings below.)
Since inception, the Company has funded operations through private
placements of its common stock, warrants and options as well as from advances
and loans from shareholders and affiliates. During the past three years,
David B. Johnston, the Company's Chairman of the Board and Chief Executive
Officer, and certain affiliates of Mr. Johnston and the Company, have
contributed approximately $ 4.8 Million to the capital of the Company in
exchange for shares of Common Stock. The Company also filed a registration
statement with the Securities and Exchange Commission on Form SB-2 which was
declared effective on January 8, 1999; the Prospectus contained therein was
amended on April 1, 1999 as part of a post effective amendment to the SB-2
registration statement and on July 16, 1999 (hereinafter the "Prospectus").
The Prospectus relates to the resale of 36,209,606 shares of the common stock
of the Company which may be sold by the holders thereof (the "Selling
Stockholders") from time to time as market conditions permit, or otherwise, at
prices and terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The shares of the common stock of
the Company, $0.001 par value per share to be resold include: (i) 20,781,250
shares to be purchased by an unrelated investor, Beach Boulevard LLC; (ii)
5,337,741 shares currently issued and outstanding; (iii) 3,840,615 shares
underlying outstanding warrants exercisable at prices ranging from $0.72 to
$5.00 per share which expire on various dates ranging from March 31, 1999 to
March 13, 2002; and (i) 6,250,000 shares underlying outstanding options
exercisable at prices ranging from $0.60 per share to $1.25 per share which
expire automatically on various dates ranging from July 21, 2000 to June 12,
2005 (the "Resale Options"). The Company will not receive any proceeds from
the resale of the Common Stock by the Selling Stockholders. The Company will
receive in related funding proceeds from any options or warrants exercised,
and up to $7,000,000 in funding through its sale of shares (the resale of
which is registered in the Prospectus) to Beach Boulevard LLC("Beach"). As of
the date of this report it has received $2,500,000 of such anticipated funding
from Beach pursuant to an investment agreement (the "Investment Agreement")
entered into on March 4, 1999 and amended in May 1999. (See PART II, ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.)
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Risk Factors Related to the Company's Future Profitability
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The following risks factors are directly related to the Company's
business, that is the development and future marketing of the CTI System, the
CTI Breast Imaging System, and the CTI System as configured for other
applications.
1. Limited Operating History; Continuing Operating Losses;
Development Stage Company. The Company was formed in June 1987 and has not
generated significant revenues to date. As of June 30, 1999, the Company had
an accumulated deficit of $25,708,810 funded by paid in capital. For the
fiscal years ended June 30, 1999 and 1998, the Company had operating losses of
$5,025,841 and $5,943,885, respectively, resulting principally from costs
incurred in research and development efforts and other costs of operations.
The Company expects that operating losses will continue until such time as
product sales generate sufficient revenues to fund its continuing operations,
as to which there can be no assurance. The Company is still considered a
development stage company. (See PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION.)
2. Uncertainties Concerning Future Profitability. The Company's
ability to achieve profitability will depend, in part, on its ability to
successfully develop clinical applications and obtain regulatory approvals for
its Systems and to develop the capacity to manufacture and market such
products on a wide scale. The Company could encounter difficulties in making
the transition from research and development to manufacturing and selling
commercial thermal imaging products on a broad basis.
3. Uncertain Ability to Meet Capital Needs. The Company will
require an estimated $6,000,000 - $7,000,000 over the next 12 months for its
research and development programs, especially for the funding of the
preclinical and clinical testing to obtain premarket approval by the FDA on
the CTI Breast Imaging System as being sought by its subsidiary CTICO. In
order to meet its expected capital needs for the 12 months ending June 30,
2000, on March 4, 1999, the Company entered into an agreement with Beach
Boulevard L.L.C. ("Beach") whereby Beach agreed to provide up to $7 million in
funding to the Company ($2.5 Million of which has already been received).
There are no other known sources of liquidity other than David B. Johnston,
the Chairman of the Board and the Chief Executive Officer of the Company, and
certain affiliates of Mr. Johnston and the Company who have in the past
contributed approximately $4,800,000 to the capital of the Company in exchange
for shares of the Common Stock. In addition, certain provisions of the
Investment Agreement may prevent the Company from achieving the full $7
Million in funding from Beach. The Company's cash requirements may vary
materially from those now forecasted and there can be no assurance that
additional capital or financing will be available when needed, or if
available, will be available on acceptable terms. Insufficient funds may
prevent the Company from implementing its business strategy or may require the
Company to delay, scale back or eliminate certain of its research and product
development programs, including the FDA clinical trials currently being
conducted by CTICO or to license third parties the rights to commercialize
products or technologies that the Company would otherwise seek to develop on
its own.(See PART II, ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION, for a full discussion of the agreement with Beach" as well as the
Company's plan of operation and cash requirements over the next 12 months.)
4. New Product Development and Integration; Technological Change.
The Company may have a difficult time introducing its products into the
marketplace and educating physicians to its use and benefits. The market for
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the Company's CTI System is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company's future success will depend upon its ability to
enhance and integrate its current product line, to complete products currently
under development, to develop and introduce new products that keep pace with
technological developments, and to respond to evolving customer requirements.
Any failure by the Company to anticipate or respond adequately to
technological developments by its competitors or to changes in customer
requirements, or any significant delays in product integration, development or
introduction could result in a loss of competitiveness or revenues. In
addition, when and if the Company begins actual marketing of its products, it
will be faced with other factors which affect companies with new products such
as timeliness of delivery of either a System, when ordered, or services for a
System delivered. See this PART I, ITEM 1. BUSINESS OF THE COMPANY, Principal
Products and Services and Their Markets, and Competitive Business Conditions,
Competitive Position in the Industry, Methods of Competition.)
5. Dependence on the CTI System and the CTI Breast Imaging System;
Uncertainty of Market Acceptance. The Company's success is dependent on the
development and market acceptance of its CTI System and the CTI Breast Imaging
System. All of the Company's revenues will be derived from the placement or
sale of the Systems for the global health care market. The market for the
Systems is still relatively undeveloped and may not experience material
expansion in the near future. In the event that the Company's market does not
develop as anticipated, the Company's business, financial condition and
results of operations would be adversely effected. The rate of deploying the
CTI Breast Imaging System in the United States will depend upon the degree to
which clinics and physicians accept, due to the worldwide existence of
mammography equipment, after PMA approval, if obtained, the CTI Breast Imaging
System as complementary to mammography to detect breast cancer (the only claim
authorized for ongoing clinical trials) or as an independent examination
technology. In addition, third-party payors in the U.S., such as governmental
programs and private insurance plans, can indirectly affect the pricing or the
relative attractiveness of the Systems by regulating the maximum amount of
reimbursement that they will provide for the taking, storing and
interpretation of medical images. A decrease in the reimbursement amounts for
imaging procedures may decrease the amount which physicians, clinics and
hospitals are able to charge patients for such services. (See this PART I,
ITEM 1. BUSINESS OF THE COMPANY, Products and Services and Their Markets, and
"Third-Party Reimbursement".)
6. CTICO Dependence on the Company. CTICO is an 80% owned subsidiary
of the Company that has developed the CTI Breast Imaging System exclusively
using contributions of capital from the Company. The efficacy of the CTI
Breast Imaging System is currently subject to confirmation in FDA clinical
trials as a tool complementary to mammography. CTICO will have no source of
revenue, other than contributions to its capital made by the Company, until
the clinical trials are successfully concluded and CTICO or the Company then
is able to market for sale or use the CTI Breast Imaging System. CTICO has no
assurance that it can finance its development, marketing, or production costs.
The Company must fund or finance the balance of the clinical trials and any
subsequent development, operating, marketing and production costs until CTICO
develops its business and then is capable of financing its operations.
Management believes that the Investment Agreement with Beach should provide
the Company with a sufficient amount of capital to fund the completion of FDA
clinical trials on the CTICO System. (See PART II, ITEM 6. MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.)
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7. Risks Applicable to Foreign Sales. Sales of the Company's
products to foreign markets may account for a substantial portion of the
Company's forecasted revenues. Foreign sales expose the Company to certain
risks, including the difficulty and expense of maintaining foreign sales
distribution channels, barriers to trade, potential fluctuations in foreign
currency exchange rates, political and economic instability, availability of
suitable export financing, accounts receivable collections, tariff
regulations, quotas, shipping delays, foreign taxes, export licensing
requirements and other United States and foreign regulations that may apply to
the export of medical equipment. The regulation of medical devices worldwide
also continues to develop, and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company. In addition, the
Company may experience additional difficulties in providing prompt and cost
effective service of its thermal imaging systems in foreign countries. The
Company does not carry insurance against such risks. The occurrence of any one
or more of these events may individually or in the aggregate have a material
adverse effect upon the Company's business, financial condition and results of
operations. (See this PART I, ITEM 1. BUSINESS OF THE COMPANY, Distribution
Methods of the Products or Service/ Status of any Publicly Announced New
Product or Service, *Marketing the CTI System in the PRC; Risks of Doing
Business in the PRC and Other Foreign Countries*.)
8. Dependence on Contracts with Third Parties. The Company does not
manufacture the hardware and operating software components of the Systems but
rather purchases these components from third parties in accordance with
specific design specifications. The Company is especially dependent on Bales
Scientific to provide the optics and systems software for CTI Breast Imaging
System. Although there is more than one manufacturer capable of manufacturing
most of the Systems' components, the failure of any one manufacturer to
deliver its components in a timely manner could result in a loss of business
for the Company and further result in time delays for installation of the
Systems. The anticipated cost of production could increase if the Company is
required to seek and make arrangements for different manufacturers to produce
the components as a precaution. Moreover, even though the Company may seek a
remedy from a manufacturer, any thermal imaging component manufactured by such
third party may be defective, resulting in a type of claim for damages against
the Company for which the Company may not have the right to claim from the
manufacturer. (See this ITEM 1. BUSINESS OF THE COMPANY, Dependence on Certain
Suppliers, and Competitive Business Conditions/Competitive Position in the
Industry/Methods of Competition, * Component Competition *.)
9. Need for FDA and Foreign Governmental Approvals; Government
Regulation. The Company's products may be regulated as medical devices by the
FDA under the Federal Food, Drug and Cosmetic Act (the "FDC Act") and the
regulations promulgated thereunder. As such, these devices require compliance
with either FDC Act Section 510(k), or acceptance of a pre-market approval
application (herein referred to as "PMA") by the FDA. Satisfaction of
applicable regulatory requirements may take several years and varies
substantially based upon the type, complexity and novelty of such devices, as
well as the clinical procedure. Although filings and governmental approvals
may be required in some foreign countries before the devices can be marketed,
other countries may require no approval. There can be no assurance that
further clinical trials of the Systems or of any future products will be
successfully completed or, if they are completed that any requisite FDA or
foreign governmental clearances or approvals will be obtained. (For a full
discussion, see this PART I, ITEM 1. BUSINESS OF THE COMPANY, Need for
Government Approval, Effects of Government Regulation.)
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10. Dependence Upon Key Personnel. Although the Company depends on
outside manufacturing and servicing capabilities, there are and will be acute
dependence upon certain key members of management and technical personnel.
Particular reliance will be made on David A. Packer, the President of the
Company and the President and Chief Operating Officer of CTICO, formerly an
employee of TRW. Furthermore, a part of the Company's current marketing
emphasis is based upon opportunities in the PRC and Thailand. General Richard
V. Secord, the Company's Chief Operating Officer and Chief Executive Officer
of CTICO has been a key person in negotiating the Company's inroads into these
markets. Certain other key personnel will be added on an "as needed" basis to
complete the tactical management group. Because of the specialized nature of
the Company's business, the Company's ability to maintain its competitive
position will depend, in part, upon its ability to attract and retain highly
qualified people in the areas of management and technology while maintaining
relationships with leading research institutions. However, if the Company
wishes to expand its scope of product and market coverage, there can be no
assurance that the Company will be able to attract the personnel on a timely
basis to accomplish such advancements. The loss of the services of Mr. Packer,
General Secord, or other key individuals may adversely affect the Company's
business and prospects. At this time, the Company does not carry key man life
insurance on any of its employees. (See this PART I, ITEM 1. BUSINESS OF THE
COMPANY, and related topics as well as PART III, ITEM 9. DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH 16(A) OF THE EXCHANGE
ACT.)
11. Competition. Competition in some markets for the Systems may be
intense. A large number of companies offer imaging systems which may be
offered as competitive with those of the Company. Many of the Company's
competitors are larger and more established and have substantially more
financial, technical, research and development and marketing resources than
the Company. Several large multi-national corporations offer competitive
products, such as X-ray or MRI equipment. Other large corporations have the
technical and financial ability to design and market competitive products, and
some of them have produced and marketed such products in the past. There can
be no assurance that such large potential competitors will not elect to
reenter the market competing with the Systems, which could have a material
adverse effect on the Company's ability to sell the Systems. There can be no
assurance that the Company will be able to compete successfully in the future,
or that future competition for product sales will not have a material adverse
effect on the business, financial condition and results of operations of the
Company. (See this PART I, ITEM 1. BUSINESS OF THE COMPANY, Competitive
Business Conditions, Competitive Position in the Industry, Methods of
Competition.)
12. Other Risk Factors - The Company will face additional risks of doing
business when and if it begins actual marketing of its Systems. Among them
are: the challenge of managing projected growth; uncertain protection for
intellectual property and possible claims of others; uncertainty in the U.S.
health care industry; and product liability risks and inadequate insurance
coverage.
Forward Looking Statements
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EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THE COMPANY'S DEPENDENCE ON THE
TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER ACCEPTANCE OF PRODUCTS, THE
IMPACT OF COMPETITION AND DOWNWARD PRICING PRESSURES, THE ABILITY OF THE
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COMPANY TO REDUCE ITS OPERATING EXPENSES AND RAISES IN THE COST OF TECHNOLOGY
DEVELOPMENT.
OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS INCLUDE THE RISKS AND
UNCERTAINTIES DETAILED IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME.
(b) BUSINESS OF THE COMPANY.
The Company's Principal Products and Their Markets
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*Introduction*
The Company is a development stage company that is a medical imaging
systems integrator producing a computerized clinical thermal imaging
diagnostic and patient management system (the "CTI System") that has been
trademarked under the name Computerized Thermal Imaging. The Company has not
filed any patent applications covering specific aspects of the system.
Rather, the Company owns computer software which is not generally subject to
patent protection. The software is proprietary and is subject to protection
as a "trade secret". The Company plans to place and/or license the CTI System
to various health care providers such as hospitals, HMOs and freestanding
image centers through "Use Agreements". Revenues will be generated under the
Use Agreements by charging the health care providers monthly for time usage
and for the disposable supplies purchased in conjunction with the CTI System.
The Company's subsidiary, CTICO has further configured the software and
hardware for the CTI System for breast cancer detection (the "CTI Breast
Imaging System"). The CTI Breast Imaging System is currently undergoing
clinical trials for in conjunction with its application for pre-market
approval from the FDA.
*Products: the CTI System and the CTI Breast Imaging System*
The Company currently has six CTI Systems placed on various sites: one
sold to a hospital in Thailand, and five of them configured as CTI Breast
Imaging Systems (configured for breast cancer detection examinations) by the
Company's subsidiary, CTICO, including the engineering design of a positioning
table that protects the privacy of the patient and avoids invasive compression
examinations. CTICO is currently seeking patent protection for the positioning
table, as well as for the algorithm process involved with the CTI Breast
Imaging System. These five units are currently being used by CTICO in clinical
trials being conducted at Norris Comprehensive Cancer Center, Los Angeles, Mt.
Sinai Hospital, Miami, St. Agnes Hospital, Baltimore, Lahey Clinic, Boston and
Providence Hospital, Washington, D.C.
The sixth System was sold to Orchard Hospital in Bangkok, Thailand in May
of 1996. The Bangkok CTI System has been used by that teaching hospital for
two years for several medical examination purposes to establish the confidence
level of Orchard Hospital to consider a joint venture for distribution in
Thailand. The Company had also placed a CTI System in the Friendship Hospital
in Beijing, China, which was originally installed by the Company as a
demonstration unit but was subsequently converted to a fee-for-use revenue
generating unit. The CTI System in Beijing produced revenue of 68,000 RMB, or
the equivalent of U.S.$8,200 through December 1997. The revenue generated in
Beijing was used to support the Company's operations in the PRC, where the
Company maintained an office until late 1997. Th Beijing CTI System was
returned to the Company offices in Layton, Utah for calibration, and then sent
to Mt. Sinai Hospital in Miami for clinical trials in conjunction with CTICO's
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attempt to attain a PMA from the FDA for the CTI Breast Imaging System. The
Company intends to return this CTI System to the PRC in preparation of
continuing marketing efforts in the PRC whenever the clinical trials have been
completed at Mt. Sinai Hospital.
* The CTI System *
The basis of the CTI System is predicated on the principle that
every externally or internally triggered physiological event causes an
associated caloric reaction. In the opinion of management, any such abnormal
caloric activity will stimulate the body's three temperature and thermal
regulatory systems. These responses are believed to be detectable and
interpretable through tell-tale thermal symptoms and temperature regulatory
response patterns over time. Management believes that the body's thermatome
(temperature) "map" has been well established by medical science, and can
provide a reliable set of clues for diagnostic and patient management
purposes, so long as the thermal symptoms are present. At other times,
symptoms such as pain or numbness and information from other medical tests,
will triangulate to indicate a disorder. Thus, the CTI System may be used by
physicians to eliminate or identify certain possible soft tissue ailments in
the process of making a diagnosis.
"Thermal imaging" as the observation technique is called
generically, is a methodology that long has held great promise, but has not
realized its potential because of deficiencies in the enabling technology.
Thus, thermal imaging has found fairly limited acceptance by the mainstream
medical community because, until the invention and development of the
Company's technology, the testing and evaluation techniques simply have not
been scientifically completed, nor medically reliable for most disorders. The
CTI System represents an integration of state-of-the-art thermal imaging
technology hardware and software components, most of which are configured to
the Company's specific needs. The CTI System is driven by sophisticated
software developed over many years by the Company and its research
contractors. The software allows for quantification of data, and significant
flexibility in data manipulation, among other advantages. However, equally
important as the CTI System's components are, the CTI System's scientifically
structured patient examination administration protocols and standards are
expected to assure the accuracy, consistency and reliability of the CTI
System's generated data.
The CTI System is suitable for use as a screening or directional
tool for imaging or diagnosis modalities, some of which are surgical, chemical
and otherwise extremely invasive. By knowing where in the body to begin
looking because of thermal irregularities, other imaging and testing can
proceed more efficiently and economically; obviously an important advantage in
containing health care costs. Additionally, management believes that as a
result of the CTI System's comparatively low user cost (less than the cost of
an MRI or CAT scan), accuracy and non-invasive procedure, the CTI System will
be advantageous for diagnostic and patient therapy purposes, in both pre- and
post-therapy assessment and with any frequency deemed necessary by the
physician. The CTI System can examine patients dynamically to enable the
physician to observe thermal reactions while the patient moves and while the
patient undergoes thermal applications.
The CTI System is currently composed of four elements:
1. The primary component is the examination unit, consisting of a
highly sensitive and accurate infra-red camera, imaging monitor, high
resolution printer, computer and proprietary software. The most unique feature
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of the CTI System is the application specific software that drives and
integrates the entire system, not only providing user friendliness and
analytical flexibility for physicians and technicians, but enabling
scientifically essential calibration corrections. Management believes that the
Company will be the first thermal imaging company to provide a consistently
objective diagnostic assessment tool that will measure multiple thermal
parameters, including facile enclosure of thermal features, dynamic graphing
of temperature distribution in the inset domain, and the use of temperature
gradient profiles in diagnostic testing.
The CTI System is a non-invasive imaging modality scientifically
applicable for an extremely wide range of patient diagnostics and therapy
management situations. The CTI System provides precise, quantitative
observation, as well as computer-assisted interpretation of irregularities in
the body's temperature and thermal regulatory systems. It is expected that
with the generated data available, physicians will be able to detect or at
least infer the presence of many diseases, disorders and injuries within the
body's physiological, neurological and vascular systems that rarely can be
detected or confirmed through conventional dense tissue/skeletal imaging
modalities such as X-ray, CAT scan, MRI and others. The CTI System is
non-dosage limited and has no detrimental side effect.
2. The second element of the CTI System is the proprietary medical
protocols that will be developed by the Company for each malady assessment.
Computer analysis requires consistently applied patient preparation and
examination application protocols.
3. Conformity is assured by using the third element, a climate
controlled laboratory (herein the Quantitative Thermal Assessment Laboratory
or "QTA" in which the patient examination occurs for equilibrating all patient
examination environments. In employing the CTI System, the Company anticipates
constructing QTAs for various potential customers including large hospital
facilities, HMOs, free-standing diagnostic centers and mobile clinics. The
customer's own technicians and physicians will operate the QTA after training.
Each installation will be linked electronically to the Company's main image
archive. A QTA center which consists of a three room suite will be
constructed within a standard 16 x 20 x 8 feet two-bed hospital room. The
rooms will have precise temperature and humidity controls by the erection of a
modular room-within-a-room. The patient temperature equilibrium rooms will
consist of two rooms within the suite for stabilization of patient temperature
as well as other preparations for testing. The imaging room is a room within
the climate controlled suite in which the patient is placed for infra-red
scanning and in which the camera, computer console and one technician is
present during the testing.
4. The fourth element of the CTI System is the use of a digital
health card that encodes a patient's thermal image (capable of storing the
patient's medical record) in a digital format on a plastic card the size of a
credit card. Only recently has the technology been improved to be capable of
storing the quantity of data for accurately carrying images from the CTI
System. More than one manufacturer now can produce such cards. The Company
plans to embed in the CTI System a "reader/writer" encoded for Company access
only to permit recording the images on the cards to enable subsequent
comparisons of the images by physicians at different clinical sites over an
integrated telemedicine system.
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* CTI Breast Imaging System*
The Company owns 80 percent of the outstanding capital stock of
Computerized Thermal Imaging, Co., a Nevada corporation (herein sometimes
referred to as "CTICO".) CTICO utilizes the CTI System specially configured
as a breast cancer screening system which is a non-invasive, non-contact
procedure that does not involve breast compression or exposure to radiation
(the "CTI Breast Imaging System"), and which is comprised of an infra-red
camera, a central processing unit, input devices, a display unit, and a power
distribution unit. The CTI Breast Imaging System also employs a proprietary
patient positioning system (for which a patent application has been filed) and
an algorithm process (for which a provisional patent application has been
filed). The positioning system was designed to maximize breast area viewed and
to include surrounding areas of interest, to limit patient movement during the
examination, to ensure consistent cooling, to permit applications of localized
thermal changes during the examination, and to accommodate any residual
patient breathing movement. Currently, the CTI Breast Imaging System is
undergoing clinical testing in accordance with an FDA approved protocol which
management expects to lead to pre-market approval (herein referred to as
"PMA") by the FDA. Clinical trials are being conducted at Providence Hospital
in Washington, D.C., Norris Cancer Center in Los Angeles, St. Agnes Hospital
in Baltimore, Lahey Clinic in Boston and at Mt. Sinai Hospital located in
Miami. (See this ITEM 1. BUSINESS OF THE COMPANY, Material Contracts
/Relationships for further information regarding the clinical testing
contracts with the various hospitals.) Once it has finished its clinical
trials, CTICO expects to file for PMA, as long as the Company can continue to
obtain the necessary financing for the operations of CTICO.
The CTI Breast Imaging System performs three independent but
interrelated functions; data acquisition, data analysis and clinical
evaluation. The CTI Breast Imaging System will use the Company's infra-red
detection system for use in data acquisition. The thermal data acquired will
consist of a time sequence of digitized thermal images. The images will then
be post-processed on specially developed data analysis software to generate
images for clinical assessment. The interpreting physician will view an image
and the supporting mathematical data underlying that image.
*Future Product and Service Plans*
The Company will continue to invest, to the extent of its available
financing, to improve the effectiveness of its proprietary application
software. In addition, the Company will continue to source from vendors who
can improve the precision and reliability of the patient testing of the CTI
System. However, the area of innovation that the Company believes will create
the next quantum leap will be the integration of the Systems with anatomical
and other imaging data. Because the Systems are digitally quantifiable, the
Company believes it is highly technically and economically feasible for the
Systems to be the foundation of inter-modality imaging, where, for instance,
image data of the CTI System is overlaid on CAT scan or MRI or X-ray or
sonographic imaging data to create a multi-dimensional "picture". This
development is not forecast until after significant market penetration.
At present, some other advanced modalities generally are what might
be termed "neo" or non-quantifiable. That is, even if the information from an
MRI is processed by computers digitally, the eventual interpretation of the
image still is subjective on the part of the technicians and diagnosing
doctors. The Company's plan is to first build quantified data bases of tests
on the same patient by other modalities and then develop the necessary
interfaces to allow overlay. Then, with this capability and the combined data
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base at hand, the Company can begin offering computerized disorder pattern
recognition assistance based upon a multi-dimensional image of patients.
Distribution Methods of the Products or Service
- -----------------------------------------------
* Marketing *
The Company has not yet begun a substantive marketing campaign although it
did initiate certain Asian relationships with both the PRC and Thailand (where
it sold one CTI System to Orchard Hospital), both countries where thermography
is a accepted modality for medical usage. The Company's Golden Health
Telemedicine Contract and related contracts entered into by a subsidiary
affiliate of the Company (TriSun/CTI Asia, Ltd.) and a company formed by the
Ministry of Public Health in the PRC were effected in furtherance of these
marketing goals. The Company has deferred commencing those contracts based on
its decision to channel all of its resources to CTICO for completion of the
FDA clinical trials on the CTI Breast Imaging System. (See below *Marketing
the CTI System in the PRC; Risks of Doing Business in the PRC and Other
Foreign Countries* and this PART I, ITEM 1. BUSINESS OF THE COMPANY, Material
Contracts and Relationships for further information on the Asian
relationships.) It is unlikely that the Company will market the CTI System
itself in the United States without developing it for other specific
applications which will likely require FDA approval. The Company cannot,
however, be sure that expenditures for clinical trials on the CTI Breast
Imaging System, or on other subsequent applications of the CTI System, will
result in confirming results or an FDA approval.
In order to be successful, the CTI Breast Imaging System and the CTI
System must be accepted both by physicians and the public. The primary method
for creating physician acceptance of the Systems will be through the
publication and presentation of technical research papers to medical
professional groups. A marketing campaign must also be undertaken to educate
the general public regarding the advantages associated with the use of the
Systems. Management understands that this marketing effort will require
substantial funds which are not presently available. While most of the funds
needed to engage in a large scale marketing effort would be necessary if the
PMA were approved and would likely have to come from equity financing,
Management believes that usage charges from the CTI Breast Imaging System
will provide sufficient funds to initiate the campaign. Based upon the current
pace of clinical trials, the qualified patient examinations required by the
FDA should be completed by the end of 1999 or early 2000 for consideration for
the FDA to grant the PMA.
* Marketing Agreement with T.S.E.T, Inc. *
While product development remains the Company's primary focus, management
has taken steps to explore marketing alliances with other companies in the
medical industry. On November 19, 1998 the Company entered into a Marketing
Agreement with T.S.E.T., Inc. ("TSET"). The Marketing Agreement provides that
TSET will use its best efforts and marketing resources to actively market the
diagnostic thermal imaging system of the Company on a world wide basis. Under
the terms of the Marketing Agreement, the Company is required, at its own
cost, to provide sales materials and marketing and technical assistance to
TSET in order to facilitate the placement of the systems. TSET is granted the
nonexclusive authority to market and sell the systems throughout the world at
prices to be set by the Company. TSET will be compensated under a commission
fee structure based on a rate of 15 percent of the "value" of each system
sold. Fees earned by TSET shall be paid either in cash or in the cash
equivalent of the Common Stock of the Company, as elected by TSET. The term of
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the Marketing Agreement is for one year, but may be renewed for subsequent one
year periods or longer as agreed upon by the parties. The Marketing Agreement
does not contain any minimum sales requirements or other performance criteria
providing for automatic termination, and may only be terminated prior to the
expiration of the initial term by the mutual consent of the parties.
*Marketing the CTI System in the PRC; Risks of Doing Business in the PRC
and Other Foreign Countries*
The Company intends to continue its efforts to market the CTI System to
the PRC, Thailand and hospitals in other foreign countries as additional funds
become available to it. Doing business in the PRC, as well as in other
developing countries, has risks not prevalent in the United States or Canada.
Judicial systems for enforcement of contracts in those counties are not
reliable. The Company has inserted arbitration clauses in its foreign
contracts to date, but there is risk to arbitration results, because the
holding is not subject to appeal, regardless of error in the application of
law. Furthermore, foreign government laws or regulations can change in a
method not customary to American companies, including the extreme measure of
nationalization of assets. The Company's existing contracts with a company
owned by the Ministry of Public Health in the PRC require letters of credit
enforceable outside the PRC to be issued as a precondition of performance by
the Company. Management intends to continue to take such financial precautions
to protect against financial risks of doing business in the PRC and developing
countries. (See this ITEM 1. BUSINESS OF THE COMPANY, Material Contracts and
Relationships for further information on contracts related to the PRC.)
Successful operations in developing countries usually require a
joint venture with a respected citizen of that country. The Company has
continued one full time employee in the PRC who maintains his relationships
with the Ministry of Public Health. The initial sale of the CTI System to the
Orchard Hospital in Thailand was brought about through a personal relationship
established in earlier years by General Richard V. Secord, the Chief Operating
Officer of the Company. There is no assurance that a venture will be formed in
Thailand, but the Company's contacts in Thailand have been successfully using
and demonstrating the CTI System and providing a recurring downloading of
patient information. Thailand and the PRC are countries where thermography (a
technology predecessor to the CTI System without computer data analysis and
without high definition cameras) has been accepted for years, largely due to
its use in proving the efficacy and proper location of acupuncture. Management
intends to use this relationship to establish a financing venture in Thailand,
when it can raise the necessary capital to pay start up costs.
Status of Any Publicly Announced New Product or Service
- ------------------------------------------------------
The Company does not have any new publicly announced products or services
other than what has been previously discussed above.
Competitive Business Conditions/Competitive Position in the Industry/Methods
- ---------------------------------------------------------------------------
of Competition
- ---------------
* CTI System *
The Company faces limited direct competition from the latest versions of
conventional thermal technology. Although the CTI System may have application
for detection or diagnosis of numerous soft tissue ailments, physicians must
broadly accept the CTI System as complementary detection technology to
prescribe its use to create a material market for its use. Many physicians
generally equate the CTI System, upon first introduction, with the predecessor
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technology of "thermography", an analog infra-red camera system without the
Company's computer algorithm analysis of computed thermal data using high
quality thermal imaging cameras. Educating doctors of the fact that the
Systems are new technology could take time and result in delays in any
financial revenue forecasts. In the opinion of management, thermography is
comparatively crude and unscientific and otherwise seen as inferior to the CTI
System and is not considered an economic barrier to market penetration. The
CTI System should not be seen as competitive to other diagnostic imaging
products, such as MRI, CAT scan, X-ray, ultrasonography, laser, and Doppler
mapping (any more than any one modality of that list is considered competitive
to another). Each of these anatomical modalities has established a niche in
the hospital diagnostics market, free standing imaging centers or physicians'
offices. Each modality is better for some disorder diagnosis situations and
less effective for others. The adoption pattern of the modalities is dictated
by the degree of advantage perceived by one modality as compared to the
others.
By comparison to all of the above-described modalities, the CTI
System has no direct competition from existing modalities in many diagnostic
situations because the CTI System gathers data regarding the physiological and
functional domain of human health, as opposed to the anatomical or structural
facets. Most other imaging devices address "anatomical or structural patient
issues" and are therefore complementary and not competitive to the CTI System.
Large companies have the resources to attempt to compete in the long term with
the Company in the physiological assessment of medical issues, but at present
are not deemed by management to be a threat. MRIs, CAT scans, and X-rays all
image hard or dense structures such as bones, organs and other material masses
within the body. Many soft tissue disorders simply are not detectable by
conventional modalities until they become manifested as relatively advanced
anatomical abnormalities such as irregular tissue density or damage.
* CTI Breast Imaging System *
Mammography is an X-ray technology most widely used in the United States
as the imaging mode for detection of breast cancer. Statistics have been
published establishing a low reliability percentage of close to 75 percent for
"false positive" indications, where mammography indicates a suspicious tumor
and a follow-up surgical biopsy establishes that the tissue is benign. An even
more frightening statistic is the percentage of mammography 'false negative"
indications, by which a breast cancer is not detected. Mammography is
significantly less effective in dense breast tissue; women under the age of 40
years typically have more dense breast tissue than women over the age of 40
years. Therefore, mammography is currently most effective in women over the
age of 40 years. The initial clinical trials approved by the FDA for CTICO are
designed to establish the CTI Breast Imaging System as complementary to
mammography. The first PMA uses will be to employ the CTI Breast Imaging
System to examine any patient with "suspicious tissue" indications resulting
from a mammography image.
Potential competition for the CTI Breast Imaging System includes an
imaging device for the detection of breast abnormalities being developed by
Imaging Diagnostics Systems, Inc. located in Sunrise, Florida, known as a
Computer Tomography Laser Mammography System ("CTLM"). This device relies on
ultra-fast laser imaging technology which can acquire data to allow
visualization of the interior structure of the breast. The ability to localize
an abnormality within the breast is greatly enhanced by the slice plane
lateral and cranio-caudal images produced by CTLM. Such images can be stored
on CD-ROM and allow the physician to recall previous studies instantly for
immediate comparison with the current study. The advantage of CTLM over
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mammography is its use of laser technology to produce the image, which does
not use harmful radiation. Management, however, believes the CTI Breast
Imaging System will prove superior to CTLM for detection of cancer because
laser images still require density of tissue, as with mammography, to produce
an image. Dense tumor formations are a later stage of cancer and management
believes the CTI Breast Imaging System detection of physiological thermal
changes will prove to be more accurate (because some tumors are benign) and
detectable at an earlier stage.
Also, an ultrasound technique is being developed by Advanced
Technology Laboratories ("ATL"), known as High-Definition Imaging. Ultrasound
sends high-frequency sound waves into the body, which are reflected back to
create images. While ultrasound is used in numerous medical procedures, ATL's
system is the first to provide adjunctive diagnostic capability for breast
cancer.
* Component Competition *
If the Company and CTICO are successful with their product development
and marketing, some component parts for the CTI System could be in short
supply. There are few manufacturers that produce an infra-red camera and unit
cooling system of a high enough quality to satisfy the specifications for a
CTI System. The systems integration and software development contractor for
both CTI and CTICO, TRW Systems in its TRW Healthcare Technology Division
(herein referred to as "TRW"), has tested numerous manufacturer's products for
certain parts. If the demand for the CTI System and the CTI Breast Imaging
System increased dramatically, some parts may not be immediately available.
Material Contracts and Relationships
- ------------------------------------
The Company has entered into a number of material contracts and
relationships in its development and marketing of its CTI System and CTI
Breast Imaging System as well as for completion of system integration and
compliance with FDA requirements. Several of these agreements are discussed
below. In addition, agreements regarding funding and business plan
development are discussed under PART II, ITEM 6. MANAGEMENTS DISCUSSION AND
ANALYSIS AND PLAN OF OPERATION, and under PART III, ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
*TRW Systems Integration Group/Asian Contracts and Relationships *
In October 1996, the Company initiated its relationship with TRW Systems
Integration Group (some subsequent contracts have been entered with other
affiliates of the consolidated group, any of which companies may be referred
to in this report as "TRW") to design a plan for systems integration to
implement the Golden Health Telemedicine Contract and related contracts
entered into by a subsidiary affiliate of the Company (TriSun/CTI Asia, Ltd.)
and a company formed by the Ministry of Public Health in the PRC. This initial
agreement formed the long-term relationship with TRW, which later resulted in
the execution of contracts with TRW for commercializing the CTI System and for
developing the software and data analysis systems integration for the CTI
Breast Imaging System. The Company has deferred any further expenditures
toward the Golden Health Telemedicine Contracts until the Ministry of Public
Health performs in causing the hospitals to place the letters of credit as
provided in the contracts, but the Company has maintained communications with
representatives of the Ministry of Public Health toward a plan for
implementing those contracts. The Asian relationships also include an
agreement entered in 1996 with Dr. Ladavan of the Orchard Hospital in Thailand
for the purchase of one CTI System for $125,000, or 50 percent of its
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anticipated market value, setting forth an intention to enter a joint venture
for the production and marketing of the CTI System in Thailand. The decision
of the Company to defer further development for commencing those contracts was
based on the decision of the Company to channel all of its resources to CTICO
for completion of the FDA clinical trials. The Company intends to resume its
Asian relationships when funds become available.
On October 29, 1996, the Company entered into a contract with TRW's
Strategic System Division. In the contract TRW agreed to provide system
management services, including testing, development, training, engineering,
integration and installation support, with regard to the CTI System. Final
closeout of this contract was accomplished on May 5, 1999 with the Company
making final payment of all amounts due to TRW under that contract and with
the delivery to CTICO of all items called for on the contract, including items
used in the production, documentation and intellectual property. Any follow-on
activities to those efforts performed on this contract have been consolidated
into the new CTICO - TRW Agreement discussed in the next paragraph.
* CTICO-TRW Agreement *
CTICO, the Company's 80% owned subsidiary, entered into a separate
technical management agreement and support agreement with TRW on June 19,
1996. This contract was closed out on May 5, 1999 with the Company making
final payment of all amounts due to TRW under this contract and the delivery
to CTI of all items produced on the contract, including items used in the
production, documentation as well as all intellectual property. A follow-on
agreement was signed between CTICO and TRW on May 7, 1999 to continue the
efforts of the previous contract as well as those ongoing under the previous
CTI-TRW agreement.
* Licence with CTICO *
In 1996, the Company entered into a License Agreement with CTICO and
initiated the development by CTICO of a new configuration of the CTI System to
develop the CTI Breast Imaging System for use in the detection of breast
cancer for marketing in North America. When CTICO was incapable of financing
its activities, and when CTICO had made progress through its pre-testing to
obtain FDA approval to proceed for a PMA, the Company executed the Stock
Transfer Agreement in 1997 to devote a primary portion of its funds toward the
development of the CTI Breast Imaging System and toward the clinical trials
designed to obtain a PMA. This resulted in the development of clinical
relationships with several health care providers and medical university
teaching institutions. The clinical trial agreements require CTICO to pay for
the examinations using the CTI Breast Imaging System as complementary medical
technology with mammography. Commencement of the clinical trials also has
resulted in CTICO engaging Quintiles, Inc. ("Quintiles"), an independent
consultant authorized by the FDA to verify clinical examination results. CTICO
utilizes Quintiles services on a time and materials basis. (See this PART I,
ITEM 1. BUSINESS OF THE COMPANY, Patents, Trademarks, Licenses, Franchises,
Concessions, Royalties Agreements, Labor Contracts, for further information on
the license agreement between CTICO and the Company. See "The Clinical Trial
Agreements" below for information on agreements with the various hospitals
conducting clinical trials.)
* The Clinical Trial Agreements *
CTICO has entered into the following agreements regarding clinical trials
of the CTI Breast Imaging System. The first two agreements (the USC
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Agreement and the HRA Agreement) are related to one clinical study at the
Norris Cancer Center, University of Southern California.
USC Agreement. CTICO and the University of Southern California
("U.S.C."), a California nonprofit educational institution, entered into a
clinical trial agreement (the "U.S.C. Agreement") on May 5, 1997. Under the
terms of this agreement, U.S.C. is to perform a clinical study of the
screening of breasts for identification of suspicious tissue using clinical
examination and mammography with and without the use of the CTI Breast Imaging
System. The goal of such study is to establish a specific confidence interval
for the detection of breast cancer associated with the use of the CTI Breast
Imaging System. The U.S.C. Agreement provides that the study will be conducted
in accordance with a protocol established by CTICO. The estimated period of
performance for the U.S.C. Agreement was undetermined at the time of its
execution. By its terms, total costs to CTICO under the U.S.C. Agreement shall
not exceed $385,219. All right, title, and interest to any intellectual
property that is the direct and specific result of the performance of the
protocol shall belong to CTICO. All right, title, and interest to any
intellectual property which are conceived or made jointly by one or more
employees of CTICO and U.S.C. shall belong jointly to CTICO and U.S.C. All
right, title, and interest to any other intellectual property developed or
conceived under the study shall be considered property of U.S.C.
HRA AGREEMENT. CTICO and the Health Research Association ("HRA"), a
California nonprofit educational institution affiliated with the University of
Southern California Medical Center, entered into a clinical trial agreement
(the "HRA Agreement") on September 16, 1997. This agreement is under the same
terms and conditions as the U.S.C. Agreement and requires HRA is to perform a
clinical study of the screening of breasts for identification of suspicious
tissue using clinical examination and mammography with and without the use of
the CTI Breast Imaging System in accordance with a protocol established by
CTICO. The protocol for the HRA Agreement is identical to the protocol
established for the U.S.C. Agreement. The estimated period of performance for
this agreement is from September 1, 1997 through September 1, 1998. All right,
title, and interest to any intellectual property that is the direct and
specific result of the performance of the protocol shall belong to CTICO. All
right, title, and interest to any intellectual property which are conceived or
made jointly by one or more employees of CTICO and HRA shall belong jointly to
CTICO and HRA. All right, title, and interest to any other intellectual
property developed or conceived under the study shall be considered property
of HRA. On March 24, 1999 CTICO entered into a subsequent agreement with HRA
with an estimated period of performance of March 15, 1999 through March 15,
2000 under which HRA is to perform a clinical study involving the screening
of human breast tissue for identification of potentially cancerous tissue by
using clinical examination and mammography with and without the use of the CTI
Breast Imaging System and has the same goal as the earlier agreement. Medical
trials of the CTI Breast Imaging System pursuant to this agreement will be
conducted at University of Southern California's Norris Cancer Center.
PROVIDENCE HOSPITAL AGREEMENT. CTICO and the Providence Hospital of
Washington, D.C.,a non-profit institution incorporated under the laws of the
District of Columbia, entered into a clinical trial agreement (the "Providence
Hospital Agreement") on February 14, 1998. Under the terms of the Providence
Hospital Agreement, Providence Hospital is to perform a clinical study
involving the screening of human breast tissue for identification of
potentially cancerous tissue by using clinical examination and mammography
with and without the use of the CTI Breast Imaging System. The goal of such
study is to establish a specific confidence interval for the detection of
breast cancer utilizing the CTI Breast Imaging System. The Providence Hospital
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Agreement provides that the study will be conducted by Providence Hospital in
accordance with a protocol established by CTICO. The estimated term of the
Providence Hospital Agreement is from February 15, 1998 to February 15, 1999.
All intellectual property that arises from, relates to, or is a direct and
specific result of performance of the protocol and directly related to the CTI
Breast Imaging System shall belong to CTICO. In addition, Providence Hospital
agrees not to disclose certain confidential information exchanged in
connection with the Providence Hospital Agreement and agrees to prevent
disclosures of such information to all third parties in a manner in which it
treats its own similar information. Although the Providence Agreement has not
been formally renewed, Providence continues to perform clinical trials as of
the date hereof and the CTICO will undertake to renew the contract in the
immediate future.
MT. SINAI MEDICAL CENTER AGREEMENT. CTICO and the Mt. Sinai Medical
Center, a non-profit institution incorporated under the laws of the State of
Florida, entered into a clinical trial agreement (the "Mt. Sinai Agreement")
on June 4, 1998 with the same purpose and goals as the Providence Hospital
Agreement and conducted in accordance with a protocol established by CTICO.
The estimated term of the Mt. Sinai Agreement is from June 1, 1998 to December
31, 1998. Although the Mt. Sinai Agreement has not been formally renewed, Mt.
Sinai has continued to perform clinical trials since December under the same
terms and conditions as set forth in the Mt. Sinai Agreement. CTICO will
undertake to formally extend the contract in the near future. The Mt. Sinai
Agreement provides for the same terms regarding confidentiality and
intellectual property as the St. Providence Agreement discussed above.
ST. AGNES HEALTHCARE, INC. AGREEMENT. CTICO and St. Agnes HealthCare,
Inc., a non-profit institution incorporated under the laws of the State of
Maryland, entered into a clinical trial agreement (the "St. Agnes Agreement")
on March 8, 1999. The St. Agnes Agreement is under the same terms for
performance of a clinical study and with the same goal of establishing a
specific confidence interval for the detection of breast cancer utilizing the
CTI Breast Imaging System as the St. Providence Agreement. As in the other
clinical trial agreements, the study will be conducted by St. Agnes in
accordance with a protocol established by CTICO. The estimated term of the St.
Agnes Agreement is from March 1, 1999 to March 1, 2000. All intellectual
property that arises from, relates to, or is a direct and specific result of
performance of the protocol and directly related to the CTI Breast Imaging
System shall belong to CTICO; and, St. Agnes agrees not to disclose certain
confidential information exchanged in connection with the St. Agnes Agreement
and agrees to prevent disclosures of such information to all third parties in
a manner in which it treats its own similar information.
LAHEY CLINIC AGREEMENT. CTICO and the Lahey Clinic, a non-profit
institution incorporated under the laws of the State of Massachusetts, entered
into a clinical trial agreement (the "Lahey Clinic Agreement") on May 18,
1999. Under the terms of the Lahey Clinic Agreement, Lahey Clinic is to
perform a clinical study involving the screening of human breast tissue for
identification of potentially cancerous tissue by using clinical examination
and mammography with and without the use of the CTI Breast Imaging System. The
clinical trials under the Lahey Clinic Agreement have the same goal as the
other clinical trial agreements and will be conducted by Lahey Clinic in
accordance with a protocol established by CTICO. The estimated term of the
Lahey Clinic Agreement is from May 1, 1999 to April 30, 2000. The Lahey Clinic
Agreement also has the same provisions regarding intellectual property and
non-disclosure/confidentiality as the other clinical trial agreements. This
Agreement is attached hereto, and incorporated by reference as Exhibit
10(fff).
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* Marketing Agreement with T.S.E.T., Inc.*
On November 19, 1998 the Company entered into a Marketing Agreement with
T.S.E.T., Inc. ("TSET"). The Marketing Agreement provides that TSET will use
its best efforts and marketing resources to actively market the diagnostic
thermal imaging system of the Company on a world wide basis. (For further
discussion on the Company's agreement with TSET, see this ITEM 1. BUSINESS OF
THE COMPANY, Distribution Methods of the Products or Service and PART III,
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.)
* CTI-Battelle Agreement*
The Company signed an agreement with Battelle Memorial Institute
("Battelle") on March 19, 1999, for technical consulting services to aid in
the submittal of regulatory submissions to the FDA. The initial period for the
technical consultation services to be provided was 5 months. The Company
renewed its contract with Battelle in August and executed a three month
extension. Under the Battelle Agreements, Battelle will provide (1) support
for algorithm development, (2) organization of design files, (3) statistical
consultation for interaction with the FDA, and (4) manufacturing review.
(This agreement is attached hereto as Exhibit 10(ggg)along with the letter
proposal and extension.)
*CTI -Quintiles Relationship*
The Company has also established a relationship with Quintiles,Inc.
("Quintiles"), an independent consultant authorized by the FDA to verify
clinical examination results. The CTICO utilizes Quintiles services on a time
and materials basis. The Company's use of Quintiles services varies from
month to month.
Sources and Availability of Raw Material; Principal Suppliers
- -------------------------------------------------------------
The Company does not manufacture the hardware and operating software
components of the Systems but rather purchases these components from third
parties in accordance with specific design specifications. Although there is
more than one manufacturer capable of manufacturing these components, the
failure of any one manufacturer to deliver its components in a timely manner
could result in a loss of business for the Company and further result in time
delays for installation of the Systems. The Company and CTICO do have a
material dependence on the following principal suppliers: Bales Scientific
which supplies the optics and systems software (for CTI Breast Imaging System)
and Precision Optical which supplies the Yittrium Oxide coated mirrors. The
Company believes that it can locate other suppliers for mirror components, if
necessary; however, should the Company be unable to obtain optics supplies
from Bales Scientific, the Company's business could be adversely affected.
The Company is currently unaware of another supplier which could provide the
same quality products as Bales.
Dependence on a Few Major Customers
- -----------------------------------
The Company currently does not have any "customers" and has sold only one
CTI System to a hospital in Bangkok, Thailand. In the United States, the
Company expects that if it is able to achieve FDA approval on the CTI Breast
Imaging System, it will not rely on one or a few major customers. It is
anticipated that the CTI System will be attractive to a widely dispersed
number of customers.
20
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Patents, Trademarks, Licenses, Franchises, Concessions, Royalties Agreements,
- ----------------------------------------------------------------------------
Labor Contracts
- ----------------
* License Agreement with CTICO *
On June 8, 1996, the Company entered into a License Agreement with
CTICO which granted an exclusive license to CTICO to distribute, research, and
develop the CTI System and related technology. The license covered
applications of the CTI System to the field of breast cancer detection and was
limited in scope to North America. The License Agreement also provided for a
joint research program whereby the parties would share research data relating
to the CTI System and cross-license any developed technologies. In addition,
the terms of the License Agreement established that the agreement would
automatically terminate in the event of any consolidation, merger, share
exchange or other event causing a change in more than 50 percent control of
the voting shares of CTICO or the Company. As a result of the Stock Transfer
Agreement executed on January 28, 1997 by the Company and CTICO, the Company
gained control of 80 percent of the common stock of CTICO. While the
provisions of the Stock Transfer Agreement manifests the parties' intent to
execute a new licensing agreement and outlined the terms of such an
arrangement, no new licensing agreement has been reached. Although no written
licensing or research agreements presently exist between the Company and
CTICO, management believes that the cross-licensing arrangement between the
two companies is still in place and, by virtue of the Company's 80 percent
controlling ownership interest in CTICO, it has the requisite ability to
ensure access for the Company to all material technological developments. The
risk of the absence of a clear, written licensing agreement is heightened by
the financial constraints upon the Company. If the Company or CTICO were to be
unable to timely pay creditors, a judgment or lien or bankruptcy against the
Company or CTICO could result in a challenge to the executory nature of any
licensing agreement, or the parties may have a disagreement as to the terms of
such agreement, due to the fact that specific licensing terms are not set
forth in writing. Although the Stock Transfer Agreement evidences the intent
of the parties to recognize a cross-license agreement and geographical
restrictions upon the use of the CTI Breast Imaging System by CTICO, that
expression of intent set forth in the Stock Transfer Agreement may not be
recognized, if challenged by CTICO or a third party acquiring either CTICO or
some of the Company's technology, as a binding license agreement. The result
could be that CTICO, if subsequently under separate stockholder control, might
be a competitor to the Company in the use of the CTI System technology and
marketing of related products. The Company expects to control this risk by
paying its creditors and establishing an appropriate licensing agreement
while controlling the stock of CTICO.
*Patents*
Neither the Company nor CTICO currently holds registered United
States or foreign patents. CTICO has acquired, by assignment, a patent
application on a Functional Thermal Imaging Apparatus which has been filed
with the United States Patent and Trademark Office. In addition, CTICO has
filed a provisional patent application with the United States Patent and
Trademark Office covering the algorithm process involved in analyzing the
imaging data collected through the CTI Breast Imaging System. CTICO must file
a non-provisional patent application, providing a more definitive description
of the invention for which patent protection is sought, by October 20, 1999.
In the event a non-provisional patent application is not filed by said date,
then the provisional application will go abandoned. Management believes other
developed technologies or components of either the CTI System or CTI Breast
Imaging System may warrant patent protection in the future. Substantial
21
<PAGE>
engineering costs and legal fees will be incurred in order to research,
develop and file additional patent applications. The Company and CTICO intend
to explore this possibility when funds become available to support such
expenditures.
*Trademarks*
The CTI System that has been trademarked under the name Computerized
Thermal Imaging.
*Franchises, Concessions, Royalty Agreements, Labor Contracts*
The Company has no franchises, concessions, royalty agreements or labor
contracts in effect.
Effect of Existing or Probable Government Regulations/Need for Governmental
- ----------------------------------------------------------------------------
Approval.
- ---------
* Need for FDA Approval on CTI Breast Imaging System *
The FDA has no prohibiting regulations preventing the use of thermal
imaging equipment, generally perceived as an infra-red camera, for medical
purposes. There can be no assurance that any state regulatory bodies or the
FDA might not impose some restrictions, with which the Systems, or the users,
must comply. The Company believes no FDA approval is required for health care
physicians or radiologists to use the CTI System, but the Company believes
that broad acceptance for use of the CTI System will require verification of
clearance from the FDA. The CTI System and CTI Breast Imaging Systems are
considered medical devices as defined by Section 201(h) of the FDC Act because
they are intended for use in the diagnosis of disease or other conditions, or
in the cure, mitigation, treatment or prevention of disease, in man or other
animals. As such, these devices require either compliance with FDC Act Section
510(k) under which the Company currently relies with respect to the CTI
System, or approval of a premarket approval application (herein referred to as
"PMA" by the FDA prior to commercialization, with respect to the CTI Breast
Imaging System. Satisfaction of applicable regulatory requirements may take
years and varies substantially based upon the type, complexity and novelty of
such devices, as well as the clinical procedure. Filings and governmental
approvals may be required in foreign countries before the devices can be
marketed in these countries. There can be no assurance that further clinical
trials of the Company's thermal imaging systems or of any future products will
be successfully completed or, if they are completed, that any requisite FDA or
foreign governmental clearances or approvals will be obtained. FDA or other
governmental clearances or approvals of products developed by the Company in
the future may require substantial filing fees, or costs to conduct clinical
trials, which could limit the number of applications sought by the Company and
may entail limitations on the indicated uses for which such products may be
marketed. In addition, approved or cleared products may be subject to
additional testing and surveillance programs required by the FDA and other
regulatory agencies, and product approvals and clearances could be withdrawn
for failure to comply with regulatory standards or by the occurrence of
unforeseen problems following initial marketing. The Company is also required
to adhere to applicable requirements for current good manufacturing practices,
to engage in extensive record keeping and reporting and to comply with the
FDA's product labeling, promotional and advertising requirements.
Noncompliance with state, federal or foreign requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, delay, denial or withdrawal of premarket clearance
or approval of devices, recommendations by the FDA that the Company not be
22
<PAGE>
allowed to enter into government contracts, and criminal prosecution, all of
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
*FDA Review*
The FDA review of a PMA application consists of the following four steps:
(i) administrative and limited scientific review by the FDA staff to determine
that the application is complete; (ii) in-depth scientific and regulatory
review by the FDA compliance personnel; (iii) review and recommendation of the
appropriate advisory committee (panel review); and (iv) a FDA good
manufacturing practices inspection. Following the FDA review, the FDA will
notify the applicant by letter of its decision to approve or deny the
application. A notice will also be published in the Federal Register. These
steps are internal FDA PMA processing so no information is available for the
time frame of the individual steps.
After CTICO developed a product that could have beneficial medical
use and would merit FDA approval, the first step was to hold a series of
discussions with the FDA. These discussions were designed to allow the Company
to present to the FDA the new product to be tested, it's basis of operation,
safety ramifications, intended usage, desired trial composition and desired
approval. Pretrial data was presented to the FDA by CTICO to demonstrate that
there was sufficient probability of success to warrant FDA consideration.
These discussions also reviewed the intended trial protocol. These
discussions led to modifications to the intended trial composition and
protocol in order to ensure that a trial would produce sufficient data
quantity and quality to allow a successful FDA review after the trial. CTICO
has successfully completed this step and has an FDA approved trial protocol,
requiring an initial data collection phase where thermal images collected by
the CTI Breast Imaging System from approximately 600 qualified patients were
collected. The next step was to set-up the trial process with the appropriate
trial oversight. CTICO has completed this step of the process. The next step
of the FDA approval process is to implement the clinical trials by executing
the approved protocol and collecting actual patient data. CTICO is currently
in this phase of the approval process with clinical trial data collection
underway at Norris Comprehensive Cancer Center, Los Angeles, Mt. Sinai
Hospital, Miami, St. Agnes Hospital, Baltimore, Providence Hospital,
Washington, D.C. and Lahey Clinic, Boston. The clinical trials permit the
medical facilities to use the CTI Breast Imaging System, to collect the
required patient information and examination results, to compare the CTI
Breast Imaging System data collected to the pathology findings of malignant or
benign tumors, to permit independent review for adherence to examination
procedures, and to categorize the collected data for appropriate presentation
to the FDA. This phase is expected to continue through 1999. CTICO has engaged
Quintiles, Inc., a consulting firm recognized by the FDA for overseeing
clinical trial data collection and adherence to FDA requirements. Following
the completion of the trial data collection phase, CTICO and its consultants
must analyze the trial results to prepare a PMA submission. The Company makes
no estimate of the time required by the FDA to review CTICO's PMA submission.
The Company will rely upon a 510(k) exemption under the FDC Act for
general medical applications, based upon the technology of the infra-red
camera components for sales of the CTI System. The Company expects in the
future to pursue specific medical applications by applications to the FDA for
a PMA or other approval, but none have been initiated at this time by the
Company.
23
<PAGE>
* Third Party Reimbursement *
Although use of the CTI System and the CTI, Co. System is permitted
now by physicians, the absence of FDA approval is a practical impediment. Most
physicians prescribe use of external procedures and imaging modalities when
there are approved payment codes acceptable for third party reimbursement
(e.g., insurance, Medicare, etc.) to enable patients to obtain medical
treatment payment assistance. The Health Insurance Care Finance Administration
("HICFA")is the agency that establishes for Medicare/Medicaid a payment code
approval for certain imaging modalities for particular suspected ailments.
Generally, HICFA does not set payment codes for use of new technology unless
the technology has obtained FDA approval. Most insurance company reimbursement
plans establish payment codes for their insureds based upon their own
experience, and for new procedures or imaging modalities, based upon HICFA's
determination. Therefore, FDA approval is needed, at least at the inception,
for each ailment examination for which the CTI System or the CTI Breast
Imaging System is used seeking reimbursement, if not covered by other general
payment codes.
For a discussion on the effect of government regulations on the
Company's proposed business development in the PRC, see this PART I, ITEM 1.
BUSINESS OF THE COMPANY, Distribution Methods of the Company's Products,
*Marketing the CTI System in the PRC; Risks of Doing Business in the PRC and
Other Foreign Countries*
Research and Development Activities in the Past Two Years
- ----------------------------------------------------------
A large portion of the Company's expenditures since inception have gone
to research and development of its CTI System and CTI Breast Imaging System as
discussed in detail under this PART I, ITEM 1. BUSINESS OF THE COMPANY with
additional expenditures on contract development and marketing efforts in Asia
as well as fund raising. Since inception the Company has spent approximately
$7,032,000 on research and development of its Systems. Because the Company has
shifted its priorities to completing CTICO's clinical trials on the CTI Breast
Imaging System in an effort to obtain PMA, it has incurred more than 60% of
its research and development expenses in the last two years, approximately
$4,267,220. The majority of the foregoing expenses were incurred in connection
with TRW software development and clinical testing expenditures relating
primarily to the CTI Breast Imaging System.
Total Number of Employees
- -------------------------
The Company has 6 full-time employees and one part time employee.
ITEM 2: DESCRIPTION OF PROPERTY
The Company owns no properties. It leases approximately 1,000 square
feet of office space in Lake Oswego, Oregon for an annual rental of
approximately $24,000 and approximately 2,000 square feet of office space in
Layton, Utah for annual rental of approximately $34,800. The Company no
longer leases office space in Michigan. The Company believes these facilities
are adequate for its current operations.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal proceedings
which would be considered material although it did file a complaint against
Kenneth M. Dodd, on February 24, 1999 in the 8th Judicial District Court,
Clark County, Nevada, case no. A399754. Kenneth Dodd is a former CEO and
24
<PAGE>
President of CTICO having resigned those positions in December of 1998. He
was also Executive Vice President of the Company until March 1998. The
Company's complaint against Mr. Dodd is seeking enforcement of certain of the
terms of Mr. Dodd's employment contract with the Company which deal with
ownership of the Company's stock options and the protection of intellectual
property. (See PART III, ITEM 10. EXECUTIVE COMPENSATION, Employment
Contracts.)
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
_____________________________________________________________________________
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for the Company's Common Stock
- -------------------------------------
The Common Stock is traded on the OTC Bulletin Board under the symbol
"COII". The following table sets forth the range of high and low closing bid
prices for the Common Stock for the periods indicated as reported by the NASD.
These prices represent inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions. There can be no assurance that an active trading market in the
shares of the Common Stock will be sustained.
<TABLE>
<CAPTION>
Common Stock Bid Price
Calendar Year 1997 Low High
- ------------------- ----------------- -----------------
<S> <C> <C>
Third Quarter $0.56 $1.69
Fourth Quarter $0.52 $1.06
Calendar Year 1998 Low High
- ------------------- ----------------- -----------------
First Quarter $0.47 $0.81
Second Quarter $0.50 $1.11
Third Quarter $0.75 $2.125
Fourth Quarter $0.51 $0.76
Calendar Year 1999 Low High
- ------------------- ---------------- ----------------
First Quarter $0.575 $1.75
Second Quarter $0.64 $1.06
</TABLE>
As of the Company's fiscal year ended June 30, 1999, there were
approximately 62,275,560 shares of its Common Stock issued and outstanding. As
of September 16, 1999, the Company had 64,998,840 common shares issued and
outstanding. The Company believes that the Common Stock was held by
approximately 5,400 persons as of its fiscal year end.
Securities Issued without Registration
- ---------------------------------------
During the period covered by this report, that is fiscal year ended June
30, 1999, there were no equity securities of the Company sold by the Company
that were not registered by the Company or previously unreported on Form
10QSB, except as follows:
25
<PAGE>
1. During the fourth quarter of the Company's fiscal year ended June
30, 1999, the Company issued an aggregate of 105,511 unregistered common
shares to PDH Ltd. to satisfy certain cash advances equaling $40,094. The
shares were issued pursuant to the exemption from registration requirements of
Section 5 of the Securities Act of 1933, under Section 4(2) as a "transaction
not involving a public offering."
2. Also during that same quarter, the Company issued 822,523
unregistered common shares to TII, an affiliate of the Company, to repay cash
advances of $312,559. The Company relied upon the Section 4(2) exemption for
the issuance of those shares.
3. During the fourth quarter of the Company's fiscal year it granted
an option to purchase shares of its common stock to one non-executive employee
of the Company in accordance with an Employment Agreement and its 1997
Employee Stock Option and Restricted Stock Plan, in effect. On May 24, 1999,
The employee was granted the option to purchase up to 100,000 unregistered
common shares of the Company for $.76 per share with one-third of the options
vesting on May 24, 2000, one-third on May 24, 2001 and one-third on May 24,
2002 beginning one year from the employment date. The options will expire
five (5)years from the date of grant and were granted in reliance upon
exemption from registration provided under Section 4(2) fo the Act. The
employee received registration rights on the underlying securities pursuant to
his employment agreement.
In addition, during the Company's fourth quarter and subsequent thereto
through the filing of this Report, the Company received funding totaling
$2,500,000 from Beach in accordance with the Investment Agreement; the Beach
shares to be purchased under the Investment Agreement are considered
"registered" under the 1933 Act through the Company's Prospectus in effect.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis of the combined financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto contained
in this report. Statements contained in this "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" which are not
historical facts may be forward-looking statements. Such information involves
risks and uncertainties, including those created by general market conditions,
competition and the possibility that events may occur which could limit the
ability of the Company to maintain or improve its operating results or execute
its primary growth strategy. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate, and there can therefore be no assurance
that the forward-looking statements included herein will prove to be accurate.
The inclusion of such information should not be regarded as a representation
by the Company or any other person that the objectives and plans of the
Company will be achieved. Moreover, such forward-looking statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements that speak only as of the
date hereof.
General
- -------
From inception through the most current fiscal year ended June 30,
1999, the Company has been involved in the research, development and
26
<PAGE>
production of its thermal imaging technology products. Although still in the
development stage, the Company has generated nominal revenues of $125,000,
from the sale of a CTI System to Thailand in 1996, and $55,815, from the sale
of laser cards to a purchaser in the PRC in 1997. The Company has relied
almost entirely on the sale of its securities to fund its research and
development operations. The Company historically has sustained annual losses
and will continue to sustain losses from its operations until its products
achieve acceptance within the medical community and the public. As evidenced
by the Consolidated Financial Statements of the Company included elsewhere in
this report, the level of the Company's losses has been largely dictated by
the amount of capital the Company has been able to raise and the volume of
costs incurred under the research program being conducted with TRW and
Battelle as well as costs of FDA testing.
Results of Operations
- ---------------------
The following discussion gives a comparison of the Company's
financial position for the fiscal year ended June 30, 1999 and June 30, 1998.
FISCAL YEAR ENDED JUNE 30, 1999 AND JUNE 30, 1998. The Company
incurred a loss of $ 5,025,841 for the year ended June 30 1999, as compared to
a loss of $5,943,885 for the year ended June 30, 1998. The Company had no
revenues in either period. The primary reason for this reduction in year end
losses in 1999 was a reduction of approximately $540,000 in general and
administrative expenses which decreased from $3,167,690 during the 1998 fiscal
year, to $2,626,562 during the 1999 fiscal year. The Company's general and
administrative activities focused on fund raising and support of research
activities which included, primarily, clinical testing of the CTI Breast
Imaging System in the 1998-99 fiscal year, and development expenses with TRW
in the 1997-98 fiscal year. The Company's reduction in General and
Administrative expenses is a result of (1) a $153,000 reduction in SEC related
legal and accounting fees during 1999 to $457,401 from $610,742. The Company
has also changed legal counsel and accounting firms in an effort to reduce its
general and administrative expenses, and (2) a temporary reduction in office
salaries over the prior year of approximately $75,000. The Company incurred
an administrative charge of $850,167 for incentive stock options issued to
non-employees in 1998 and 1999 the Company incurred a $525,000 compensation
expense in eliminating a $525,000 subscription receivable from MFG.
During the Company's fiscal year ended June 30, 1999, the Company spent
$1,837,182 on research and development expenses compared with $2,430,038 in
1998. The decrease occurred despite higher clinical testing costs, $659,091 in
1999(which were $438,530 in 1998) and FDA and consulting expenses of $134,651
in 1999, due to a large decrease in TRW contract expenses, from $1,237,905 in
1998 to $485,273 in 1999. Shifting in contract objectives from product
development and enhancement to support of clinical testing caused the large
TRW decrease. The Company also incurred expenses of $54,484 for research
equipment in 1998 compared to $155,826 in 1999. The Company has expensed all
costs associated with its processes and systems, including software code
writings, computer system hardware and software purchases from third party
vendors, material expenses in the development of the examination table and all
payroll related development expenses throughout the periods presented.
Interest expenses increased to $568,221 from $415,101 due to a discount of
$597,500 on notes payable being recognized chiefly in FYE 1999. The discount
is the result of the restricted stock issued to satisfy the notes being valued
at 100% of market price and the notes contain a redemption value clause of 50%
of market for the stock redemption. Depreciation expense during the two
comparable periods were slightly higher in 1999, $50,353 in 1999 vs. $32,344
in 1998.
27
<PAGE>
The Company funded its losses during the fiscal years ended June 30, 1999
and 1998, through issuances of common stock in exchange for cash
contributions, notes, and through advances from related parties which have
consistently provided funding to the Company: Thermal Imaging, Inc. ("TII"),
an affiliate of Mr. Johnston, Doug Holt doing business as PDH, Ltd.("PDH"), an
independent contractor which provides various services to the Company, and
Daron Dillia doing business as Manhattan Financial Group ("MFG"). The Company
received funding of $3,175,540 from sales of stock for cash during the during
its 1998/1999 fiscal year, which included a private placement of stock with an
officer/director for a $200,000 cash contribution, the exercise of certain
warrants for proceeds of $188,200, the completion of a private placement with
gross proceeds of $1,000,000, and $875,000 in cash contributions from MFG
pursuant to a stock purchase agreement exercised in February/March of 1999.
The Company also received $2,500,000 from Beach pursuant to the Investment
Agreement of which $1,000,000 (net of $87,660 in placement fees) was received
prior to its fiscal year ended June 30, 1999. The Company also funded
operations with stock for services and payment of non-interest bearing
advances from affiliates of the Company. These transactions included the
issuance of 4,864,184 shares during the fiscal year ended June 30, 1999 to
certain affiliates of the Company as repayment of advances made from July 31,
1997 through June 30, 1999, aggregating $2,320,738. Approximately $1,416,574
of the advances from stockholders occurred during the fiscal year ended June
30, 1998, with additional $904,164 in advances made during the current fiscal
year ended. The Company also issued 2,140,164 shares during its fiscal year
ended in June of 1999 to MFG in satisfaction of two Notes payable with:
aggregate principal 597,500, accrued discount of $597,500 and accrued interest
of $49,638 for a total of $ 1,244,638. The Company also issued shares and
relieved a subscription receivable as compensation for $555,686 in services
rendered.
The Company funded losses during its fiscal year ended June 30, 1998 by
selling shares of the Common Stock for cash in the amount $ 2,906,236. It
received advances from shareholders of $1,416,574 which were repaid in common
shares its next fiscal year (see paragraph above). The Company also issued
521,478 shares as compensation for services valued at $306,381 as well as
compensation warrants for services with an aggregate value of $1,006,000.
Sources of Long and Short Term Liquidity
- ----------------------------------------
* No Revenues from Operations*
The Company has had no significant revenues from operations from
inception. The Company's cash requirements consist of: office salaries and
expenses including lease payments on its office space, legal and accounting
fees to comply with securities registration (including updating its Prospectus
currently in effect) and reporting requirements, cost of clinical trials, TRW
and Battelle technical support, and FDA consulting. The Company intends to
raise additional equity funds from the sale of the common stock through
private offerings to new investors and pursuant to the Investment Agreement
with Beach to meet cash requirements through June 30, 2000.
* Funding/Investment Agreements and Consulting Agreements Regarding
Business Plan Formation*
In connection with the formation of its business plan as well as
providing for its cash requirements, the Company, during the last three years,
the Company entered into a variety of agreements with various individuals or
entities some of whom are considered affiliated. Material of these agreements
are: (1) the Investment Agreement with Beach which provides and will continue
28
<PAGE>
to provide for a large portion of the Company's liquidity for the next 12
months and (2) various agreements with MFG, an entity which, since inception,
has provided consulting and financial services to the Company. MFG is a dba
for Daron Dillia, who is a 5% beneficial shareholder of the Company. MFG, in
addition to or in conjunction with its own agreements with the Company, was
material in consummating certain other consulting/funding agreements with such
parties as Liberty Capital Group Inc., Ambient Capital, Inc., Bristol Asset
Management, LLC, Cameron Capital Management Ltd. and Beach. Those agreements
which were in effect during the Company's fiscal year ended June 30, 1999 are
discussed below and/or under PART III, ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS.
BEACH BOULEVARD L.L.C. SECURITY PURCHASE AGREEMENT On March 4, 1999, the
Company entered into a Securities Purchase Agreement (as amended in May, the
"Investment Agreement") with Beach Boulevard L.L.C. ("Beach"). Subject to
certain conditions provided in the Investment Agreement, the Company may
require Beach to purchase up to $7,000,000 of Common Stock of the Company in a
series of tranches of $500,000 each. At the closing of the first of these
tranches on May 13, 1999 (the "Initial Closing Date"), the Company issued
757,576 shares to Beach. At the closing of the second of these tranches on
June 15, 1999 (an "Additional Closing Date") the Company issued 862,069 shares
to Beach. The third of these tranches closed on July 15, 1999 with 843,170
shares issued to Beach. Closings for subsequent tranches (each, an
"Additional Closing Date") will be held after the Company gives a notice
(each, a "Tranche Notice") to Beach. Without the consent of Beach, there can
not be more than one Additional Closing Date in any one calendar month. Beach
elected to participate in a fourth and fifth tranche which occurred on August
1, 1999 with the issuance of 856,164 shares and on September 13, 1999 with the
issuance of 875,657 shares. Beach was not required under the Agreement to
participate in the fourth and fifth tranches because the Company's price of
its common shares in the market was below the required $.75 per share.
Beach's obligation to purchase additional tranches over the initial $1,500,000
in funding, is conditioned on several factors discussed below.
The purchase price for each share of Common Stock being bought by
Beach on each Additional Closing Date is based on the lowest sale price of the
stock during the period from the date of the relevant Tranche Notice to and
including the trading day immediately before that Additional Closing Date
multiplied by (i) for the first two Additional Closing Dates, 82.5%, and (ii)
for each Additional Closing Date thereafter, 85%. Beach's obligations to
purchase additional tranches are subject to certain requirements relating to
the effectiveness of the Company's Registration Statement covering the shares
issued or to be issued to Beach, the number of shares authorized and reserved
for issuance to Beach, the continued accuracy of representations and
warranties made by the Company in the Investment Agreement, the absence of
material adverse changes in the business, operations or conditions of the
Company, and the absence of any suspension of the trading of the Company's
Common Stock by the SEC or the NASD.
In addition, after Beach purchased $1,500,000 (currently completed
as of July 15, 1999) of the Company's Common Stock, Beach's obligation to fund
subsequent tranches is subject to the following conditions: (1) the lowest
sale price of the Common Stock during the period from the date of the Tranche
Notice to and including the trading day before the relevant Additional Closing
Date (the "Current Price") must be seventy-five cents ($0.75) or more and (2)
the average daily trading volume for the twenty consecutive trading days
ending the day before the relevant Additional Closing Date must be 200,000 or
more shares.
29
<PAGE>
The Company also agreed to issue certain additional shares
("Supplemental Shares") to Beach based on the average of the lowest sale price
of a share of Common Stock for any five trading days selected by Beach during
the period beginning on the first trading day after each closing date (whether
the Initial Closing Date or an Additional Closing Date) and continuing through
and including the twentieth trading day after that closing date. If that
average (the "Market Price of the Common Stock") is less than 95% of the
Current Price applicable to the relevant closing date (the "Base Price"), the
Company will issue the number of Supplemental Shares equal to (1) the product
of (x) the number of shares purchased on the relevant closing date, multiplied
by (y) the excess of the Base Price over the Market Price of the Common Stock,
divided by (2) the Market Price of the Common Stock. The Company is obligated
to issue the Supplemental Shares, if any, within 30 days after the relevant
closing date. In connection with the shares issued on the initial Closing
Date, the Company issued 57,945 Supplemental Shares to Beach; supplemental
shares were also issued on the third tranche equal to 70,746 and on the forth
tranche equal to 69,080 shares taking into account a reduction due to an
8,463 share overage in the second tranche. Any Supplemental Shares to be
issued in connection with the fifth tranche has not yet been determined.
Because Beach is not required to purchase additional shares unless certain
provisions are met as set forth in the preceding paragraph, there is no
assurance that Beach will ultimately provide the Company with the full $7
Million. The Company has amended its Prospectus twice as a result of the
Investment Agreement. The first amendment was filed with the Securities and
Exchange Commission as part of a Post effective Amendment to its Form SB-2 on
April 1, 1999; the second was filed on July 16, 1999 under rule 424(b)(3).
Because the Company is registering the Beach shares for resale, it is required
to maintain its Prospectus in effect.
MFG AGREEMENTS: Effective January 1, 1997, the Company entered in a
Consulting Agreement with MFG covering financial services.(See ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) MFG provides regular
financial advising services to the Company, such as strategic consulting to
arrange financing of projects including the Beach Investment Agreement. MFG
has also provided the following funding to the Company in the past year.
1. On February 8, 1999, Daron Dillia, doing business as Manhattan
Financial Group ("MFG"), entered into a stock purchase agreement with the
Company under which it subsequently purchased 2,364,865 restricted shares of
the Company's Common Stock for $875,000. As consideration therefor, the
Company allowed MFG to purchase the common shares at 50% of the low bid price
during that time period (February 8 through March 15, 1999). The Company also
granted piggy back registration rights to MFG although, to date, MFG has
declined to exercise its registration rights in connection with the filing of
its amended Prospectus.
2. Promissory Notes (collectively the "MFG Notes") On April 15,
1998 the Company executed a Corporation Note - Straight" ("MFG Note I") in an
original principal amount of $250,000, with interest accruing from April 15,
1998 at a rate of 10 percent per annum, payable on or before October 15, 1998.
The MFG Note I names Manhattan Financial Group as payee and provides that
Manhattan Financial Group may elect at maturity to convert the principal and
interest due under the MFG Note I into the Common Stock at a conversion rate
of 50 percent of the closing price as of April 15, 1998 or the lesser of 50
percent of the closing bid price on any date on which the lender chooses by
written notification to convert his note and interest into the Common Stock.
On September 11, 1998, the Company executed a second "Corporation Note -
Straight" (`MFG Note II') in an original principal amount of $347,750, with
interest accruing from September 11, 1998 at a rate of 10 percent per annum,
30
<PAGE>
payable on or before April 11, 1999. The MFG Note II names Manhattan Financial
Group as payee and provides that Manhattan Financial Group may elect at
maturity to convert the principal and interest due under the MFG Note into the
Common Stock at a conversion rate of 50 percent of the closing price as of
September 11, 1998 or the lesser of 50 percent of the closing bid price on any
date on which the lender chooses by written notification to convert his note
and interest into the Common Stock.
In early May of 1999, the Company issued a total of 2,140,164 of its
unregistered common shares to MFG in satisfaction of the MFG Notes with a
total due under the MFG Notes of $1,244,638. The amount was comprised of
remaining principal due on the Notes and $597,500, accrued amortization
discount of $597,500 and accrued interest of $49,638.
In late fiscal year end 1999, the Company recognized as compensation
expense $525,000 to MFG. The Company eliminated a $525,000 stock subscription
receivable for 525,000 shares issued to MFG in 1996. The compensation expense
was recognized as a result of MFG's consulting activities.
BRISTOL ASSET MANAGEMENT, L.L.C. INVESTMENT AGREEMENT On January 20,
1998, the Company entered into an Investment Agreement (herein referred to as
the (Investment Agreement) with Bristol Asset Management, L.L.C., a Delaware
limited liability company ("Bristol"} regarding the periodic purchase of
shares of the Common Stock. Subsequent to the original effective date of the
Company's Registration Statements (January 8, 1999), Bristol declined to
participate under its investment agreement with the Company. The Company
entered into a new investment agreement with Beach Boulevard L.L.C. ("Beach")
and amended its registration statement and Prospectus accordingly to reflect
this material change.
AMBIENT CAPITAL GROUP, INC. FINANCIAL ADVISORY AGREEMENT On October 29,
1997, the Company executed a Financial Advisory Agreement with Ambient Capital
Group, Inc. ("Ambient") appointing Ambient to act as its financial adviser
with respect to planning and executing capital structure strategies, revising
the Company's business plan, and certain other matters related thereto. These
financial advisory services included negotiation of capital financing for
equipment and the introduction of new capital financing sources to the
Company. Ambient received as an initial retainer fee for its services of
83,333 shares of the Common Stock and 83,333 warrants giving Ambient the right
to purchase five shares of the Common Stock at $0.72 per share for each
warrant issued. The agreement with Ambient was terminated in accordance to its
terms on or about the time that Bristol declined to participate under the
terms of the Bristol Agreement, and is of no further force and effect.
WILLARD HARPSTER CONSULTING AGREEMENT Effective January 1, 1997, the
Company and Willard Harpster ("Harpster") executed a Consulting Agreement
covering financial services associated with the development of a comprehensive
business plan, future acquisition strategies, capital development and fund
raising. The Company requested in 1997 and 1998 numerous consultations with
Harpster for advice to inhibit short selling of the Common Stock, for review
of the Common Stock sales and trading compliance, and for advice in
development of its business plan for presentation to capital markets. In
consideration of such services, Harpster was granted an option to purchase all
or any portion of 275,000 shares of the Common Stock at a purchase price of
$0.75 per share in accordance with the various terms and provisions of the
agreement regarding exercise, vesting, etc. In November 1998, Harpster
terminated the Consulting Agreement and waived any and all rights to exercise
his vested stock options. Consequently, all stock options granted to Harpster
terminated and are of no further force or effect. In addition, Harpster did
31
<PAGE>
not obtain any of the Common Stock of the Company pursuant to the exercise of
stock options granted in connection with the performance of services under the
Consulting Agreement.
FUNDING FROM AFFILIATES. During the three years prior to the date of
this report, David B. Johnston, the Chairman of the Board and the Chief
Executive Officer of the Company, and certain affiliates of Mr. Johnston and
the Company have contributed approximately $4,800,000 to the capital of the
Company in exchange for shares of the Common Stock. The Company believes that
its current agreement with Beach as well as potential additional contributions
from other accredited investors, as needed, will be sufficient to meet the
Company's short-term operating expenses and capital expenditures over the next
12 months as well as provide for the required funding of FDA testing on behalf
of CTICO; however, affiliates, as in the past, will likely provide additional
funding when and if needed. At the present time there is no commitment from
anyone other than Beach with respect to any future capital contributions to
the Company, and there is no way to predict when and if any such additional
contributions may be made. Consequently, the bulk of the needed capital over
the next 12 months must come from Beach (from which the Company is expecting
an additional $4,500,000) with additional contributions to be made by
affiliates and/or one or more substantial new investors. Beach has already
funded the Company with $2.5 Million; however, under the terms of the
Agreement, Beach is not obligated to provide funding over $1.5 unless certain
conditions are met. (See BEACH BOULEVARD L.L.C. SECURITY PURCHASE AGREEMENT,
above under this ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.)
Capital Requirements/Plan of Operation
- ---------------------------------------
The Company will require an estimated $6,000,000 - $7,000,000 for the
next 12 months for its research and development programs, preclinical and
clinical testing, development of its sales and distribution efforts, operating
expenses, and regulatory processes. The Company's capital requirements,
however, may vary from its estimates and depends on numerous factors,
including the progress of its research and development programs; results of
preclinical 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; the economic impact
of competing technological and market developments; licensing and other
relationships; and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. The Company estimates that it
will need approximately $4.5 Million to complete CTICO's clinical trials; $1.5
Million for day-to-day operating expenses including its lease payments on two
facilities of $60,000 per year and $600,000 to cover salaries; $400,000 for
legal and accounting to maintain its Prospectus in effect as well as for SEC
compliance with reporting obligations.
The following constitute the various aspects of the Company's Plan of
Operation over the next twelve months in order or priority: (1) the completion
of PMA on the CTI Breast Imaging System through clinical trials as well as
continued system integration development and algorithm development by the
Company associated therewith; and (2) additional efforts for CTI Systems
development for other applications, such lower back imaging, especially
regarding insurance coding.
COMPLETION OF PMA/ FDA APPROVAL/CLINICAL TRIALS The efficacy of the
CTI Breast Imaging System is currently subject to confirmation in FDA clinical
trials as a tool complementary to mammography. The FDA clinical trials
requirement for CTICO to receive its PMA approval requires medical facilities
32
<PAGE>
to conduct examinations and conduct and produce clinical statistical data from
use of the CTI Breast Imaging System. The rate of conducting examinations
determines the monthly cash flow requirements and the time for qualifying for
PMA. CTICO also incurs costs for FDA legal counsel and for consulting services
from a firm recognized by the FDA for overseeing clinical trial data
collection and adherence to FDA requirements. The Company has advanced CTICO
approximately $6.5 Million through June 30, 1999. The current estimated
requirements to fund CTICO's research and clinical testing are approximately
$500,000 per quarter. Management has set a goal of completing the clinical
testing for the PMA portion of FDA approval process during the next 12 months
and anticipates additional related costs of $4.5 Million.
CTI SYSTEM DEVELOPMENT. The Company has committed to devote a major
portion of its resources and subsequent capital financing, in excess of its
fixed operating costs, to the operations of CTICO for the completion of the
ongoing FDA Clinical Trials. Although the Company is prioritizing its funding
of CTICO, it also plans to conduct multiple clinical trials involving the CTI
System in the identification of soft tissue maladies. Although such clinical
trials may not be necessary for physicians to use the CTI System, the benefit
of specific purpose clinical trials will be to enable the Company to reference
medical efficacy claims in connection with marketing efforts, to enhance
physician in the CTI System, and to obtain the designation of insurance
payment codes for particular CTI System procedures. Management believes that
the market in the United States alone for the CTI System would be dramatically
enhanced if clinical trials were to substantiate the Company's assertion that
the CTI System can distinguish and verify fraudulent (versus real muscular)
lower back pains.
Source of Potential Long-term Liquidity: Equipment Financing/ Use Agreements
- -----------------------------------------------------------------------------
The Company expects that both Use Agreements and equipment financing will
be sources of long term liquidity although it is premature to anticipate the
results of either. Although the Company has investigated both options and has
in fact entered into preliminary discussions with equipment financing
companies, it is awaiting PMA on its CTI Breast Imaging System, before
entering into any additional planning regarding either. Much of what the
Company anticipates as being its sources of long-term liquidity will be a
result of (1) whether or not it achieves PMA on its CTI Breast Imaging System,
(2) if PMA is achieved, the development of a more definitive marketing
strategy, (3) how successful such marketing strategy proves to be, (4) whether
it is able to develop its CTI System for other applications in the United
States, and (5) the results of marketing efforts of the CTI System in the PRC
Thailand and elsewhere.
Year 2000 Compliance.
- ---------------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Company
believes that its internal systems are Year 2000 compliant or will be upgraded
or replaced in connection with previously planned changes to information
systems prior to the need to comply with Year 2000 requirements. However, the
Company is uncertain as to the extent its customers and vendors may be
affected by Year 2000 issues that require commitment of significant resources
and may cause disruptions in the customers' and vendors' businesses.
33
<PAGE>
Uncertainties Affecting Liquidity
- ---------------------------------
The Company is largely dependent on Beach to provide for liquidity over
the next year; it is possible that Beach will fail to provide the required
funding or that the price and volume of the Company's common stock in the
market place will be insufficient to enable the Company to require the
purchase of additional shares by Beach. The Company, since inception, has
continually sought funding for both its day to day operations and its business
purpose and has often sought substantial loans from affiliates and
shareholders which were often repaid in stock. Until such time as the Company
begins receiving revenues from operations (not likely until and unless PMA
approval is received), the Company will be faced with the difficulties and
expenses associated with meeting its financing needs.
Commitments of Capital Expenditures/Sources of Funding
- ------------------------------------------------------
See Plan of Operation/Cash Requirements above.
Trends/Uncertainties Affecting Continuing Operations
- ----------------------------------------------------
The Company's ability to achieve profitability will depend, in part,
on its ability to successfully develop clinical applications and obtain
regulatory approvals for its products and to develop the capacity to
manufacture and market such products on a wide scale. There is no assurance
that the Company will be able to successfully make the transition from
research and development to manufacturing and selling commercial thermal
imaging products on a broad basis. While attempting to make this transition,
the Company will be subject to all risks inherent in a growing venture,
including the need to produce reliable and effective products, develop
marketing expertise and enlarge its sales force. Some of the risks the
Company will be subjected to are enumerated under PART I, ITEM 1. BUSINESS
DEVELOPMENT, Risks Factors Affecting the Company's Future Profitability.
Seasonal Aspects
- -----------------
None.
ITEM 7. FINANCIAL STATEMENTS
The following comprise the Company's audited financial statements for
its year ended June 30, 1999.
34
<PAGE>
C O N T E N T S
Independent Auditors' Reports 3
Consolidated Balance Sheet 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity (Deficit) 6
Consolidated Statements of Cash Flows 11
Notes to Consolidated Financial Statements 13
F-2
<PAGE> 35
JONES, JENSEN
& COMPANY, LLC
----------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
Board of Directors
Computerized Thermal Imaging, Inc.
(A Development Stage Company)
Layton, Utah
We have audited the accompanying consolidated balance sheet of Computerized
Thermal Imaging, Inc. (a development stage company) as of June 30, 1999, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year ended June 30, 1999 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 audit.
We conducted our audit 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 of
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 consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Computerized Thermal Imaging, Inc. (a development stage company) as of June
30, 1999, and the consolidated results of their operations and their cash
flows for the year ended June 30, 1999, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
consolidated financial statements and discussed in Note 8, the Company has
incurred significant recurring losses from operations since inception, has
negative working capital and stockholders' equity (deficit) position at June
30, 1999, and is dependent on outside sources of financing for continuation of
its operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to
this matter are also discussed in Note 8. These financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ Jones, Jensen & Company
Jones, Jensen & Company
Salt Lake City, Utah
October 7, 1999
50 South Main Street Suite 1450
Salt Lake City, Utah 84144
Telephone (801) 328-4408 Facsimile (801) 328-4461
F-3
<PAGE> 36
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Balance Sheet
ASSETS
June 30,
1999
------------
CURRENT ASSETS
Cash and cash equivalents $ 137,162
------------
Total Current Assets 137,162
------------
PROPERTY AND EQUIPMENT, NET (Notes 1 and 2) 238,643
------------
TOTAL ASSETS $ 375,805
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade 470,870
Accrued liabilities 64,644
------------
Total Current Liabilities 535,514
------------
CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $5.00 par value,
100,000 shares authorized -
Common stock, $.001 par value, 100,000,000 shares
authorized, 62,275,560 shares issued and outstanding 62,276
Additional paid-in capital 25,486,825
Losses accumulated during the development stage (25,708,810)
------------
Total Stockholders' Equity (Deficit) (159,709)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 375,805
============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 37
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Operations
<TABLE>
<CAPTION>
From
Inception on
June10,
For the Years Ended 1987 through
June 30, June 30,
1999 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
REVENUES
Interest income $ 6,124 $ 3,307 $ 26,007
Income from sale of prototypes - - 180,815
------------- ------------ --------------
Total Revenues 6,124 3,307 206,822
------------- ------------ --------------
COSTS AND EXPENSES
Operating, general and administrative
expenses 2,626,562 3,167,690 16,294,310
Research and development costs 1,837,182 2,430,038 7,032,246
Interest expense 568,221 415,101 2,140,333
Litigation settlement - - 514,380
------------- ------------ --------------
Total Costs and Expenses 5,031,965 6,012,829 25,981,269
------------- ------------ --------------
LOSS BEFORE EXTRAORDINARY ITEM (5,025,841) (6,009,522) (25,774,447)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT - 65,637 65,637
------------- ------------ --------------
NET LOSS $(5,025,841) $(5,943,885) $ (25,708,810)
============ ============ ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 57,525,818 41,943,867
=========== ============
BASIC LOSS PER COMMON SHARE $ (0.09) $ (0.14)
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
</TABLE>
<PAGE> 38
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional During the
-------------------- Paid-In Subscription Development
Shares Amount Capital Receivable Stage Total
------------- -------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception, June 10, 1987 - $ $ - $ - $ - $ -
Stock issued for cash to founding
stockholders in 1987 at $0.001 per share 5,000,000 5,000 - - - 5,000
Stock issued for cash in connection with
a public offering of common stock in 1988
at $0.004 per share 5,000,000 5,000 14,562 - - 19,562
Stock issued for cash in connection with
a Regulation D offering of common stock
in 1989 at $3.13 per share 80,000 80 249,930 - - 250,010
Stock issued for services in 1990 at
$0.51 per share 500,000 500 254,500 - - 255,000
Stock issued for cash in connection
with a Regulation D offering of common
stock in 1991 at $0.50 per share 180,000 180 89,820 - - 90,000
Stock issued for services in 1991
at $0.50 per share 3,240,000 3,240 1,616,760 - - 1,620,000
Stock issued for services in 1992
at $0.12 per share 4,860,000 4,860 578,340 - - 583,200
Stock issued for services in 1993
at $0.06 per share 1,134,500 1,134 82,726 - - 83,860
Stock issued for extension of debt
agreement in 1993 at $0.08 per share 9,000 9 691 - - 700
Stock issued in connection with claims
by certain stockholders in 1993
at $0.06 per share 1,000 1 59 - - 60
Stock issued for cash in 1994 at $0.07
per share 387,000 387 25,613 - - 26,000
Stock issued for services in 1994
at $0.10 per share 1,485,660 1,486 149,148 - - 150,634
------------- -------- ---------------- ------------ ------------- ------------
Balance Forward 21,877,160 $ 21,877 $ 3,062,149 $ - $ - $ 3,084,026
------------- -------- ---------------- ------------- ------------- ------------
The accompanying notes are an integral part of
these consolidated financial statements.`
F-6
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)(Continued)
Losses
Accumulated
Common Stock Additional During the
-------------------- Paid-In Subscription Development
Shares Amount Capital Receivable Stage Total
------------- -------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 21,877,160 $ 21,877 $ 3,062,149 $ - $ - $ 3,084,026
Stock issued for extension of debt
agreement in 1994 at $0.07 per share 9,000 9 591 - - 600
Stock issued in connection with claims
by certain stockholders in 1994
at $0.12 per share 51,000 51 5,989 - - 6,040
Stock issued for cash in 1995 at
$0.60 per share 679,202 680 407,995 - - 408,675
Stock issued for services in 1995
at $0.87 per share 3,506,461 3,506 3,049,200 - - 3,052,706
Stock issued to convert certain notes
payable in 1995 $0.17 per share 702,400 702 117,941 - - 118,643
Common stock issued upon conversion of
preferred shares in 1995 at $1.69
per share 124,600 125 209,875 - - 210,000
Stock issued for cash in connection
with a Regulation D offering of common
stock in 1996 at $1.00 per share 1,462,600 1,463 1,461,137 - - 1,462,600
Stock issued for a note receivable in
connection with a Regulation D offering
of common stock in 1996 at $1.00
per share 525,000 525 524,475 (525,000) - -
Stock issued for offering cost
in connection with a Regulation D
offering of common stock in 1996 53,650 53 (53) - - -
Stock issued in connection with the
settlement of a note payable to an
individual in 1996 at $0.98 per share 734,942 735 721,345 - - 722,080
Stock issued in connection with the
settlement of claims by certain
stockholders in 1996 at $0.88
per share 578,000 578 507,702 - - 508,280
Common stock issued upon conversion of
preferred shares in 1996 at $1.70 per
share 14,700 14 24,986 - - 25,000
------------- -------- ---------------- ------------ ------------- ------------
Balance Forward 30,318,715 $ 30,318 $ 10,093,332 $ (525,000) $ - $ 9,598,650
------------- -------- ---------------- ------------ ------------- ------------
The accompanying notes are an integral part of
these consolidated financial statements.`
F-7
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)(Continued)
Losses
Accumulated
Common Stock Additional During the
-------------------- Paid-In Subscription Development
Shares Amount Capital Receivable Stage Total
------------- -------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 30,318,715 $ 30,318 $ 10,093,332 $ (525,000) $ - $ 9,598,650
Stock issued in repayment of certain
notes payable and interest expense
in 1996 at $1.05 per share 146,590 147 153,060 - - 153,207
Stock issued for cash in 1996
at $0.68 per share 1,163,625 1,164 795,306 - - 796,470
Stock issued for services in 1996
at $1.05 per share 1,277,633 1,278 891,874 - - 893,152
Losses accumulated during the period
from inception, June 10, 1987,
through June 30, 1996 - - - - (11,389,470) (11,389,470)
------------- -------- ---------------- ------------ ------------- -------------
Balance at June 30, 1996 32,906,563 32,907 11,933,572 (525,000) (11,389,470) 52,009
Stock issued as a bonus to investors
in connection with the Company's 1996
Regulation D offering of common stock
at $0.00 per share 211,900 212 (212) - - -
Conversion of debentures to common stock
at $0.65 per share 98,768 99 64,026 - - 64,125
Stock issued for cash at $0.55 per share 1,833,152 1,833 1,008,376 - - 1,010,209
Stock issued for services at $0.59
per share 687,266 687 404,811 - - 405,498
Net loss accumulated in 1997 - - - - (3,349,614) (3,349,614)
------------- -------- ---------------- ------------ ------------- -------------
Balance at June 30, 1997 35,737,649 35,738 13,410,573 (525,000) (14,739,084) (1,817,773)
------------- -------- ---------------- ------------ ------------- -------------
The accompanying notes are an integral part of
these consolidated financial statements.`
F-8
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)(Continued)
Losses
Accumulated
Common Stock Additional During the
-------------------- Paid-In Subscription Development
Shares Amount Capital Receivable Stage Total
------------- -------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 35,737,649 35,738 13,410,573 (525,000) (14,739,084) (1,817,773)
Conversion of debentures to common stock
at $0.41 per share 2,403,838 2,404 977,951 - - 980,355
Stock issued to convertible debenture
holders for failure to complete
registration of the underlying common
stock in a timely manner at $0.42
per share 197,574 198 82,018 - - 82,216
Stock issued for cash at
$0.31 per share 9,476,418 9,476 2,896,760 - - 2,906,236
Stock issued for services
at $0.59 per share 521,478 521 305,860 - - 306,381
Warrants issued for services - - 1,006,000 - - 1,006,000
Stock subject to rescission offer (771,200) (771) (306,102) - - (306,873)
Net loss accumulated in 1998 - - - - (5,943,885) (5,943,885)
------------- -------- ---------------- ------------ ------------- -------------
Balance at June 30, 1998 47,565,757 47,566 18,373,060 (525,000) (20,682,969) (2,787,343)
Reclassification of stock no longer
subject to recission offer
at $0.40 per share 771,200 771 306,102 - - 306,873
Shares issued in a private placement to
a director and a stockholder for cash
at $0.70 per share 285,000 285 199,715 - - 200,000
Common stock issued for cash with
169,837 shares issued for a placement
fee to a third party at $0.47
per share 2,133,862 2,134 997,866 - - 1,000,000
Issuance of common stock for cash
advances at $0.47 per share 460,861 461 217,316 - - 217,777
Issuance of common stock to affiliate
for cash advances at $0.48 per share 4,403,323 4,403 2,098,558 - - 2,102,961
------------- -------- ---------------- ------------ ------------- -------------
Balance Forward 55,620,003 $ 55,620 $ 22,192,617 $ (525,000) $(20,682,969) $ 1,040,268
------------- -------- ---------------- ------------ ------------- -------------
The accompanying notes are an integral part of
these consolidated financial statements.`
F9
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)(Continued)
Losses
Accumulated
Common Stock Additional During the
-------------------- Paid-In Subscription Development
Shares Amount Capital Receivable Stage Total
------------- -------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 55,620,003 $ 55,620 $ 22,192,617 $ (525,000) $(20,682,969) $ 1,040,268
Issuance of common stock upon conversion
of warrants at $0.71 per share net of
placement fee of $2,000 264,166 264 187,936 - - 188,200
Shares issued for services at $.67 per
share 45,800 46 30,640 - - 30,686
Common stock issued in private placement
at $0.37 per share 2,364,865 2,365 872,635 - - 875,000
Common stock issued for cash to redeem two
notes totaling $597,500, accrued discount
of $597,500, accrued interest of $49,638
for a total of $1,244,638 at $0.37 per
share 2,140,164 2,140 1,242,498 - - 1,244,638
Common stock issued for cash, net of
offering expenses $87,660 at $0.55
per share 1,669,127 1,669 910,671 - - 912,340
Common stock issued to satisfy liability
at $0.29 per share 171,435 172 49,828 - - 50,000
Net loss accumulated in 1999
- - - 525,000 (5,025,841) 4,500,841
------------- -------- ---------------- ------------ ------------- -------------
Balance, June 30, 1999 62,275,560 $ 62,276 $ 25,486,825 $ 0 $(25,708,810) $ (159,709)
============= ======== ================ ============ ============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
F-10
</TABLE>
<PAGE> 43
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Corporation)
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
From
Inception on
Years Ended June 10,
June 30, 1987 through,
1999 1998 June 30, 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,025,841) $ (5,943,885) $ (25,708,810)
Adjustments to reconcile net loss
to net cash used in operating activities:
Common stock, options and warrants issued
as compensation for services 555,686 1,311,860 8,911,596
Common stock issued for interest expense - 155,831 423,596
Common stock issued in settlement
of litigation - - 514,380
Common stock issued for failure
to complete timely registration - 82,216 82,216
Extraordinary gain on extinguishment
of debt - (65,637) (65,637)
Depreciation expense 50,393 32,344 132,314
Amortization of debt issuance costs
and discounts on notes payable 597,500 287,051 937,969
Changes in operating assets and liabilities:
Decrease in deposits 2,204 - -
Increase (decrease) in accounts
payable and accrued liabilities (204,517) (401,535) 535,514
--------------- -------------- ---------------
Net Cash Used in Operating Activities (4,024,575) (4,541,755) (14,236,862)
--------------- -------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Sale of assets 4,790 - 4,790
Capital Expenditures (144,569) (66,066) (375,747)
--------------- -------------- ---------------
Net Cash Used in Investing Activities (139,779) (66,066) (370,957)
--------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 3,175,540 2,906,236 10,025,302
Advances from stockholders 904,164 1,416,574 2,320,738
Proceeds from notes payable and accrued
interest 292,971 409,292 3,213,132
Legal fees and interest added to note 258,146 238,453 496,599
Payment of debt issuance costs - - (133,600)
Payment of notes and convertible debentures (559,369) (326,522) (1,177,190)
--------------- -------------- ---------------
Net Cash Provided by Financing Activities 4,071,452 4,644,033 14,744,981
--------------- -------------- ---------------
The accompanying notes are an integral part of
these consolidated financial statements.
F-11
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows (Continued)
From
Inception on
Years Ended June 10,
June 30, 1987 through,
1999 1998 June 30, 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH (92,902) 36,212 137,162
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 230,064 193,852 -
--------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 137,162 $ 230,064 $ 137,162
=============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest $ - $ - $ -
Income taxes $ - $ - $ -
SUPPLEMENTAL SCHEDULE FOR NON-CASH
FINANCING AND INVESTING ACTIVITIES
Common stock issued for advances
from shareholders $ 2,320,738 $ $ 2,320,738
Common stock issued for notes payable,
accrued discount & interest $ 1,244,638 $ 980,355 $ 2,224,953
Common stock issued for convertible
subordinated debentures $ - $ 640,660 $ 640,660
Common stock returned to equity,
recission offer declined $ 306,873 $ 306,873 $ -
Common stock issued for liabilities $ 50,000 $ - $ 50,000
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-12
<PAGE> 45
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Computerized Thermal Imaging, Inc. (the "Company") is a Nevada Corporation,
involved in the development of a thermal imaging system for applications in
the health care industry. The Company's system is based upon computer
interpretation of thermal photography using proprietary software developed by
the Company. The Company was originally incorporated as Business Helpers,
Inc. on June 10, 1987 and subsequently adopted name changes to DTI Dorex, Ltd.
and, finally, to Computerized Thermal Imaging, Inc. The Company is considered
a development stage enterprise because it has not yet generated significant
revenues from sale of its products. Since its inception, the Company has
devoted substantially all of its efforts in three areas: 1) the development
and improvement of a system for commercial application of thermal imaging
technology in the medical industry; 2) the development of markets for thermal
imaging technology; and 3) the search for sources of capital to fund its
efforts. Following is a summary of the Company's significant accounting
policies:
a. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiary, Computerized Thermal Imaging Company ("CTICO"),
formerly known as Thermal Medical Imaging, Inc. All significant intercompany
transactions and accounts have been eliminated in consolidation.
b. Significant 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 dates of the financial statements and
the reported amounts of revenues and expenses during the periods. Actual
results could differ from estimates making it reasonably possible that a
change in the estimates could occur in the near terms.
c. Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with an
original maturity of three months or less when purchased to be cash
equivalents.
F-13
<PAGE> 46
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
d. Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets, which
range from five to seven years. Expenditures for major renewals and
betterments that extend the original estimated economic useful lives of the
applicable assets are capitalized. Expenditures for normal repairs and
maintenance are charged to expense as incurred. The cost and related
accumulated depreciation of assets sold or otherwise disposed of are removed
from the accounts, and any gain or loss is included in operations.
e. Income Taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax basis of
assets and liabilities and their financial amounts at year-end. The Company
has provided a valuation allowance to reduce its potential deferred tax assets
to their net realizable value.
f. Research and Development Expenses
Research and development costs are expensed as incurred. These costs
consist of direct and indirect costs associated with the development of its
software and hardware associated with its thermal imaging systems.
g. Stock-Based Compensation
Stock-based compensation is accounted for using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", rather than applying the fair value method
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation".
h. Basic Loss Per Share
Basic loss per share is computed on the basis of the weighted average
number of shares of common stock outstanding during each period. Common
equivalent shares from common stock options and warrants are excluded from the
computation as their effect would dilute the loss per share for all periods
presented.
i. Reclassification
Certain amounts for the years ended June 30, 1998 have been reclassified to
conform with the presentation of the June 30, 1999 amounts. The
reclassifications have no effect on net income for the year ended June 30,
1999.
F-14
<PAGE> 47
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 consists of the following:
1999 Life
---------- ---------
Office furniture, fixtures and
equipment $ 379,613 5-7 years
Less accumulated depreciation (140,970)
---------
$ 238,643
=========
Depreciation expense during the years ended June 30, 1999 and 1998 was
$50,393 and $ 32,344, respectively.
NOTE 3 - STOCKHOLDERS EQUITY
Preferred Shares
The Company has one class of preferred shares authorized pursuant to an
amendment to its Articles of Incorporation in April of 1992 with the power to
designate the rights and preferences of the Preferred Shares or any class or
series within the preferred shares vested in Board of Directors. The Board of
Director has the authority without further stockholder action, to issue up to
3,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, and the number of shares constituting any series or designation
of such series. The Company has no preferred shares outstanding as of its
fiscal year ended June 30, 1999.
Subscription Receivable
The Company treated as compensation the subscription note receivable in
the amount of $525,000 to Manhattan Financial Group ("MFG") in the fiscal year
end June 30, 1999. The subscription receivable had originally been issued in
exchange for a note from MFG in the amount of $525,000 for 525,000 shares of
the Company's common stock sold during the year ended June 30, 1996.
F-15
<PAGE> 48
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 4 - INCOME TAX
The composition of deferred tax assets and the related tax effects at June 30,
1999 are as follows:
Benefit from carryforward of net
operating losses $ 5,300,000
Less valuation allowance (5,300,000)
----------
Net deferred tax asset $ -
==========
The difference between the income tax benefit in the accompanying statement of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
Percentage Percentage
of Pre-Tax of Pre-Tax
Amount Loss Amount Loss
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Benefit for income tax at
federal statutory rate $ 1,500,000 34.0% $ 2,020,000 34.0%
Non-deductible expenses ( 25,000) (1.7%) (446,000) (7.5%)
Increase in valuation
allowance (1,475,000) (32.3%) (1,574,000) (26.5%)
------------ ----------- ------------ -----------
Total $ - 0 % $ - 0 %
============ =========== ============ ===========
</TABLE>
The non-deductible expenses shown above related primarily to the issuance of
common stock for services using different valuation methods for financial and
tax reporting purposes.
At June 30, 1999, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $14,600,000 of unused net
operating losses available for carryforward to future years. The benefit from
carryforward of such net operating losses will expire in various years between
2002 and 2014 and could be subject to severe limitations if significant
ownership changes occur in the Company.
F-16
<PAGE> 49
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 5. STOCK WARRANTS AND OPTIONS
Warrants
During 1999, as an inducement to exercise certain warrants (the
underlying shares of which were registered in the Company's Prospectus) the
Company issued an aggregate of 264,166 warrants to three parties. The parties
were the beneficial owners of certain of those warrants discussed in the
Company's Prospectus and in the record name of Ambient Capital. The Company
received $188,200 net of a $2,000 fee, from the exercise of the warrants, and
issued 264,166 common shares in connection with the exercise. The same number
of new warrants were issued to the three parties in denominations of 104,066
warrants, 150,000 warrants and 10,000 warrants. Each warrant is convertible
into one common share of the Company's common stock at an exercise price of
$1.19 per share and must be exercised on nor before February 1, 2002.
During the year ended June 30, 1998, the Company, in order to attract
additional investment, revised the terms and increased the number of shares
covered by warrants issued in connection with a 1996 Regulation D offering of
the Company's common stock. The revised warrants include a 50 percent
increase in shares (from 2,199,500 to 3,299,250), a reduction in the exercise
price (from $5.00 to $2.50 per share) and an extension of the expiration date
to December 31, 1999.
During the year ended June 30, 1998, the Company also issued 83,333 shares
of its common stock and issued warrants for an additional 416,655 shares at
$0.72 per share to a consulting firm that provides public relations and
certain other advisory services. In connection with this transaction, the
Company recognized consulting expense of approximately $200,000.
A summary of warrant activity over the last two years is as follow:
Number of
Shares Exercise Price
---------- -----------------
Balance at June 30, 1997 2,349,500 $1.50 - $5.00
Warrants issued in connection with
a consulting agreement 416,665 $ 0.72
Warrants reissued to participants
in 1996 Regulation D offering 3,299,250 $ 2.50
Warrants canceled for reissuance (2,199,500) $ 5.00
------------
Balance at June 30, 1998 3,865,515 $0.72 - $2.50
Warrants exercised ( 264,166) $ 0.72
New warrants issued to three parties 264,166 $ 1.19
------------
Balance at June 30, 1999 3,865,515 $0.72 - $2.50
============
F-17
<PAGE> 50
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 5. STOCK WARRANTS AND OPTIONS (Continued)
Options
Periodically the Company issues incentive stock options to employees,
officers and directors as well as outside consultants to promote the success
of the Company and enhance its ability to attract and retain the services of
qualified persons. The issuance of such options are approved by the Board of
Directors. Options are usually granted under the Company's 1997 Employees
Restricted Stock and Stock Option Plan (the "Plan").
On May 24, 1999 the Company granted an option to purchase 100,000 shares
of the Company's common stock to one non-executive employee under its Plan.
The options vest at one-third each starting from the first anniversary date of
employee at an exercise price of $0.76 per share and will expire five year
from the grant date.
The Company considers two options grants forfeited: one to a consultant
for 275,000 shares due to termination of the consulting agreement in November
of 1998, and an option to purchase 500,000 commons shares granted to one
executive of the Company which were forfeited upon termination of his
employment contract.
The Company has granted the following stock options in the last three
years:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------
Employee Non-Employee Total Exercise Price
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Options outstanding -July 1, 1996 2,500,000 - 2,500,000 $ 1.25
Options granted 500,000 - 500,000 $ 0.97
------------ ------------ ------------
Options outstanding -July 1, 1997 3,000,000 - 3,000,000 $.97 - 1.25
Options granted 2,250,000 2,275,000 4,525,000 $0.60- 0.75
------------ ------------ ------------
Options outstanding -July 1, 1998 5,250,000 2,275,000 7,525,000 $0.60 - 1.25
Options granted 100,000 - 100,000 $ 0.76
Options forfeited during 1999
(500,000) (275,000) (775,000) $0.75 - 1.25
------------ ------------ ------------
Balance at June 30, 1999 4,850,000 2,000,000 6,850,000 $0.60 - 1.25
============ ============= ============
</TABLE>
F-18
<PAGE> 51
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 5. STOCK WARRANTS AND OPTIONS (Continued)
Following is a summary of outstanding options at June 30, 1999
Number of Shares Vested Expiration Date Exercise Price
-------------------- ---------- --------------- ---------------
1,250,000 625,000 August, 2001 $ 0.70
500,000 333,333 April, 2002 $ 0.97
1,000,000 500,000 September, 2002 $ 0.75
2,000,000 2,000,000 November, 2002 $ 0.60
2,000,000 2,000,000 June, 2005 $ 1.25
100,000 0 May 24, 2004 $ .76
------------------- ---------
6,850,000 5,358,333
=================== =========
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation', requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options is greater than or equals the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized.
Proforma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using Black-
Scholes option pricing model with the following weighted-average assumptions
for 1999 and 1998: risk-free interest rate of 4.5%; no dividend yield;
weighted average volatility factor of the expected market price of the
Company's common stock of 0.70 and a weighted-average expected life of the
options of 3 years.
F-19
<PAGE> 52
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 5. STOCK WARRANTS AND OPTIONS (Continued)
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of proforma disclosures, the estimated fair value of the options
is included in expense at the date of issuance because the options may be
fully exercised at that date. The Company's proforma information follows:
1999 1998
------------ ------------
Net loss available to common
stockholders $ (4,500,841) $(5,943,885)
Proforma net loss available to
common stockholders $ (4,538,841) $(6,967,195)
Proforma basic and dilutive
loss per share $ (0.08) $ (0.17)
NOTE 6. RELATED PARTY TRANSACTIONS
Since its inception, the Company has been dependent upon certain individuals,
officers/ stockholders and the related corporations under their control
(collectively referred to as the "Affiliates") to provide capital, management
services, assistance in finding new sources for debt and equity financing and
guidance in the development of the Company's thermal imaging system. The
Affiliates have generally provided services and incurred expenses on behalf
of the Company in exchange for shares of the Company's common stock. However,
in certain instances in years prior to 1996, one such Affiliate deposited
directly to its account, cash collected on behalf of the Company. Such cash
was raised through issuance of notes payable and common stock of the Company
for which a complete accounting for the proceeds was not made by the
Affiliate. In this circumstance the difference has been charged to
compensation expense and reflected as operating, general and administrative
expenses in the accompanying financial statements. Following is an analysis of
transactions involving the Affiliates during the years ended June 30, 1999 and
1998:
F-20
<PAGE> 53
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 6. RELATED PARTY TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
Affiliate 1 Affiliate 2 Affiliate 3
Shares Amount Shares Amount Shares Amount
----------- ------------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year ended June 30, 1999
- -------------------------
Balance of debt and cash
advances at June 30, 1998 - $ 1,192,854 - $ 223,720 - $ 354,167
Funding for the Company
included in notes payable - - - - - 347,750
Non-interest bearing advances
to the Company to fund current
operations, uncollateralized - 1,080,582 - 122,094 2,140,164 (1,244,638)
Payments via stock and cash
cash of $62,300 4,514,507 (2,273,436) 440,851 (345,814) - -
Interest accrued and accretion
of discount on notes payable - - - - - 542,721
----------- ------------- ------------ ----------- ---------- ------------
Total balance of debt and cash
advances at June 30, 1999 4,514,507 $ - 440,861 $ - 2,140,164 $ -
=========== ============ ============ =========== ========== ============
F-21
</TABLE>
<PAGE> 54
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 6. RELATED PARTY TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
Affiliate 1 Affiliate 2 Affiliate 3
Shares Amount Shares Amount Shares Amount
----------- ------------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30, 1998
- ------------------------
Warrants issued -compensation - $ - - $ - - $ 740,000
Shares of the Company's common
stock issued as compensation
at a price of $0.76 per share - - - - 100,000 76,000
Cash investment in Company 5,463,477 $ 1,827,130 666,666 $ 250,000 2,746,275 $ 689,106
----------- ------------- ------------ ----------- ---------- ------------
Total investment by
Affiliates - 1998 5,463,477 $ 1,827,130 666,666 $ 250,000 2,846,275 $ 1,505,106
============ ============ ============ =========== =========== ===========
Funding for the Company
included in notes payable - $ - - $ - - $ 354,167
Non-interest bearing advances
to the Company to fund current
operations- uncollateralized - 1,192,854 - 223,720 - -
----------- ------------- ------------ ----------- ---------- ------------
Total debt to affiliates 1998 - $ 1,192,854 - $ 223,720 - $ 354,167
=========== ============= ============ =========== ========== ===========
Interest expense recognized
on note payable - $ - - $ - - $ 104,167
----------- ------------- ------------ ----------- ---------- ------------
Total interest expense
to affiliates - 1998 - $ - - $ - - $ 104,167
=========== ============= ============ =========== ========== ============
</TABLE>
The Company has been involved in certain stockholder disputes concerning its
technology and has generally been successful in settling such disputes
primarily through issuances of common stock. Affiliate 1 has agreed to
indemnify the Company should additional stockholder disputes regarding the
Company's technology arise.
F-22
<PAGE> 55
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 7. CONTINGENCIES
Litigation
At June 30, 1999 the Company was not involved in any pending or threatened
legal dispute which the Company believes would have a material adverse impact
on the Company's financial statements.
Operating Leases
The Company has two existing lease agreements for office space which is
accounted for as an operating leases. One of the leases expired in August of
1999 and the Company continues to occupy the space on a month to month basis
at a monthly rental fee $1750 per month. The Company intends to enter into a
new lease on the premises. At June 30, 1999, the future minimum payments
required under the noncancelable operating leases are as follows:
Year Ended
June 30, Portland, OR(1) Layton, UT
---------- ------------ -------------
2000 $ 3,500 $ 37,119
2001 38,604
2002 40,148
2003 17,001
------------- ------------
Total 3,500 $ 132,872
============= ============
NOTE 8 - GOING CONCERN
Since its inception, as a development stage enterprise, the Company has not
generated significant revenue and has been dependent on debt and equity raised
from individual investors to sustain its operations. The Company has conserved
cash by issuing its common and preferred stock to satisfy obligations, to
compensate individuals and vendors and to settle disputes that have arisen.
However, during the years ended June 30, 1999 and 1998, the Company incurred
net losses of $ 5,025,841 and $5,943,885 respectively, and negative cash flows
from operations of $(4,024,575) and $(4,541,755), respectively. These factors
along with a $(398,352) negative working capital position at June 30, 1999
raise substantial doubt about the Company's ability to continue as a going
concern.
Management plans to take specific steps to address its financial situation as
follows:
F-23
<PAGE> 56
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
NOTE 8 - GOING CONCERN (Continued)
In the near term the Company plans to continue with its funding plans
with Beach Boulevard LLC. Beach has provided $2.5 Million to the Company
since May of 1999 and pursuant to its Investment Agreement with the Company
has agreed to provide up to $7 Million in funding. The Company will also seek
additional private sales of debt and common stock to qualified investors to
fund its current operations.
In the long-term, the Company believes that cash flows from
commercialization of its thermal imaging systems will provide the resources
for continued operations.
There can be no assurance that the Company's planned private sales of
debt and equity securities or its planned public registration of common stock
will be successful or that the Company will have the ability to commercialize
its thermal imaging systems and ultimately attain profitability. The Company's
long-term viability as a going concern is dependent upon three key factors, as
follows:
The Company's ability to obtain adequate sources of debt or equity funding
to meet current commitments and fund the commercialization of its thermal
imaging system.
The ability of the Company to obtain positive test results of its
thermal imaging system in clinical trials currently in progress.
The ability of the Company to ultimately achieve adequate profitability
and cash flows to sustain its operations.
F-24
<PAGE> 57
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the preceding two years the Company has had no changes in or
disagreements with accountants on accounting and financial disclosure other
than its termination of its principal auditor, Ham Langton & Brasenia, LLP on
August 17, 1999 with the engagement of Jones, Jensen & Company LLC on that
same date as reported on Form 8-K filed with the Securities and Exchange
Commission on August 23, 1999, and amended on August 25, 1999. The Company's
Form 8-K and 8-K/A are hereby incorporated by reference.
_______________________________________________________________
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
Set forth below are the directors and executive officers of the
Company, together with their ages as of the date of this Report.
Name Age Position Since
_________________________ ____ _____________________________ ___________
David B. Johnston (1)..... 56 Chairman of the Board & Chief August 1987
Executive Officer
David A. Packer........... 48 President and Treasurer N/A
Richard V. Secord......... 64 Chief Operating Officer, Feb. 1996
Secretary and Director
Brent M. Pratley, M.D.
(1)(2).................... 62 Director June 1994
Milton R. Geilmann
(1)(2).................... 62 Director Jan. 1998
Harry C. Aderholt (2).... 79 Director Jan. 1998
___________________________________________________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The Company may employ such additional management personnel as the
Board of Directors deems necessary. The Company has entered into an agreement
with one individual to serve in the position of Vice-President of Engineering.
The Company does not consider such position to be an "executive" position and
intends to establish other such positions as needed. The Company has not
identified or reached an agreement or understanding with any other individuals
to serve in such management positions, either executive or non-executive, but
does not anticipate any difficulty in employing qualified personnel.
Biographical Information
- -------------------------
A description of the business experience during the past several
years for each of the directors and executive officers of the Company is set
forth below.
58
David B. Johnston has served as Chairman of the Board of the Company
since August 1987 and Chief Executive Officer, effective July 1, 1997. He
currently serves as an officer and/or director of CTICO and of Thermal
Imaging, Inc. (herein sometimes referred to as "TII"), affiliates of the
Company. From 1984 through 1989, Mr. Johnston was President of Funding
Selection, Inc., an Oregon investment banking and mergers and acquisitions
firm. Prior to that, Mr. Johnston was Chairman of Grace Capital, Ltd. in
Oregon, a specialized medical and computer high technology private placement
firm. Mr. Johnston received a Bachelor of Science degree in Business
Administration from Brigham Young University and a graduate degree in banking
and corporate finance from the University of Southern California.
David A. Packer was elected President of the Company in April 1997.
Effective July 1, 1997, he was also elected to be Treasurer of the Company. In
December 1998, Mr. Packer was appointed to serve as President and Chief
Operating Officer of CTICO, an 80 percent owned Subsidiary of the Company.
Before joining the Company Mr. Packer served as a senior manager for TRW's
engineering office in Ogden, Utah from 1976 until 1997. Mr. Packer received a
Bachelor of Science degree in Electronics from Brigham Young University in
1975.
Richard V. Secord (Major General, United States Air Force, Retired)
was elected Chief Operating Officer of the Company in June 1995 and currently
serves in that same position for TriSun/CTI Asia, Ltd., an affiliate of the
Company. He was elected as a director of the Company effective February 1996
and has served as Vice Chairman and Secretary of the Company since July 1,
1997. General Secord previously served as President of the Company from
February 1996 to April 1997. He is also Chief Executive Officer and a director
of CTICO. General Secord was instrumental in securing the Company's contracts
in Thailand and with the Chinese government through TriSun/CTI Asia, Ltd., a
joint venture between the Company and TriSun Medical America, Inc., which was
formed at the direction of the PRC Ministry of Public Health to effect the
Golden Health Care Plan for the People's Republic of China. General Secord was
awarded The Order of the White Elephant, one of the highest decorations that
can be awarded a non- Thai military officer, for his distinguished valor and
service in assisting the Thai military. General Secord served in many
positions while performing military service. He was the first military officer
to be appointed Deputy Assistant Secretary of Defense (Near East, Africa and
South Asia). General Secord received a Bachelor of Science degree from the
United States Military Academy. He is also a graduate of the United States Air
Force Command and Staff College, and the United States Naval War College. In
addition, he holds a Masters degree in International Affairs from George
Washington University.
Brent M. Pratley, M.D. was elected as a director of the Company in
June 1994 and served as the Secretary of the Company from June 1994 to
September 1997. Dr. Pratley is currently licensed to practice medicine in Utah
and California, and since 1978 has been in private practice in General
Orthopedics and Sports Medicine at Utah Valley Regional Medical Center located
in Provo, Utah, as well as in Los Angeles, California. Dr. Pratley received
his Doctor of Medicine degree in Orthopedic Surgery in 1968 from the College
of Medicine at the University of California, Irvine, California.
Milton R. Geilmann was elected as a director of the Company in
January 1998. Mr. Geilmann has been associated with the medical field for over
32 years. From 1985 to 1993, he worked at E. R. Squibb and Sons, where he held
many positions, including Nuclear Consultant for Diagnostic Medicine. Mr.
Geilmann received a Masters of Science degree in Pharmacology in 1957 from
State University of New York.
59
<PAGE>
Harry C. Aderholt (Brigadier General, United States Air Force,
Retired) was elected as a director of the Company in January 1998. General
Aderholt served in Southeast Asia, particularly Thailand, for many years both
in and out of the U.S. Air Force. Since his retirement from military service
in 1976, General Aderholt has engaged in various private business ventures,
including serving as Vice President of Air Siam in Bangkok, Thailand.
Directors of the Company are elected by the stockholders at each
annual meeting and serve until the next annual meeting of stockholders or
until their successors are duly elected and qualified. Officers are elected to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed or their earlier resignation or removal from office.
The Company does not have an Executive Committee. However, the Company does
have an Audit Committee and a Compensation Committee which were created in
January 1998. The Audit Committee reviews and reports to the Board of
Directors on the financial results of the Company's operations and the results
of the audit services provided by the Company's independent accountants,
including the fees and costs for such services. The Compensation Committee
reviews compensation paid to management, including administration of the
Company's 1997 Stock Option and Restricted Stock Plan, and recommends to the
Board of Directors appropriate executive compensation. There is no family
relationship between or among any of the directors and executive officers of
the Company, except for the relationship between Mr. Johnston and Mr. Packer,
who are cousins by marriage.
Involvement in Other Public Companies
- -------------------------------------
None of the Company's officers or directors are involved with any other
public company deemed to be a "reporting company."
Involvement in Certain Legal Proceedings
- ----------------------------------------
Except as indicated below and or hereinbefore, to the knowledge of
Management, during the past five years, no present director, executive
officer, or person nominated to become a director or executive officer of the
Company:
(1) Filed a petition under federal bankruptcy laws or any state
insolvency law, now had a receiver, fiscal agent or similar officer appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an
executive officer at or within two years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offences);
(3) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him or her from or
otherwise limiting his involvement in any type of business, securities or
banking activities;
(4) Was found by a court of competent jurisdiction in a civil
action, by the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated any federal or state securities law, and
the judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended , or vacated.
60
<PAGE>
Compliance with Section 16(a) of the Exchange Act
The Company has not received any copies for review of Form 3, 4 or 5 or
other written representation from any of its officers and directors. The
following individuals are considered reporting persons during the last fiscal
year (officer, director, 10% shareholder), all of whom have failed to file on
a timely basis:
David B Johnston, Chairman of the Board, Chief Executive Officer
Milton R. Geilmann, Director
Brent M. Pratley, M.D., Director
David A. Packer, President and Treasurer, Chief Financial Officer
Harry C. Aderholt, Director
Richard Secord, Director, Chief Operating Officer and Secretary
None of the above individuals filed their Form 3 Initial Statement of
Beneficial Ownership on Form 3 due on the effective date of the Company's
registration statement. The Company filed a short form registration statement
on Form 8A on January 8, 1999 (which was the effective date of its Prospectus,
making it effective within 60 days thereafter or March 5, 1999. None of these
individual filed a Form 5 Annual Statement of Beneficial Ownership of
Securities (due on or about the 45th day after the end of the Company's fiscal
year or August 14, 1999 nor did they file a written representation that no
Form 5 was required. Except for Mr. Johnston and General Secord, none of the
foregoing individuals has had any change in security ownership since the
initial filing on Form 3 was due, to the best knowledge and belief of the
Company. Both General Secord and Mr. Johnston would have been required to file
a Form 4 Statement of Changes in Beneficial Ownership during the past fiscal
year due to a change in ownership position: Mr. Johnston for the acquisition
of shares in the record name of TII in repayment of advances made to the
Company, and General Secord for the acquisition of shares from TII in a
private transaction.
ITEM 10: EXECUTIVE COMPENSATION
During the fiscal year ended June 30, 1999, Mr. Packer, and General
Secord were each paid salaries in excess of $100,000. Mr. Dodd, a former
President and CEO of CTICO, received a salary in excess of $100,000 in prior
years. Mr. Johnston, the Company's Chief Executive Officer has not been paid
a cash salary over the past three years but instead has been deemed
compensated in the form of periodic issuance of restricted common shares to
TII, (an affiliate of Mr. Johnston's. See Item 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS. The periodic issuance of restricted shares of the
Common Stock to TII are in settlement of both services provided to and
expenses incurred on behalf of the Company by Mr. Johnston, and mostly took
place during 1997.
All corporate decisions regarding employee compensation and stock
option awards during the last three year period have been approved by the
Board of Directors. In January 1998, the Board of Directors created a
Compensation Committee composed of Dr. Pratley, Mr. Geilmann and General
Aderholt, all non-employee directors. The committee will assume responsibility
for reviewing all executive compensation matters and administering the
Company's 1997 Stock Option and Restricted Stock Plan.
61
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
_________________________________________________________________________
Awards Payouts
-------------------------- --------
Securities All
Other Underlying Other
Name and Principal Fiscal Annual Compen- Restricted Options and LTIP($) Compen-
Position Year Salary($) Bonus($) sation(2)($) Stock Awards SAR's(#)(1) Payouts sation
- ------------------------------ --------- ----------- -------- --------------- ------------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David B. Johnston, 1999 -0- -0- $ -0- -0- -0- -0- -0-
Chairman of the Board, and 1998 -0- -0- $ -0- -0- 1,000,000 -0- -0-
Chief Executive Officer (3) 1997 -0- -0- $ 152,498 -0- -0- -0- -0-
Richard V. Secord, 1999 $175,000 -0- -0- -0- -0- -0- -0-
Secretary, Director, 1998 $175,000 -0- -0- -0- 1,250,000 -0- -0-
Chief Operating Officer (4) 1997 $204,486 -0- -0- -0- -0- -0- -0-
CEO of CTICO
Kenneth M. Dodd, 1999 $ 95,835 -0- -0- -0- -0- -0- -0-
Former President of CTICO(5) 1998 $200,004 -0- -0- -0- -0- -0- -0-
Former VP of the Company 1997 $156,667 -0- -0- -0- -0- -0- -0-
David A. Packer, 1999 $135,000 -0- -0- -0- -0- -0- -0-
President, Treasurer, CFO(6) 1998 $135,000 -0- -0- -0- -0- -0- -0-
President of CTICO 1997 $ 31,657 -0- -0- -0- 500,000 -0- -0-
- -------------------------------------------------------------------------------------------------------------
(1) None of the options granted to employees have been exercised. Of Mr.
Johnston's options on 1,000,000 shares, 750,000 shares are vested as
of the date hereof. Of General Secord's options on 3,250,000 shares
(2,000,000 of which were granted in 1996), only 2,937,500 shares
are vested as of the date hereof. Of the 500,000 option shares granted
to Mr. Packer, 333,333 shares are vested as of the date hereof.
Mr. Dodd's options on 500,000 shares, granted in 1996, are considered
forfeited when he terminated employment.
(2) Certain of the officers of the Company routinely receive other benefits
from the Company, including travel reimbursement, the amounts of which are
customary in the industry. The Company has concluded, after reasonable
inquiry, that the aggregate amounts of such benefits during the last three
completed fiscal years, which cannot be precisely ascertained, did not
exceed the lesser of $50,000 or 10 percent of the total compensation
reported for the named executive officers excepting Mr. Johnston who has
foregone annual monetary compensation in favor of the issuance of
restricted shares of the Common Stock. Included in "Other Annual Compensation"
for Mr. Johnston are reimbursements of travel expenses for himself and
other executives of the Company which were paid by TII. Mr. Johnston also
has the use of a Company vehicle. Based on available information,
General Secord's Other Annual Compensation, which is comprised of
reimbursed travel and a $500 per month car allowance, did not exceed 10
percent of annual compensation during the periods discussed, nor did Mr.
Packer's who also receives a monthly $500 car allowance and reimbursed
travel.
(3) Mr. Johnston has generally served the Company without a salary or other
cash compensation. Through a corporation, Thermal Imaging, Inc.("TII")
Mr. Johnston has advanced over $4,800,000 in the form of cash or payments
of Company related expenses. The compensation reflected in 1997 is the
difference between stock payments and cash advanced for expenses paid in
1997. The Company has repaid the $4,177,839 in advances from TII via
the issuance of 9,073,895 restricted shares over the prior three years.
Mr. Johnston is the beneficial owner of 13,992,271 shares of the
Common Stock of the Company as of September 16, 1999 (including shares
of the Common Stock held in the names of Thermal Imaging, Inc.(excluding
shares underlying options). The aggregate value of all Common
Stock beneficially held by Mr. Johnston, pursuant to Section 13d-3 of the
62
<PAGE>
Exchange Act, as of September 16, 1999, based upon the closing market price
of the Company's unrestricted shares of the Common Stock as of Sept. 16,
1999 was approximately $13,117,754.
(4) General Secord served as President of the Company from February 1996 to
April 1997. He was elected Secretary of Company effective July 1, 1997.
General Secord is the beneficial owner of 150,000 shares of the Company
as of September 16, 1999, valued at approximately $150,000 at that date.
(5) Mr. Dodd resigned from his position of Executive Vice President of the
Company in March 1998, and from his position as President and Chief
Executive Officer of CTICO in December 1998. While employed by the
Company Mr. Dodd also received stock in CTICO totaling approximately 7.5
percent of the outstanding CTICO shares. The value of the CTICO
shares on the date of issue was insignificant, and, therefore, not
reflected as compensation to Mr. Dodd.
(6) Mr. Packer was elected President of the Company in April 1997 and Treasurer
of the Company effective July 1, 1997. He became President and COO of CTICO
in December of 1998; he received no additional salary in such capacity.
</TABLE>
Employment Contracts
- ---------------------
DAVID B. JOHNSTON, the Chief Executive Officer of the Company, and
the Company entered into an Employment Agreement dated October 29, 1997, but
effective September 18, 1997. The term of the agreement is for three years,
automatically renewable for additional periods of one year thereafter unless
terminated upon the giving of notice at least 14 days prior to the annual
renewal date. The agreement calls for no mandatory annual cash compensation,
but does provide for compensation in the form of non-statutory stock options
covering 1,000,000 shares of the Common Stock at an exercise price of $0.75
per share. Twenty-five percent of the options vested upon the execution of the
agreement, and 25 percent of the remaining options vest on each anniversary
date of the agreement. The options granted to Mr. Johnston must be exercised
within five years from the date of grant. To the extent applicable, the
options granted to Mr. Johnston are subject to the Company's 1997 Stock Option
and Restricted Stock Plan. At the cost to the Company, Mr. Johnston has
"piggyback" registration rights with respect to the shares of the Common Stock
derived from the exercise of the options. As of the date of this Report none
of the options granted to Mr. Johnston under the agreement have been
exercised. The agreement subjects Mr. Johnston to a two year non-compete
restriction, the obligation not to induce any employee of the Company to leave
his employment with the Company during the term of the agreement or for two
years after the termination thereof, and the duty not to reveal any
confidential information about the business of the Company.
DAVID A. PACKER, the President of the Company, and the Company
entered into an Employment Agreement dated April 30, 1997. The term of the
agreement is for three years and calls for compensation of $135,000 per year,
plus non-statutory stock options covering 500,000 shares of the Common Stock
at an exercise price of $0.97 per share. One-third of the options vest on each
anniversary date of the agreement. The options granted to Mr. Packer must be
exercised within five years from the date of the agreement. If the agreement
is terminated for "cause" as defined in the agreement, or Mr. Packer
voluntarily terminates the agreement, all of the options granted to Mr. Packer
thereunder, and which have not been exercised, shall be forfeited. At the cost
of the Company, Mr. Packer has "piggyback" registration rights with respect to
the shares of the Common Stock derived from the exercise of the options. The
agreement subjects Mr. Packer to a two year non-compete restriction, the
obligation to give the Company the right to take advantage of any business
opportunity, and the duty not to reveal any confidential information about the
business of the Company.
In December 1998, Mr. Packer was appointed to serve as President and
Chief Operating Officer of CTICO Mr. Packer does not receive any additional
compensation for the services provided to CTICO .
RICHARD V. SECORD, the Chief Operating Officer of the Company, and
the Company entered into an original Employment Agreement dated June 12, 1995,
which was superseded by a new agreement dated September 18, 1997. The term of
the new agreement is for three years and calls for compensation of $175,000
per year. In addition to the cash compensation, the agreement ratifies an
original grant to General Secord of non-statutory stock options covering
2,000,000 shares of the Common Stock at an exercise price of $1.25 per share,
50 percent of which vested on June 12, 1996 and 50 percent of which vested on
June 12, 1998. The options granted pursuant to the original agreement must be
exercised within ten years from the date of grant. In addition, General Secord
was granted additional non-statutory options covering 1,250,000 shares of the
Common Stock at an exercise price of $0.70 per share. Twenty-five percent of
these additional options vested on September 18, 1997, and 25 percent of the
remaining options vest on each anniversary date of the agreement (September
18). These options must be exercised within five years from the date of grant.
To the extent applicable, the additional options granted to General Secord are
subject to the Company's 1997 Stock Option and Restricted Stock Plan. At the
cost of the Company, General Secord has "piggyback" registration rights with
respect to the shares of the Common Stock derived from the exercise of the
options. As of the date of this report none of the options granted to General
Secord under the agreement have been exercised . The agreement subjects
General Secord to a two year non-compete restriction, the obligation not to
induce any employee of the Company to leave his employment with the Company
during the term of the agreement or for two years after the termination
thereof, and the duty not to reveal any confidential information about the
business of the Company.
63
<PAGE>
In December 1998, General Secord was appointed to serve as Chief
Executive Officer of CTICO. General Secord does not receive any additional
compensation for the services provided to CTICO .
KENNETH M. DODD, former President of CTICO, an 80 percent owned
subsidiary of the Company, executed an Employment Agreement with the Company
on October 11, 1995. The term of the agreement was for three years and called
for compensation of $150,000 per year, plus non-statutory stock options
covering 500,000 shares of the Common Stock at an exercise price of $1.25 per
share. One-half of the options vested on June 1,1996, 125,000 options vested
on June 2, 1997, and the remaining 125,000 options vested on October 11, 1998.
The options granted to Mr. Dodd must be exercised within 10 years from the
date of the agreement. If the agreement is terminated for "cause" as defined
in the agreement, or Mr. Dodd voluntarily terminates the agreement without the
consent of the Company, all of the options granted to Mr. Dodd thereunder, and
which have not been exercised, shall be forfeited. At the cost of the Company,
Mr. Dodd has `piggyback" registration rights with respect to the shares of the
Common Stock derived from the exercise of the options. As of the date of this
Report, none of the options granted to Mr. Dodd under the agreement have been
exercised. The agreement subjects Mr. Dodd to a two year non-compete
restriction, the obligation to give the Company the right to take advantage of
any business opportunity, and the duty not to reveal any confidential
information about the business of the Company. As part of the consideration
for the agreement, Mr. Dodd was appointed the Chief Executive Officer of CTICO
and received 2,830,959 shares of the common stock of CTICO (approximately 7.6
percent of its issued and outstanding common stock).
64
<PAGE>
Mr. Dodd resigned from his positions as Executive Vice President of
the Company and President, Chief Executive Officer, and Director of CTICO in
March 1998 and December 1998, respectively. It is the Company's position that
Mr. Dodd forfeited his options when his employment with the CTICO terminated
in December of 1998
NON-EXECUTIVE EMPLOYMENT CONTRACT - LYNN SATTERTHWAITE -The Company
has also entered into an Employment Agreement with Mr. Lynn Satterthwaite as
a Vice President of Engineering on May 24 of this year. Mr. Saitterthwaite is
not considered an executive officer of the Company. Under the terms of his
employment agreement, Mr. Satterthwaite is employed for an annual compensation
of $110,000. He was also granted options on 100,000 shares of the Company at
an exercise price of $0.76 with options vesting in groups of one-third
starting on his anniversary date of employment with the Company. The options
expire five years from the date of grant. As part of his employment agreement,
he received registration rights on his options. The term of the employment
agreement is three years. (See Exhibit 10(iii) attached hereto and
incorporated herein)
Director Compensation
- ---------------------
By appropriate resolution of the Board of Directors, directors may
be reimbursed or advanced cash for expenses, if any, relating to attendance at
meetings of the Board of Directors and may be paid a fixed sum (as determined
from time to time by the vote of a majority of the directors then in office)
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the Company
in any other capacity and receiving compensation therefor. Members of special
or standing committees may, by appropriate resolution of the Board of
Directors, be allowed similar reimbursement of expenses and compensation for
attending committee meetings.
Stock Options and Restricted Stock: Employee Stock Option Plan
- --------------------------------------------------------------
In June 1995, the Board of Directors adopted the Company's 1995
Stock Option Plan, which was never ratified by the stockholders and formally
terminated by the Board of Directors on September 18, 1997. On September 18,
1997, the Board of Directors adopted the Company's 1997 Stock Option and
Restricted Stock Plan (the "Plan") subject to the approval of the stockholders
of the Company. The Plan was formally adopted by the stockholders of the
Company on February 6, 1998. The Plan provides for the grant by the Company to
employees of the Company of (i) options to purchase shares of the Common
Stock, and (ii) shares of the Company's restricted Common Stock (the
"Restricted Stock"). The options and the Restricted Stock are hereinafter
sometimes collectively referred to as the "Plan Awards". Options granted under
the Plan may include non-statutory options that do not meet the requirements
of Sections 421 through 424 of the Internal Revenue Code of 1986, as amended
(the "Code"), as well as incentive stock options ("ISO") intended to qualify
under Section 422 of the Code. An aggregate of 5,125,000 shares of the Common
Stock may be issued pursuant to the provisions of the Plan. The Plan shall be
administered by the Board of Directors or by a committee of the Board composed
solely of two or more non-employee directors (the "Administrator"). The
Administrator shall administer the Plan so as to comply at all times with the
Exchange Act, including Rule 16b-3 (or any successor rule), and, subject to
the Code, shall otherwise have absolute and final authority to interpret the
Plan. The Plan shall continue in effect for a term of 10 years unless sooner
terminated pursuant to its provisions.
65
<PAGE>
As mentioned above, the 1995 Stock Option Plan was to be submitted
to the stockholders in order to qualify for statutory stock option treatment
under the Code, but such submission never occurred. Employees of the Company
who were awarded options pursuant or in reference to the 1995 Stock Option
Plan have ratified their agreements to reflect that the plan was never
submitted to the stockholders for approval but that such options shall
incorporate, as contractual terms, the terms and conditions of the 1995 Stock
Option Plan.
Stock Options. Pursuant to the Plan, the term of each option shall
be 10 years from the date of grant or such shorter term as may be determined
by the Administrator; provided, in the case of an ISO granted to a 10 percent
stockholder, the term of such ISO shall be five years from the date of grant
or such shorter time as may be determined by the Administrator. Each option
granted under the Plan may only be exercised to the extent that the optionee
is vested in such option. Except as otherwise provided, all options issued
under the Plan shall vest 20 percent each year over a five year period.
Notwithstanding the foregoing, the Administrator shall have the discretionary
power to establish the vesting periods for any option granted under the Plan,
except that in no case may the Administrator permit more than 25 percent of
any option to vest before the first anniversary of the earlier of the date of
grant or the date on which the optionee began providing services to the
Company. The exercise price shall be such price as is determined by the
Administrator in its sole discretion; provided, however, the exercise price
shall not be less than 100 percent of the Fair Market Value of the shares of
the Common Stock subject to such option on the date of grant (or 110 percent
in the case of an option granted to an employee who is a 10 percent
stockholder on the date of grant). A 10 percent stockholder shall mean a
person that owns more than 10 percent of the total combined voting power of
all classes of outstanding stock of the Company or any subsidiary, taking into
account the attribution rules set forth in Section 424 of the Code. Any shares
of the Common Stock issued upon exercise of an option shall be subject to such
rights of repurchase and other transfer restrictions as the Administrator may
determine in its sole discretion. To the extent that the aggregate Fair Market
Value (determined on the date of grant) of the shares with respect to which
ISOs are exercisable for the first time by an individual during any calendar
year under the Plan, and under all other plans maintained by the Company,
exceeds $100,000, such options shall be treated as non-statutory options.
"Fair Market Value" shall be the mean between the closing bid and asked prices
of the shares of the Common Stock on the date in question (on the principal
market in which the shares are traded), or if the shares were not traded on
such date, the mean between closing bid and asked prices of the shares on the
next preceding trading day during which the shares were traded.
Restricted Stock. The Administrator shall have the authority to
grant shares of the Common Stock to employees that are subject to certain
terms, conditions, and restrictions (the "Restricted Stock"). The Restricted
Stock may be granted by the Administrator either separately or in combination
with options. The terms, conditions and restrictions of the Restricted Stock
shall be determined from time to time by the Administrator without limitation,
except as otherwise provided in the Plan; provided, however, that each grant
of Restricted Stock to an employee shall require the employee to remain an
employee of the Company or any of its subsidiaries for at least six months
from the date of grant. The Restricted Stock shall be granted to employees for
services rendered and at no additional cost to the employee, provided,
however, that the value of the services performed must, in the opinion of the
Administrator, equal or exceed the par value of the Restricted Stock to be
granted to the employee. The terms, conditions, and restrictions of the
Restricted Stock shall be determined by the Administrator on the date of
66
<PAGE>
grant. No certificates will be issued to an employee with respect to the
Restricted Stock until the date the Restricted Stock becomes vested in
accordance with the Plan. The Restricted Stock may not be sold, assigned,
transferred, redeemed, pledged or otherwise encumbered during the period in
which the terms, conditions and restrictions apply (the "Restriction Period").
More than one grant of Restricted Stock may be outstanding at any one time,
and the Restriction Periods may be of different lengths. Receipt of the
Restricted Stock is conditioned upon satisfactory compliance with the terms,
conditions and restrictions of the Plan and those imposed by the
Administrator. On the date the Restriction Period terminates, the Restricted
Stock shall vest in the employee. If an employee (i) with the consent of the
Administrator, ceases to be an employee of, or otherwise ceases to provide
services to, the Company or any of its subsidiaries, or (ii) dies or suffers
from permanent and total disability, the vesting or forfeiture (including
without limitation the terms, conditions and restrictions) of any grant under
the Plan shall be determined by the Administrator in its sole discretion,
subject to any limitations or terms of the Plan. If the employee ceases to be
an employee of, or otherwise ceases to provide services to, the Company or any
of its subsidiaries for any other reason, all grants of Restricted Stock under
the Plan shall be forfeited (subject to the terms of the Plan).
As of the date of this report, no shares of the Restricted Stock
have been granted under the Plan.
As of the date of this report, the following options were
outstanding under the Plan for executive officers and directors. The
following does not include grants of options to employees who are not
considered executive officers of which options to purchase 100,000 shares of
common stock were granted to one employee during 1999 under the Plan:
<TABLE>
<CAPTION>
OPTION PLAN GRANT TABLE
Name of Person to
Whom Options Number of Shares Expiration Date
Were Granted Under Option of Option Vesting Date
----------- ------------ --------- -----------
<S> <C> <C> <C>
David B. Johnston, 250,000 09/18/02 (1) 09/18/97 (2)
Chairman of the Board, 250,000 09/18/02 (1) 09/18/98 (2)
Chief Executive Officer, 250,000 09/18/02 (1) 09/18/99 (2)
and Treasurer 250,000 09/18/02 (1) 09/18/00 (2)
Richard V. Secord, 312,500 09/18/02 (1) 09/18/97 (2)
Chief Operating Officer (3)(4) 312,500 09/18/02 (1) 09/18/98 (2)
312,500 09/18/02 (1) 09/18/99 (2)
312,500 09/18/02 (1) 09/18/00 (2)
Kenneth M. Dodd, -0- N/A N/A
Former President ent of CTICO (3)(5)
David A. Packer, -0- N/A N/A
President and Treasurer (3)(4)
(1) The option may terminate prior to this date. An option will automatically
terminate and revert to the Company upon the termination of employment with
"cause", as defined in the employee's Employment Agreement. In addition, an
option will automatically terminate and revert to the Company if vested as
of the date of resignation or termination "without cause", as defined in
the employee's Employment Agreement, but not exercised on or before the
expiration of 90 days after the termination date of employment.
(2) Conditioned on the employee's continued employment with the Company.
67
<PAGE>
(3) These employees hold options granted prior to the adoption of the Plan. The
options were originally granted pursuant to the terms of the Company's 1995
Stock Option Plan which was never ratified by the stockholders and formally
terminated by the Board of Directors on September 18, 1997. The option
granted prior to the Plan were: 2,000,000 to General Secord, 500,000 to
Mr. Packer and 500,000 to Mr. Dodd. See above discussions under this ITEM 11.
EXECUTIVE COMPENSATION, "Employee Stock Options and Restricted Stock:
Employee Stock Option Plan", and " Employment Contracts". The terms of the
employee stock option agreements were amended to ratify and incorporate the
terms of the 1995 Stock Option Plan into the respective stock option
agreements as contractual provisions. The Company considers Mr. Dodd's
options forfeited as of the date of his termination of employment.
(4) General Secord was President of the Company from February 1996 to April
1997, and was elected Secretary effective July 1, 1997. Mr. Packer was
elected President in April 1997 and Treasurer effective July 1, 1997.
(5) Mr. Dodd resigned as Executive Vice President of the Company in March 1998
and as President, Chief Executive Officer, and director of CTICO
in December 1998. The Company considers his options forfeited at the
termination of his employment.
</TABLE>
There were no options granted in the last fiscal year to any of the
Company's named executive officers or directors. The only option granted was
an option to purchase 100,000 shares of common stock of the Company which was
granted to one employee.
Option and Grant Tables
- ------------------------
Option/Warrant Grants to Executive Personnel
in Last Fiscal Year Ended June 30, 1999
--------------------------------------
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options/Warrants
Options/Warrants Granted to Exercise Price Expiration
Name Granted (2) Employees in FY99 Per Share Date (3)
- -------------------------------- ------------------ --------------------- ------------------ ------------
<S> <C> <C> <C> <C>
NA -0- 0% NA NA
</TABLE>
The following table shows, as to the named executive officers, information
concerning aggregate option exercises during the fiscal year ended June 30,
1999 and the option values as of June 30, 1999.
Aggregated Option and Warrant Exercises in Last Fiscal Year
and Year End Option and Warrant Values
---------------------------------------
<TABLE>
<CAPTION
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/Warrants Options/Warrants at
Shares Acquired at June 30, 1999 June 30, 1999
Name on Exercise Value Realized Exercisable/ Unexercisable Exercisable/ Unexercisable(1)
- ------------------------- -------------- -------------- -------------------------- -----------------------------
<S> <C> <C> <C> <C>
David B. Johnston, -0- -0- 500,000/500,000 $0/$0
Chairman of the Board,
Chief Executive Officer,
and Treasurer (2)
Richard V. Secord, -0- -0- 2,625,000/625,000 $ 18,750/$ 18,750
Chief Operating Officer (3)(4)
David A. Packer, -0- -0- 166,667/333,333 $0/$0
President and Treasurer (3)(4)
Kenneth M. Dodd, -0- -0- 0/0 $0/$0
Former President of CTICO (5)
68
<PAGE>
(1) The value of the unexercised in-the-money options/warrants at June 30, 1999
was determined by calculating the difference between the exercise price per
share of the Common Stock, as set forth in the respective stock option
agreement, and the closing bid price per share of the Common Stock on June
30, 1999 which was $0.73. The resulting amount is deemed to be the value of
the options/warrants for purposes of this table. In the event the exercise
price per share of the Common Stock exceeded the closing price per share of
the Common Stock on June 30, 1998, a "zero" value is shown.
(2) The option granted to Mr. Johnston for 1,000,000 shares of Common Stock
is exercisable at $0.75 per share and, therefore, the shares underlying
such option are not "in-th-money".
(3) General Secord was President of the Company from February 1996 to April
1997, and was elected Secretary effective July 1, 1997. Mr. Packer was
elected President in April 1997 and Treasurer effective July 1, 1997.
(4) The option granted to General Secord for 2,000,000 shares of Common Stock
has an exercise price of $1.25 per share and, therefore, the shares
underlying such option are not "in-the-money"; the option granted to David
Packer has an exercise price of $0.97 per share and, therefore, the shares
Underlying such option are not "in-the-money".
(5) Mr. Dodd resigned as Executive Vice President of the Company in March 1998
and as President, Chief Executive Officer, and director of CTICO in
December 1998. The option granted Mr. Dodd for 500,000 shares of Common
Stock is exercisable at $1.25 per share and, therefore, the shares under-
lying such option are not "in-the-money."; the Company considers Mr. Dodd's
Options forfeited under the terms of his Employment Agreement.
</TABLE>
Long-Term Incentive Plans
- --------------------------
The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit plan.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information regarding the
beneficial ownership of all shares of the Common Stock at September 16, 1999
for each person who owns beneficially more than five percent of the
outstanding shares of the Common Stock. The percentage ownership is based on
64,998,840, common shares issued and outstanding at September 16, 1999 and
also takes into account the results of the exercise of any options or warrants
exercisable within 60 days of the filing date.
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Shares Beneficially Owned
-------------------------
Name of Beneficial Owner (1) Number Percent
---------------------------- ---------- -----------
<S> <C> <C>
David B. Johnston (2)............................................ 14,742,271 22.42%
Daron Dillia (3)................................................. 5,743,140 8.48%
Beach Boulevard LLC(4).............................................. 926,910 1.43%
(1) The address of Mr. Johnston is the address of the Company. The address of
Daron Dillia is the address of Manhattan Financial Services, 1142 Manhattan
Blvd, #134, Manhattan Beach CA, 90266; the address of Beach is c/o Krieger
& Prager Esqs., 319 5th Ave., New York, New York 10016.
69
<PAGE>
(2) Includes 750,000 shares of the Common Stock which are covered by options
exercisable within 60 days from September 30, 1999, and 13,952,271
shares of the Common Stock owned by Thermal Imaging, Inc., an affiliate of
Mr. Johnston. Mr. Johnston is CEO and a Director of Company.
(3) Includes 35,000 shares of the Common Stock issued and outstanding and
700,000 shares of the Common Stock underlying the Resale Warrants in the
name of Daron Dillia. Also includes 3,008,140 shares of the Common Stock
issued and outstanding and 2,000,000 shares of the Common Stock which are
covered by options exercisable within 60 days of September 30, 1999, and
in the name of Manhattan Financial Group, an affiliate of Ms. Dillia.
(4) Beach does not currently own 5% of the Company's issued and outstanding
Shares; however, Beach is considered and "underwriter" and has purchased
in the last 5 months 4,392,407 common shares in five separate tranches for
Proceeds to the Company of $2,500,000. Beach is entitled to purchase up
to $7 Million of the Company's shares. The majority of the shares Beach
has purchased are resold (pursuant to the registration thereof) within
30 days of purchase.
</TABLE>
The following table presents certain information regarding the
beneficial ownership of all shares of the Common Stock at September 16, 1999
for each person who is an executive officer and/or director of the Company.
The percentage ownership is based on 64,998,840, common shares issued and
outstanding at September 16, 1999 and also takes into account the results of
the exercise of any options or warrants exercisable within 60 days of the
filing date.
BENEFICIAL OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------
Name of Beneficial Owner (1) Number Percent
---------------------------- -------------- ----------
<S> <C> <C>
David B. Johnston (2)............................................ 14,742,271 22.42%
Richard V. Secord (3)............................................ 3,088,500 4.55%
Brent M. Pratley, M.D............................................ 600 *
David A. Packer (4).............................................. 333,333 *
Harry C. Aderholt (5)............................................ 143,110 *
Milton R. Geilmann (6)........................................... 30,000 *
Officers and Directors as a Group(7)............................... 18,296,214: 27.69%
(1) Unless otherwise indicated, each person named in the above-described table
has the sole voting and investment power with respect to his shares of the
Common Stock beneficially owned. The business address of each individual is
the same as the address of the Company's principal executive offices except
for Dr. Pratley whose business address is 1055 North 300 W., No. 501,
Provo, Utah 84604; Mr. Geilmann, whose business address is 20660 S.W.
Shoshone Drive, Tualatin, Oregon 97062; and General Aderholt, whose address
is 23 Miracle Strip Parkway, N.E., Ft. Walton Beach, Florida 32548.
(2) Includes 750,000 shares of the Common Stock which are covered by options
exercisable within 60 days from September 30, 1999, and 13,952,271
shares of the Common Stock owned by Thermal Imaging, Inc., an affiliate of
Mr. Johnston.
(3) Includes 2,937,500 shares of the Common Stock which are covered by options
exercisable within 60 days from September 30, 1999 and 1,000 shares in
the name of Joanne Secord who resides at the same address as General Secord.
70
<PAGE>
(4) Includes 333,333 shares of the Common Stock which are covered by options
exercisable within 60 days from September 30, 1999.
(5) Includes 610 shares in name of Louise Aderholt who resides at the same
address as Harry Aderholt.
(6) Includes 15,000 shares owned by Blake Geilmann who resides at the same address.
(7) Unless otherwise provided, the calculation of percentage ownership is based
on the total number of shares of the Common Stock outstanding as of September
16, 1999. Any shares of the Common Stock which are not outstanding as of
such date but are subject to options, warrants, or rights of conversion
exercisable within 60 days of September 30, 1999 shall be deemed to be
outstanding for the purpose of computing percentage ownership of outstanding
shares of the Common Stock by such person but shall not be deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person. Percentage total for the group includes percentages of those
individuals who own less than one percent.
</TABLE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management believes that all prior related party transactions are on
terms no less favorable to the Company as could be obtained from unaffiliated
third parties. Management's reasonable belief of fair values is based upon is
based upon proximate similar transactions with third parties or attempts to
obtain the consideration from third parties. All ongoing and future
transactions with such persons, including any loans or compensation to such
persons, will be approved by a majority of disinterested, independent outside
members of the Board of Directors.
Since its inception the Company has been dependent upon certain
individuals, consultants, officers/stockholders and the related corporations
under their control (collectively referred to as the "primary contributors")
to provide capital, management services, assistance in finding new sources for
debt and equity financing and guidance in the development of the Company's
Systems. The primary contributors have generally provided services and
incurred expenses on behalf of the Company in exchange for shares of common
stock. The following discussions are related to agreements with and/ or
funding from primary contributors.
Proceeds From the Sale of Securities - Thermal Imaging, Inc.,
An Affiliate of Dave Johnston
- ------------- -----------------
In certain instances in years prior to 1997, primary contributors
accepted cash raised through the issuance of short term promissory notes and
private placements of securities, including shares of the Common Stock and
debentures, on behalf of the Company. Such amounts were deposited into the
separate bank accounts of certain primary contributors and either transferred
directly to the account of the Company or transferred to third parties in
payment of debts of the Company. In a majority of these instances, Thermal
Imaging, Inc. ("TII"), an affiliate of Mr. Johnston, the Chief Executive
Officer of the Company, received funds raised from investors and deposited the
amounts in an account over which Mr. Johnston had sole control. The funds
received in the TII account were commingled with other assets of TII.
In an effort to account for such proceeds, the auditors have assumed
that all funds raised during the past three fiscal years which were not paid
by investors directly to the Company were initially transferred to TII. In
71
<PAGE>
those cases where reliable evidence is not available to accurately verify the
subsequent transfer of funds from TII to the Company or to creditors of the
Company, or to distinguish contributions made by TII to the Company in return
for shares of the Common Stock from transfers of funds collected on behalf of
the Company for which shares of the Common Stock had been issued to
subscribers, the discrepancies have been treated as compensation to Mr.
Johnston and charged as a compensation expense to the Company and reflected as
operating, general and administrative expenses in the Consolidated Financial
Statements for Company during its fiscal year ended June 30, 1996. In 1996,
this amount was $152,498, as reflected in the Summary Compensation Table. This
resulting amount constitutes the total of all compensation paid during such
period to Mr. Johnston. Mr. Johnston did not receive any compensation during
the 1999 or 1998 fiscal year. During 1999 Mr. Johnston and/or TII advanced
the Company additional funds as set forth in the below table, which was repaid
in unregistered common shares of the Company none of which was considered
compensation to Mr. Johnston (See Table below.)
Dorex Settlement- Assumption of Liability of TII,
an Affiliate of David Johnston
--------------------------------
Between July and October 1995, the Company reached various settlements
with former stockholders of Dorex, Inc. ("Dorex") regarding threats of
litigation arising out of the Company's acquisition of certain research
contracts with the State University of New York - Buffalo ("SUNY") and
intellectual property relating to thermal imaging technology. In 1989, Dorex
entered into a research agreement with SUNY regarding the development and
application of computerized thermography analysis. After Dorex became unable
to meet funding obligations under the research program, TII, an affiliate of
Mr. Johnston and a stockholder in Dorex, paid arrearages due under the
agreement and assumed future payment obligations in order to continue the
project. As a result of an arrangement negotiated, TII gained an assignment of
the research agreement and related technology to the exclusion of Dorex. TII
subsequently transferred all of its contractual and proprietary rights in the
project to the Company. According to management, certain Dorex stockholders
threatened litigation against the Company as a result of its role in the
acquisition of the research agreement and related technology. In order to
avoid litigation, management issued 630,000 shares of the Common Stock to
Dorex stockholders in 1995 in consideration of their discharge and release of
the Company from all claims and liabilities relating to the technology.
Settling Dorex stockholders executed written agreements acknowledging their
release of the Company. Some remaining stockholders have not settled. In an
effort to protect the Company from future costs associated with the Dorex
transaction, the Company entered into an Assumption of Liability Agreement
(the "Liability Agreement') with TII, effective April 17, 1996. The terms of
the Liability Agreement provide that in exchange of the issuance of 112,500
shares of the Common Stock to TII, TII agrees to assume liability for all
claims made by Dorex stockholders against the Company after April 17, 1996.
Marketing Agreement with T.S.E.T. Inc.
- ---------------------------------------
On November 19, 1998 the Company entered into a Marketing Agreement with
T.S.E.T., Inc. (`TSET'). The Marketing Agreement provides that TSET will use
its best efforts and marketing resources to actively market the diagnostic
thermal imaging system of the Company on a world wide basis. On the date that
the Marketing Agreement was entered into by the Company, General Secord, a
Director and Chief Operating Officer of the Company, beneficially owned
approximately 2.4 percent of TSET. Two other directors of the Company have a
72
<PAGE>
beneficial interest in TSET which is equal to approximatley 5% See discussion
under PART I, ITEM 1. BUSINESS OF THE COMPANY, Distribution Methods of the
Company's Product.
Certain Stock Transactions
- ---------------------------
A substantial portion of the cash contributed to the Company over the
past several years has come from primary contributors. Major contributors have
been TII, an affiliate of Mr. Johnston, Daron Dillia doing business as
Manhattan Financial Group, and Paul D. Holt doing business as PDH, Ltd., an
independent contractor who provides various administrative services to the
Company. All of the restricted shares of the Common Stock issued to the
primary contributors, unless otherwise noted, has been valued at 50 percent of
the average monthly trading price of free trading shares of the Common Stock.
Management believes that such a valuation method fairly and accurately
reflected the fair market value of restricted shares of the Common Stock at
the respective dates of issue.
Manhattan Financial Group Consulting Agreement and Related Agreements
- ----------------------------------------------------------------------
Effective January 1, 1997, the Company and Manhattan Financial Group
of Manhattan Beach, California ("MFG'), executed a Consulting Agreement
covering financial services. MFG provides regular financial advising services
to the Company, such as strategic consulting to arrange financing of projects.
For example, MFG arranged, for no additional fee other than the Common Stock
set forth below, the sale of convertible debentures in 1996 and the 8%
Convertible Debenture in 1997, and MFG negotiated and arranged an equipment
financing commitment not utilized in 1996 as well as various other agreements
with such entities as Liberty Capital Group, Inc., Ambient Capital Group,
Inc., Bristol Asset Management LLC, and Willard Harpster, all of which were
entered into during early to mid 1997 and are no longer in effect. MFG also
negotiated the Company's current funding source from Beach in early 1999. The
term of the agreement is for one year, automatically renewable for additional
periods of one year thereafter unless terminated upon proper notice. The
consideration for the agreement was 100,000 shares of the Common Stock and an
option to purchase 2,000,000 shares of the Common Stock at an exercise price
of $0.60 per share (the original executed agreement referenced an exercise
price of $0.75 per share, but the agreement was amended to reflect a reduced
exercise price of $0.60 per share). Fifty percent of the options vested upon
the execution of the agreement, and the remaining 50 percent of the options
vested on December 31, 1997. At the cost of the Company, MFG has `piggyback'
registration rights with respect to the shares of the Common Stock derived
from the exercise of the options. As of the date of this Report, none of the
options granted to MFG under the agreement have been exercised. In the event
of termination of the agreement before its expiration date, all options
exercisable must be exercised on or before the expiration of three years
following the termination date, extended by agreement, from an original
exercise period of 90 days following the termination date. In addition, the
agreement subjects MFG to a duty not to reveal any confidential information
about the business of the Company. The resale of 2,000,000 shares of the
Common Stock to be issued to MFG in connection with the exercise of options
granted pursuant to the Consulting Agreement has been registered under the
Securities Act in the Company's Prospectus in effect. During the last three
years MFG has been instrumental in providing MFG's Consulting Agreement with
the Company remains in effect as of the date of this Report. (See PART II,
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION for further
discussion.)
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<PAGE>
During 1998, the Company entered into two Promissory Notes with MFG
with an aggregate principal amount of $597,750. Under the Notes, which each
had an interest rate of 10 percent per annum, provided that MFG could elect,
at maturity of each of the respective notes, to convert the principal and
interest due into common stock of the Company. Both the Notes are paid in
full with the issuance of 2,140,164 shares of the Company at a value of
$1,244,638 which includes the aggregate principal, $597,500 in accrued
amortization discount, and $49,638 in interest. Although the Company granted
registration rights to MFG when and if Notes were converted into stock of the
Company, MFG did not assert such rights upon conversion and the shares have
not been registered for resale in the Company's Prospectus.
The Company also entered in a Stock Purchase Agreement with MFG in
February, 1999. MFG was granted the option to purchase up to $1.25 Million
worth of the Company's common stock at a purchase price equal to 50% of the
low bid price during the time period from February 8 through March 15, 1999.
MFG purchased 2,364,865 shares in late March for $875,000 at $.37 per share
pursuant to the agreement (For a additional information discussion of MFG
Notes and other MFG Stock Purchase Agreement, see Part II, ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.)
During the Company's fiscal year ended June 30, 1999, the Company paid
MFG approximately $444,000 in placement fees related to its various funding
efforts during that fiscal year. Fees were established on a case by case basis
depending on the extent of MFG's involvement in each funding. The Company also
eliminated a $525,000 subscription receivable in the fourth quarter of 1999
which was recognized as compensation of $525,000 to MFG for consulting. MFG
purchased 525,000 common shares in 1996 for $525,000.
PDH, Ltd. Agreement
- ------------------
PDH, Ltd. has been issued shares of the Company's common stock
valued at $253,000 as compensation and reimbursement of expenses for public
relations services rendered from July 1, 1996 through June 30, 1997. It was
issued 666,666 shares for a cash investment of $250,000 during 1998, and also
advanced $223,720 during 1998 and $122,094 in 1999 which was repaid during
1999 with the issuance of additional 440,861 shares . The resale of certain
shares of the Common Stock issued to PDH, Ltd. has been registered under the
Securities Act pursuant to the Company's Prospectus. PDH, Ltd. is an assumed
business name for Paul Douglas Holt and any persons engaged by him. For the
past several years, PDH, Ltd. has been responsible for the Company's
stockholder communications and investor relations. PDH, Ltd. maintains an
office for the benefit of the Company and incurs expenses on its behalf for
which the Company reimburses PDH, Ltd in the form of restricted shares of its
common stock.
The following is an analysis of transactions involving TII, PDH,
Ltd. and MFG during the fiscal years ended June 30, 1999, June 1998 and June
1997:
74
<PAGE>
<TABLE>
<CAPTION>
TII PDH, Ltd. MFG
Shares Amount Shares Amount Shares Amount
------------ ----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30, 1999
Balances of debt and cash advances as of
June 30, 1998................................ - $ 1,192,854 - $ 223,720 - $ 354,167
Funding for the Company included in
notes payable................................ - - - - - 347,750
Non-interest bearing advances to the Company
to fund current operations. These
advances are uncollateralized................ - 1,080,582 122,094 2,140,164 (1,244,638)
Payments via stock and cash to TII of $62,300.... 4,514,507 (2,273,436) 440,861 (345,814) - -
Interest accrued and accretion of discount
on notes payable............................. - - - - - 542,721
----------- ----------- --------- --------- --------- ----------
Total balances of debt and cash advances as
of June 30, 1999 ........................... 4,514,507 $ - 440,861 $ - 2,140,164 $ -
=========== =========== ========= ========= ========= ==========
Subscription receivable treated
as satisfied via compensation in 1999........... - - - - 525,000 $ 525,000
----------- ----------- --------- --------- ---------- ----------
Year Ended June 30, 1998
Warrants issued as compensation................. - $ - - $ - - $ 740,000
Shares of the Company's Common Stock
issued as compensation at a price of
$0.76 per share.............................. - - - - 100,000 $ 76,000
Cash investment in the Company.................. 5,463,477 $ 1,827,130 666,666 $ 250,000 2,746,27 $ 689,106
----------- ----------- --------- --------- --------- ----------
Total investment - 1998......................... 5,463,477 $ 1,827,130 666,666 $ 250,000 2,846,27 $1,505,106
=========== =========== ========= ========= ========= ==========
Funding for the Company included in notes
payable, .................... - $ - - $ - - $ 250,000
Accrued interest and accretion of discount....... - - - - - $ 104,167
Non-interest bearing advances to the Company
to fund current operations. These
advances are uncollateralized.................. - $ 1,192,854 - $ 223,720 - -
----------- ----------- --------- --------- --------- ----------
Total debt to party - 1998...................... - $ 1,192,854 - $ 223,720 - $ 354,167
=========== =========== ========= ========= ========= ==========
Year Ended June 30, 1997
Shares of the Company's Common Stock
issued as compensation and repayment of
expenses incurred on behalf of the
Company by the parties at prices ranging
from $0.53 to $0.70 per share................. 287,266 $ 152,498 400,000 $ 253,000 - $ -
Non-interest bearing advances to the Company
to fund current operations, uncollateralized... 1,960,418 980,209 - - - -
----------- ----------- --------- --------- --------- ----------
Total investment by party - 1997............... 2,247,684 $ 1,132,707 400,000 $ 253,000 - $ -
=========== =========== ========= ========= ========= ==========
</TABLE>
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this Form 10k-SB for the
Company's year ended June 30, 1999.
Exhibit Exhibit
No. Description(1) Where Incorporated
- ---------- ---------------- --------------------
Registration Statement Parts I, II and III
On Form SB-2, as amended
Declared effective on Jan.
8, 1999. (2)
75
<PAGE>
Post Effective Amendment Parts I, II, and III
On Form SB-2 filed on
April 1, 1999(2)
Amended Prospectus under Parts I, II, and III
424(b)(3) as filed on
July 16, 1999(2)
Form 10QSB for the period Part III
Ended December 31, 1999 (2)
Form 10QSB for the period Part III
Ended March 31, 1999
Form 8-K and 8K/A Part II and III
filed on August 23
1999 and amended on August
25, 1999
(1) Summaries of all exhibits contained in this report are modified in their
entirety by reference to such exhibits.
(2) These documents and related exhibits have been previously filed with the
Securities and Exchange Commission.
The following exhibits are filed as part of this Form 10KSB:
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
----------- -------------------------
<S> <C>
3(a)* Articles of Incorporation filed June 10, 1987.
3(b)* Amendment to Articles of Incorporation filed July 31, 1987.
3(c)* Amendment to Articles of Incorporation filed September 12, 1989.
3(d)* Amendment to Articles of Incorporation filed November 6, 1989.
3(e)* Amendment to Articles of Incorporation filed April 22, 1992.
3(f)* Amendment to Articles of Incorporation dated February 17, 1998.
3(g)* Bylaws, as Amended January 15, 1998.
4* Common Stock Specimen.
5** Opinion Regarding Legality.
10(a)* PR Expense Funds Administration Agreement dated July 9, 1997 between the
Company, Liberty Capital Group, Inc. and Manhattan Financial Group.
10(b)* Financial Advisory Agreement dated October 29, 1997 between the Company and
Ambient Capital Group, Inc.
10(c)* Assumption of Liability Agreement dated April 17, 1996 between the Company
and Thermal Imaging, Inc.
10(d)* Investment Agreement dated January 20, 1998 between the Company and Bristol
Asset Management, LLC.
10(e)* Consulting Agreement dated November 5, 1997 between the Company and Daron
Dillia doing business as Manhattan Financial Group.
10(f)* Consulting Agreement dated November 5, 1997 between the Company and Willard
Harpster.
10(g)* Subscription Agreement dated August 15, 1996 between the Company and
Cameron Capital Management Ltd. With respect to 6% Convertible Debentures
aggregating $550,000.
10(h)* Subscription Agreement dated March 13, 1997 between the Company and
Cameron Capital Management Ltd. With respect to 8% Convertible Debentures
aggregating $125,000.
10(i)* 12% Series A Senior Subordinated Convertible Redeemable Debenture due April
30, 1998.
10(j)* Signatories to Dorex Release.
10(k)* Employment Agreement dated October 11, 1995 between the Company and Kenneth
M. Dodd.
10(l)* Letter Agreement dated June 12, 1995 between the Company and Richard V.
Secord confirming terms for Personal Services Agreement.
76
<PAGE>
10(m)* Employment Agreement dated April 30, 1997 between the Company and David A.
Packer.
10(n)* Escrow Agreement dated November 20, 1997 between the Company, Roger Sack
and First Nebraska Trust Company.
10(o)* Golden Health Card Contract dated April 24, 1995 between TriSun Medical
Corporation and TriSun/CTI Asia, Ltd.
10(p)* Golden Health Plan Hospital Systems Integration Contract dated April 24,
1995 between TriSun Medical Corporation and TriSun/CTI Asia, Ltd.
10(q)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
October 29, 1997 between the Company and David B. Johnston.
10(r)* Employment Agreement dated October 29, 1997 between the Company and David
B. Johnston.
10(s)* Letter Agreement dated July 10, 1997 between the Company and
Capital Group, Inc. s with respect to public relations.
10(t)* License Agreement dated June 8, 1996 between the Company and Thermal
Imaging, Inc.
10(u)* Participation Option Notices by various signatories to a Private Placement
Subscription Participation Option.
10(v)* Pledge Agreement dated September 11, 1997 between the Company and Looper,
Reed, Mark & McGraw Incorporated.
10(w)* Pledge Agreement dated September 11, 1997 between Thermal Medical Imaging,
Inc. (nka CTICO) and Looper, Reed, Mark & McGraw Incorporated.
10(x)* Employment Agreement dated November 13, 1997 between the Company and
Richard V. Secord.
10(y)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
January 15, 1998 between the Company and Richard V. Secord.
10(z)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
June 12, 1995 between the Company and Richard V. Secord.
10(aa)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
June 12, 1995 between the Company and Richard V. Secord.
10(bb)* Commitment Letter Agreement dated March 6, 1997 between the Company and
Select Capital Advisors, Inc.
10(cc)* Services Agreement dated July 1997 between the Company and Liberty Capital
Group, Inc.
10(dd)* Stock Transfer Agreement dated January 28, 1997 between the Company and
Thermal Medical Imaging, Inc. (nka CTICO)
10(ee)* Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and David Packer.
10(ff)* Amendment to Employee Stock Option Agreement dated January 22, 1998 between
the Company and Kenneth M. Dodd.
10(gg)* Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and Richard V. Secord.
10(hh)* Computerized Thermal Imaging, Inc. Consultant Stock Option Agreement dated
November 5, 1997 between the Company and Willard Harpster.
10(ii)* Computerized Thermal Imaging, Inc. Consultant Stock Option Agreement dated
November 18, 1997 between the Company and Daron Dillia D/b/a Manhattan
Financial Group.
10(jj)* Computerized Thermal Imaging, Inc. Restricted Stock Purchase Agreement
dated July 9, 1997 between the Company and Manhattan Financial Group.
10(kk)* Computerized Thermal Imaging, Inc. 1995 Stock Option Plan.
10(ll)* Computerized Thermal Imaging, Inc. 1997 Stock Option and Restricted Stock
Plan.
10(mm)* Offshore Securities Subscription Agreement relating to 12% Series A Senior
Subordinated Convertible Redeemable Debentures of the Company.
10(nn)* 12% Series A Senior Subordinated Convertible Redeemable Debentures of the
Company.
10(oo)* Golden Health Telemedicine Contract dated April 24, 1995 between TriSun
Medical Corporation - China and TriSun/CTI Asia, Ltd.
10(pp)* Contract between TRW Systems Integration Group and Computerized Thermal
Imaging, Inc. dated October 29, 1996. [Articles VI, XXIV, XXXII, and
Appendix A have been omitted pursuant to a Request for Confidential
Treatment. Accordingly, the material has been filed separately with the
SEC.]
10(qq)* Clinical Trial Agreement dated September 16, 1997 between Thermal Medical
Imaging, Inc. and Health Research Association.
10(rr)* Contract between TRW Systems Integration Group and Thermal Medical Imaging,
Inc. dated June 19, 1997. [Articles VI, XXIV, XXXII, and Appendix A have
been omitted pursuant to a Request for Confidential Treatment. Accordingly, the
material has been filed separately with the SEC.]
10(ss)* Clinical Trial Agreement dated November 7, 1997 between Thermal Medical
Imaging, Inc. (nka CTICO) and the University of Southern California.
10(tt)* Clinical Trial Agreement dated June 4, 1998 between Thermal Medical
Imaging, Inc. (nka CTICO). and Mt. Sinai Hospital.
77
<PAGE>
10(uu)* Clinical Trial Agreement dated February 14, 1998 between Thermal
Medical Imaging, Inc. (nka CTICO) and Providence Hospital.
10(vv)* Clinical Study of Examination of Breast for Identification of
Suspicious Tissue Using Clinical Examination and Mammography With and
Without the TMI Thermal Imaging System (Protocol for all clinical
trial agreements).
10(ww)* Promissory Note dated May 1, 1998 between Computerized Thermal
Imaging, Inc. and Looper, Reed, Mark & McGraw Incorporated.
10(xx)* Confidential Settlement and Release Agreement dated February 5, 1998
between the Company and Reg. S Intercontinental Ltd., Banco Cooperativo
Costaricense, Mardi International Corporation, Pegasus Financial Services
Corp. and Manny Lopez. [Portions of Section 1 have been omitted pursuant to
a Request for Confidential Treatment. Accordingly, the material has been
filed separately with the SEC.]
10(yy)* Settlement Agreement dated April 30, 1998 between the Company and Lockwood
Resources Limited, Y.L. Hirsch, and Ari Goldstein. [Portions of Sections 1,
2, and 3 have been omitted pursuant to a Request for Confidential
Treatment. Accordingly, the material has been filed separately with the
SEC.]
10(zz)* Confidential Settlement and Release Agreement dated August 12, 1998 between
the Company and A.M.H.C. Wehneijer de Affiliate, B.V. [Portions of Section
1 have been omitted pursuant to a Request for Confidential Treatment.
Accordingly, the material has been filed separately with the SEC.]
10(aaa)* Corporate Note between the Company and Manhattan Financial Group dated
April 15, 1998.
10(bbb)* Corporate Note between the Company and Manhattan Financial Group dated
September 11, 1998.
10(ccc)* Marketing Agreement dated November 19, 1998 between the Company and
T.S.E.T., Inc.
10(ddd)** Manhattan Financial Group Rule 144 Investment
10(eee)*** Beach Boulevard L.L.C. Securities Purchase Agreement
10(fff)***** Clinical Trial Agreement between CTICO and Lahey Clinic, dated May 18, 1999
10(ggg)***** Agreement with Battelle Memorial Institute dated March 19, 1999 and renewed
on via letter agreement on August 30, 1999 [Portions of this Agreement have been
omitted pursuant to a Request for Confidential Treatment. Accordingly, the
material has been filed separately with the SEC.]
10(hhh)***** TRW Letter Agreement with CTICO [Portions of this Agreement have been omitted
pursuant to a Request for Confidential Treatment. Accordingly, the material has
been filed separately with the SEC.]
10(iii)***** Employment Agreement with Satterthwaitte
10(jjj)***** Lease Agreement -Office Space Layton, Utah
10(kkk)***** Lease Agreement - Office Space - Oregon
11* Computation of Per Share Earnings.
16**** Letter from Ham, Langston & Brezina, LLP. Consenting to the disclosure of
Statements contained in the Form 8K filed on Aug. 23, 1999
and amended on Aug. 25 1999
16(a)* Letter from King, Griffin & Adamson, P.C. consenting to the disclosure
statements contained in the registration statement.
16(b)* Letter from Randy Simpson, C.P.A. consenting to the disclosure statements
contained in the registration statement.
21* Subsidiaries of the Registrant.
23(a)** Consent of Counsel (included in Exhibit 5).
23(b)* Consent of Ham, Langston & Brezina, LLP.
24 (1)* Powers of Attorney.
27***** Financial Data Schedule
* Previously filed with the Company's Registration Statement on SB-2, as amended and declared effective on Jan.
8, 1999.
** Previously filed with the Company's amended Prospectus on July 16, 1999 and with the Company's Form 10Q
for December 31, 1999 and filed with the Commission on March 1, 1999
*** Previously filed as part of the Company's Post Effective Amendment to its Registration Statement, filed with
the Commission on April 1, 1999
**** Previously filed with the Company's Amended 8K on August 25, 1999
***** FILED HEREWITH
</TABLE>
(b) Reports on Form 8K
The Company filed a report on 8-K disclosing applicable information on
Item 4. thereunder "Changes and Disagreements with Accountants". Under this
Item the Company disclosed the termination of its principal accountant and the
engagement of a new principal accountant. The Company filed its 8-K on August
23, 1999 and amended it to include Exhibit 16, on August 25, 1999.
78
<PAGE>
SIGNATURES
In accordance with Sections 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMPUTERIZED THERMAL IMAGING, INC.
Date: October 12, 1999 /s/ David A. Packer
___________________________________
David A. Packer
President, Treasurer &
Chief Financial Officer
In accordance with The Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated
/s/ David B. Johnston
BY:______________________________________
David B. Johnston
Title: Chief Executive Officer, Chairman of the Board of Directors
Date: October 12, 1999
/s/ David A. Packer
By: _____________________________________
David A. Packer
Title: President, Chief Financial Officer, Treasurer
Date: October 12, 1999
/s/ Richard V. Secord
By:______________________________________
Richard V. Secord
Tile: Chief Operating Officer, Secretary, Director
Date: October 12, 1999
/s/ Harry C. Aderholt
By: ______________________________________
Harry C. Aderholt
Title: Director
Date: October 12, 1999
10(fff)
CLINICAL TRIAL AGREEMENT
This Clinical Trial Agreement ("Agreement") is entered into by and between
Thermal Medical imaging, Inc. ("Sponsor") and Lahey Clinic ("Institution"), a
nonprofit institution incorporated under the laws of Massachusetts.
Recitals
WHEREAS, the clinical trial contemplated by this Agreement is of mutual
interest and benefit to Institution and to Sponsor, will further the study
objectives of Institution in a manner consistent with it's non-profit, tax
exempt health care institution and may derive benefits for both Sponsor and
Institution through the discovery of new knowledge;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, the parties hereto agree to the following:
Definitions
"Monitor" shall mean the individual or firm retained by Sponsor to provide
monitoring services for the Study utilizing Sponsor's Protocol and Study
Device, initially being QBRI International, Inc.
"Principal Investigator" shall be Kevin S. Hughes, M.D. who is acting as a
representative for the Institution in activities associated with this study.
"Protocol" shall mean the Protocol and Statement of Work as attached hereto as
Exhibit "A">
"Study" shall mean the clinical studies, examinations and collection of
patient data using the Study Device as described in the Protocol, conducted
and collected at the Institution's premises from patients examined by the
Investigator.
"Study Device" shall mean integrated thermal imaging data acquisition system
for breast cancer detection, the interpretive algorithm analysis process and
the clinical evaluation and display device/software which are to be used or
administered during the Study in accordance with the provisions of the
Protocol.
"Sponsor Intellectual Property" shall mean all inventions, improvements and
discoveries whether or not covered by intellectual property protection, which
are conceived or made by one or more employees of Sponsor's organization or
sub-contractor hired by Sponsor.
1. CONTENTS AND ORDER OF PRECEDENCE
This Agreement consists of this Agreement and the following documents which
shall be referred to collectively herein as the "Transaction Documents":
a. Exhibit "A"- Protocol ; and
b. Exhibit "B" - Budget
In the event of any conflict between such Exhibits and this Agreement shall
control.
2. PERFORMANCE OF THE STUDY
2.1 Institution shall perform the Study substantially in accordance with
the protocol and the terms and conditions of this Agreement. Sponsor and
Institution may at any time amend the Study and this Agreement by mutual
written consent.
<PAGE>
2.2 In the event that the Principal Investigator becomes unable or
unwilling to continue the Study and a mutually acceptable substitute is not
available, both the Institution and the Sponsor shall have the option to
terminate this Agreement. The Principal Investigator and any and all other
persons involved in the Study (collectively the "Investigator(s) "shall
execute the Investigator Agreement) prior to beginning any activities
associated with the Study.
2.3 Nothing in the Agreement shall be construed to limit the freedom of
the Investigators, whether participants in this Agreement or not, from
engaging in similar studies made independently under other grants, contracts
or agreements with parties other than Sponsor, provided said investigations
are not in conflict or violate the terms and conditions of this Agreement.
2.4 In performing the Study, Institution and Principal Investigator shall
at times undertake, comply with, and complete the following:
1. The Protocol;
2. This Agreement;
3. Generally accepted standards of good clinical practice;
4. Instructions provided in writing by Sponsor or Monitor;
5. All applicable federal, state and local laws and regulations
applicable to the conduct of the Study and the performance of clinical
investigators generally including but not limited to the Federal Food, Drug
and Cosmetic Act and regulations of the Food and Drug Administration;
6. Prepare an appropriate patient informed consent document sufficient
to comply with all local, state, and federal statutory and regulatory
requirements and in form acceptable to each of the parties to initiation of
any procedures required by the Study;
7. Obtain and forward to Sponsor and Monitor evidence of Institutional
Review Board ("IRB") approval of the Study and the informed consent document
prior to beginning the Study;
8. Obtain and forward to Sponsor and Monitor evidence of ongoing
review of the Study and Informed Consent document by the IRB at least
annually;
9. Obtain and forward to Sponsor and Monitor evidence of IRB approval
of any advertisement used for the Study prior to the publication or other use
of the advertisement;
10. Review the clinical investigators' manual and all updates provided;
11. Maintain Study and related medical records according to local,
state and federal statutory and regulatory requirements;
12. Immediately notify Sponsor and Monitor, according to procedures
specified by Monitor, of any and all serious and/or unexpected adverse events
as defined by the Study and promptly record such events on an appropriate case
report for ("CRF") provided by Sponsor;
13. Promptly notify Sponsor and Monitor of any pregnancy of any subject
enrolled in the Study;
14. Enroll only qualified subjects in the Study as provided in the
Protocol, or as directed by Sponsor and Monitor.
3. MAINTENANCE OF RECORDS AND FORMS
3.1 Institution agrees to fulfill the obligations imposed by Sponsor for
maintenance of records and reports, and those obligations included in Subpart
D of 21 CFR Chapter 1, Responsibilities of Sponsor and Investigators, a copy
of which is provided by Monitor as part of the study manual.
<PAGE>
3.2 Principal Investigator shall complete and return accurate CRF's to
Sponsor as described in the Study. Principal Investigator also agrees to
ensure the data captured on the CRF's is consistent with the patient medical
records, to complete the case report forms in a timely, coherent, legible
fashion, and to have the CRF's completed in advance of any planned monitoring
visits.
3.3 Institution shall retain all records from the Study (including
medical records of enrolled patients) for the period of five (5) years and
will permit inspection by Sponsor or its authorized representatives of all
such records during normal business hours. During the period of performance
and for a reasonable period thereafter, Sponsor may make copies of and/or
extract non-confidential information from such records at Sponsor's expense.
For purposes of this paragraph, confidential information shall mean
information which identifies a specific patient.
4. LICENSES AND QUALIFICATIONS
4.1 Principal Investigator shall have and maintain in full force and
effect any and all professional and other licenses, certificates or documents
required to render the services described in this Agreement and agree to
provide copy of these licenses, certificates or documents to Sponsor or
Monitor on request. If any such license is suspended or revoked during the
course of the Principal Investigator's participation in the Study, Institution
agrees to notify Sponsor and Monitor promptly in writing.
4.2 Principal Investigator represents and warrants that he has not been
barred from conducting clinical studies by the US Food and Drug Administration
or any other applicable governmental regulatory agency. Institution agrees to
immediately notify Sponsor and Monitor in writing if the Principal
Investigator is barred during the course of the Study.
4.3 Principal Investigator agrees to provide a current curriculum vitae
which is true, complete and accurate up to the start date of this Agreement,
Investigator agrees that Sponsor may supply copies of the Curriculum Vitae to
Monitor, the FDA and any other government regulatory bodies in connection with
the Study.
4.4 Institution represents and certifies that no investigation or study
in which Principal Investigator has been engaged has been terminated for
Principal Investigator's failure to adhere to protocol, guidelines, or Federal
or State regulations.
5. PERIOD OF PERFORMANCE
This estimated period of performance is from 5/1/99 to 4/30/00. However,
the patient enrollment goal for the trial may be reached before or after this
estimated date. The agreement will remain in effect until the accrual for all
clinical sites reaches the goal of 300 malignant patients. This Agreement
shall become effective upon the date of the last signature hereto and shall
continue in effect for the full duration of the period of performance unless
sooner terminated in accordance with the provisions of article 2 or 15.
6. REPORTS
Institution shall furnish Sponsor reports, in the form of case report
forms and logs, in such frequency and format as mutually agreed to by the
parties, but in no event less than every 30 days. A final report setting forth
the accomplishments and significant Study findings or lack thereof shall be
prepared by Institution and submitted to Sponsor within 90 days of the
expiration of the Agreement.
<PAGE>
7. COSTS, BILLINGS AND OTHER SUPPORT
7.1 It is agreed and understood by the parties hereto that, subject to
Article 2, payments shall be made by Sponsor to Institution on a monthly basis
as set forth in Exhibit B. Sponsor shall make payments based on completed case
report forms for patients enrolled in the trial during the prior month in
addition to any other amounts mutually agreed to by parties in Exhibit A.
7.2 Checks shall be made payable to:
Lahey Clinic, Inc.
------------------
7.3 In the event of termination of this Agreement pursuant to Article 15
hereof, Sponsor shall pay all costs directly attributable to the Study accrued
by Institution as of the date of termination, including all costs directly
attributable to the Study accrued by Institution as of date of termination,
including all non-cancelable obligations, and for all costs associated with
patient follow-up as required by the Protocol of those already enrolled in the
Study.
8. PUBLICITY
Neither party shall use the name, trade name, trademark or other
designation of the other party in connection with any products, promotion or
advertising without the prior written permission of the other party.
9. PUBLICATIONS
The Study to be performed under this Agreement is part of a Multi-Center
Collaborative project. The Institution recognizes that the results generated
by this Study may have added scientific significance when combined and
published together with data generated by other centers involved in the
project. Accordingly, Institution expressly acknowledges that the right to
publish the combined results of the collaborative project belongs to Sponsor.
The Institution shall have the rights to publish the results of this Study but
agrees to refrain from publishing until the project is complete, the data
analyzed and the combined results submitted for publication, and until the
Sponsor has received final Food and Drug Administration Pre Market approval or
disapproval. Sponsor shall notify the Institution within 30 days of
notification from FDA of their decision.
10. CONFIDENTIALITY
10. 1 During the term of this Agreement, Sponsor expects to provide
Institution with the Study Device, Protocol, and other information, data and
materials related thereto (collectively, the "Confidential Property") which
Sponsor considers confidential or proprietary in nature and which shall be
prominently marked or identified as confidential or proprietary. Institution
shall receive and hold such Confidential Property in confidence and agrees to
prevent disclosure of said Confidential Property to all parties other than
those involved in conducting the Study, in the manner Institution treats its
own similar information.
10.2 Institution shall not consider information disclosed to it by
Sponsor to be confidential which: (1)is now common knowledge or subsequently
becomes such through no breach of this Agreement (2) is rightfully in
Institution's possession prior to Sponsor's disclosure as shown by written
records (3) is disclosed to Institution by an independent third party that is
not under a separate confidentiality agreement relating thereto; or (4) is
independently developed by or for Institution without benefit of confidential
information received from Sponsor.
<PAGE>
11. INTELLECTUAL PROPERTY
Notwithstanding anything to the contrary in this Agreement, all right,
title and interest to any intellectual property, including without limitation
inventions, improvements, results, data and discoveries, that arise from,
relate to or are direct and specific result of performance of the Protocol and
is directly related to the Study Device, shall belong to the Sponsor.
12. ARBITRATION
Any controversy or claim between the parties arising out of or relating
to this agreement, or a breach thereof, which cannot be resolved relating to
this agreement, or a breach thereof, which cannot be resolved by mutual
agreement shall be settled by binding arbitration conducted by a single
arbitrator in accordance with the commercial arbitration rules of the American
Arbitration Association. Any judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof, each such
arbitration shall be held in the county of Middlesex.
All federal and state substantive and procedural laws applicable to this
agreement relating to arbitration of conflict shall be fully complied with by
the parties.
Unless the parties otherwise agree, each party may conduct discovery prior
to any arbitration hearing in accordance with the State of Massachusetts rules
of civil procedure and evidence. Additionally, there shall be no evidence by
affidavit allowed, and each party shall disclose a list of all documentary
evidence to be used, a list of all witnesses and experts to be called by the
party at least 20 (twenty) days prior to the arbitration hearing.
13. EXPORT
Sponsor agrees that it will at all times be in compliance with the United
States government export regulations and laws and that Any sub-Sponsor
agreement will require that the sub-sponsor Agreement will require that the
sub-Sponsor is in compliance with these regulations and laws. Sponsor asserts
that it is not now doing business with any country to which the United States
government prohibits export of products under consideration in this Study.
14. TERMINATION
14.1 If a party hereto breaches a material term, covenant or condition of
the Transaction Documents or this Agreement, the non-breaching party may
terminate this Agreement. Prior to termination, the non-breaching party shall
provide written notice of default, which shall inform the breaching party of
the facts and circumstances upon which such default is based and which shall
provide the breaching party with 30 (thirty) days in which to cure such breach
or such longer period as the parties may agree or as applicable law may
require. If such breach is not cured within the specified time period, the
non-breaching party may terminate this Agreement by providing written notice
of such termination to the defaulting party.
14.2 This Agreement may be terminated immediately by Sponsor upon written
notice to Institution in the event of any adverse patient reaction. Upon
receipt of a termination notice from Sponsor, the Institution shall stop
enrolling and treating patients under the Study to the extent consistent with
generally accepted standards of good medical practice and patient safety.
<PAGE>
14.3 Termination of this Agreement by either party for any reason shall
not effect the rights and obligations of the parties accrued prior to the
effective date of termination
14.4 Principal Investigator's participation in the Study will
automatically terminate upon
receipt of notice that:
1 . Any license required to be held by Investigator is suspended or
revoked; or
2. Investigator has been debarred from conducting clinical studies by
the US Food and Drug Administration.
14.5 In addition to termination under 16.1 and 16.2, Sponsor may
terminate Institution's participation in the Study upon written notice to
Institution in the event that:
1. Sponsor terminates the Study; or
2. Overall study enrollment goals have not been met, even if
Investigator's individual enrollment has not been reached.
14.6 Institution may terminate participation in the Study if Investigator
becomes unwilling or unable to serve, provided Sponsor is provided at least
thirty (30) days advance written notice, in order to give Sponsor an
opportunity to identify and engage a replacement Investigator.
14.7 Upon termination of this Agreement: (1) the Investigator shall stop
enrolling patients in the Study; (ii) shall cease conducting procedures on
patients already enrolled in the Study, except to the extent such procedures
are medically necessary and permissible, and (iii) both Institution and
Investigator shall return to Sponsor any and all Confidential Property which
is in Institution's, Investigator's, or any of their employee's or agent's
possession or control.
15. Warranties
15.1 Institution agrees ton perform the Study in accordance with the
prevailing professional standards.
15.2 INSTITUTION MAKES NO WARRANTIES FOR ANY PURPOSE WHATSOEVER, EXPRESS
OR IMPLIED, AS TO THE STUDY OR THE RESULTS OF THE STUDY, INCLUDING THE
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE STUDY OR THE
RESULTS OF THE STUDY UNDER THIS AGREEMENT. Neither the Principal Investigator,
Sponsor, nor any other person is authorized to give any such warranty in the
name or on behalf of the Institution.
15.3 Sponsor agrees that it will not rely solely on technical information
provided by the Institution or the Principal Investigator in developing any
invention or product, but will independently test, analyze and evaluate all
inventions and products prior to manufacture and distribution of such
inventions and products.
15.4 Neither Institution or Investigator shall make any warranty or
representation, including but not limited to a warranty or representation of
the efficacy of the Study Device, without the express permission of the
Sponsor, and Sponsor will not be liable for any unauthorized warranty or
representation made by Investigator.
16. INSURANCE AND INDEMNIFICATION
16.1 At all times during the conduct of the Study under this Agreement,
Institution agrees to maintain at its sole cost and expense appropriate and
adequate professional and general commercial liability
<PAGE>
insurance, such protection being applicable to and covering negligent
acts/omissions of officers, employees and agents while acting within the scope
of their employment by Institution, on an occurrence made basis in single
limit coverage of not less than One Million Dollars ($ 1,000,000) per claim or
incident and One Million Dollars ($ 1,000,000) annual aggregate for death,
bodily injury, illness or property damage to support indemnification
obligations of Institution in Section 18.4 hereof. A Certificate evidencing
such policy shall be delivered to Sponsor upon written request.
16.2 Sponsor will hold harmless, indemnify and defend Institution it's
trustees, and agents from demands, claims or costs of judgments that may be
made or instituted against any of them by reason of injury or death to any
person, or damage to property arising out of or related to performance of the
study, provided however, Sponsor will have no liability for loss or damage
resulting from: (1) failure to adhere to the protocol or Sponsor's written
instructions concerning use of the study device, (ii) Failure to comply with
applicable FDA or other government requirements, or (iii) negligence or
willful malfeasance by Providence, it's trustees, officers, agents or
employees.
16.3 At all times during the study, Sponsor agrees to maintain at it's
sole cost and expense a policy or program of comprehensive general liability
insurance or self-insurance on an occurrence made basis in single limit
coverage of not less than one million dollars ($1,000,000) per incident, and
an annual aggregate of I million dollars ($1,000,000), for death, bodily
injury, illness or property damage to support the indemnification obligations
assumed herein. Sponsor shall maintain such comprehensive general liability
insurance during the period that the Study or any modification thereof is
being administered, manufactured, sold or distributed to humans by Sponsor and
a reasonable period thereafter which in no event shall be less than two years.
A Certificate evidencing the comprehensive general liability policy shall be
delivered to Providence Hospital upon request.
16.4 Institution agrees to hold harmless, indemnify and defend Sponsor
from all liabilities, demands, expenses, and losses arising out of and related
to Institution's or Principal Investigator's gross negligence or willful
misconduct.
17. INDEPENDENT CONTRACTOR
17.1 Institution is an independent contractor and not an agent, joint
venture partner of Sponsor.
17.2 Investigator is a member of Institution which is an independent
contractor of Sponsor for all purposes and not an employee, as that term is
understood for purposes of federal and state law. Nothing in this Agreement
shall be deemed to constitute a partnership or joint venture between Sponsor
and Institution, nor shall anything in this Agreement be deemed to constitute
Investigator or Sponsor as the agent of the other. Neither Investigator,
Institution nor Sponsor shall become liable or bound by an representation, act
or omission whatsoever of the other, except to the extent expressly provided
in this Agreement.
18. GOVERNING LAW
This Agreement shall be governed and construed in accordance with the laws of
the State of Massachusetts as adjudicated by a court of competent
jurisdiction.
19. ATTORNEY'S FEES
In any action on or concerning this Agreement, the prevailing party shall
be awarded its reasonable attorney's fees, costs and necessary disbursements,
to be paid by the non-prevailing party.
<PAGE>
20. ASSIGNMENT
Neither party shall assign it's rights or duties under this Agreement to
another without the prior written consent of the other party, except to any
party succeeding to substantially all of the business interests of the
assigning party,
21. INSPECTION AND ACCESS
Sponsor's authorized representatives and regulatory authorities may
examine and inspect the Institution's facilities as required for performance
of the Study and inspect and copy all data and work products relating to the
Study. Inspections will be conducted during regular business hours upon
reasonable notice and to the extent permitted by law and until the Sponsor has
received final Food and Drug Administration Pre-Market approval or
disapproval.
22. RESEARCH MATERIALS
22.1 Institution acknowledges that the Study Device and all other property
and materials provided to the Investigator by Sponsor in connection with the
Study is to be used only for research purposes in connection with the Study.
Institution and Investigator shall have no license or authority to use any
such item in any other context or for any other purpose.
22.2 Institution also agrees to use the Study Device only in the space
approved by Monitor or Sponsor in accordance with documentation provided by
Monitor or Sponsor. Investigator agrees to maintain adequate records of the
use of the Study Device. In addition, Institution agrees to return Study
Device and all other property and materials being provided to Investigator by
Sponsor in connection with the Study upon termination or completion of the
Study.
23. WAIVER AND SEVERABILITY
23.1 No waiver by either party of any breach of any provision hereof
shall constitute a waiver of any other breach of that or of any other
provision hereof
23.2 In the event a court or governmental agency of competent
jurisdiction holds any provision of this Agreement to be invalid, such holding
shall have no effect on the remaining provisions of this Agreement, and they
shall continue in full force and effect. Upon such holding, the parties shall,
within a reasonable period of time, determine whether the severed provision(s)
detrimentally and materially affect the obligations or performance of either
or both parties. If so affected, the parties shall, within a reasonable period
of time, negotiate in good faith to modify this Agreement to relieve such
effects. If such negotiations do not result in mutually agreeable
modifications to this Agreement, wither effected party may terminate this
Agreement upon providing the other party with thirty (3 (30) days written
notice of such termination.
23.3 Sections 3.3, 6, 7.3, 9,10, 11,12,15,20,22 and this 23.3 shall survive
the termination of this Agreement for any and all reasons whatsoever.
<PAGE>
24. AGREEMENT MODIFICATION
This Agreement may be modified or amended, including extension of the
term of this Agreement, at any time only by the written concurrence of both
parties.
25. NOTICES
Any notices given under this Agreement shall be in writing and delivered
to the following addresses by return receipt mail, postage prepaid, or by
overnight courier service. Such notices shall be effective upon the third
business day following mailing, if by mail, or upon receipt, if by courier.
For Sponsor:
Thermal Medical Imaging, Inc.
1760 South Telegraph Road, Suite 202
Bloomfield Hills, MI 48302
For Institution:
The Lahey Clinic Research Department
31 Mall Road
Burlington, MA 0 1805
With a copy to Dr. Kevin S. Hughes, Lahey Clinic, 41 Mall Road, Burlington, MA
01805
For Monitor:
QBRI International, Inc.
1300 North 17th Street
Arlington, VA 22209
Attention: Ann Andre
26. THIRD PARTY RIGHTS
This Agreement shall not create any rights, including without limitation
third party beneficiary rights, in any person or entity not a party to this
Agreement.
<PAGE>
27. ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between the parties
hereto and there are no collateral, oral or written agreements or
understandings. This Agreement supersedes any prior oral or written agreements
or understandings between the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement in two or
more counterparts, each as an original and all together as one instrument as
of the date of last signature below written.
THERMAL MEDICAL IMAGING, INC. LAHEY CLINIC
By: /s/ David Packer By: /s/ Robert Dorland
Name: David Packer Name: Robert Dorland
Title: President Title: VP, Research
Date: 5-18-99 Date: 5/3/99
By: /s/ Kevin Hughes
Name: Kevin Hughes, M.D.
Title: Principal Investigator
10(ggg)
TECHNICAL SERVICES AGREEMENT
For Research and Development
AGREEMENT NUMBER CP040801
LABOR AND MATERIALS Type
Battelle Memorial Institute, through its Commercial Business Operations
(BATTELLE) agrees to provide to Computerized Thermal imaging, Inc. (CLIENT)
technical/research services relating to technical consulting to aide in the
submittal of regulatory submissions to FDA for a thermal imaging system
for assistance in the diagnosis of breast cancer, substantially in accordance
with BATTELLE's Proposal No. CP040801, (the Project) incorporated herein by
reference, under the following terms and conditions:
1. ACCEPTANCE AND COMMENCEMENT
BATTELLE's Proposal may be accepted within sixty (60) days from the date of
BATTELLE's signature below. BATTELLE will begin work within thirty (30) days
of receipt of this Agreement executed by CLIENT. The Project period is
estimated as five (5) months from commencement.
2. PAYMENT
CLIENT agrees to pay BATTELLE's charges for labor services, estimated
[Redacted due to confidentiality: contains industry sensitive or intellectual
property provisions.]plus charges for other expenses incurred in the
performance of the Project, without set-off, payable within thirty (30) days
of the date of semimonthly invoices.
CLIENT will not be required to reimburse, and BATTELLE shall not be required
to incur any charges in excess of the estimate stated above, unless mutually
agreed upon in writing. Invoices not paid within thirty (30) days of the date
of invoice shall accrue interest at the rate of two (2) percent per month.
CLIENT will provide a deposit prior to commencement of work in the amount of
[Redacted due to confidentiality: contains industry sensitive or intellectual
property provisions.] The deposit amount will be returned to CLIENT upon
receipt of final payment, or applied to the final invoice, at CLIENT's option.
Travel, materials, and other non-labor charges will be billed in addition to
the above amount.
3. INTELLECTUAL PROPERTY
[Redacted due to confidentiality: contains industry sensitive or intellectual
property provisions.]
<PAGE>
Technical Services Agreement No. CP040801
4. NO ENDORSEMENT/LITIGATION
BATTELLE does not endorse products or services. Therefore, CLIENT agrees that
it will not use or imply BATTELLE's name, or use BATTELLE's reports, for
advertising, promotional purposes, raising of capital, recommending
investments, or any way that implies endorsement by BATTELLE, except with
prior written approval of an officer of BATTELLE.
BATTELLE does not undertake Projects for the purposes of litigation or to
assign fault or blame and does not provide expert witness services. Therefore,
CLIENT agrees not to use any Project results in any dispute, litigation, or
other legal action.
In any event, if, at any time, BATTELLE or its employees are required to
respond to any subpoenas, orders for attendance at depositions, hearings or
trials, document requests, or other legal proceedings as a result of or
relating to BATTELLE's work on the Project, CLIENT agrees to reimburse
BATTELLE, in addition to any other amounts payable under this Agreement,
BATTELLE's labor charges, attorney time and/or fees, travel, photocopying and
other miscellaneous expenses.
5. CONFIDENTIALITY
If proprietary information other than Project results is disclosed by either
party to the other in connection with the performance of this Agreement, the
receiving party agrees that such information shall be maintained in confidence
for a period of five (5) years from the date of disclosure, provided that such
information is clearly identified in writing as proprietary. Oral disclosures
of proprietary information must be identified as proprietary at the time of
disclosure and must be followed by written confirmation within two (2) weeks.
The parties shall not be liable for disclosures made inadvertently or by
mistake, providing the parties exercise the same standard of care to protect
the information received as they do to protect their own proprietary
information. These obligations with respect to handling proprietary
information shall not be applicable to the following: (a) information that is
now in, or hereafter enters, the public domain through no fault of the
receiving party; (b) information that was previously known by the receiving
party independently of the disclosing party; (c) information that is
independently developed by the receiving party; (d) information that is
disclosed with the written approval of the other party; or (e) information
that is received from a third party without a duty of confidentiality.
No license to the other party, under any trademark, patent, or copyright is
either granted or implied by conveying information to that party. None of the
information that may be submitted or exchanged by the respective parties shall
constitute any representation, warranty, assurance, guarantee or inducement by
either party to the other with respect to infringement of trademarks, patents,
copyrights or any right of privacy, or other rights of third persons. The
confidentiality obligations of this paragraph shall survive the termination or
expiration of this Agreement.
6. LIMITATION OF LIABILITY
BATTELLE will provide a high standard of professional service on a best
efforts basis. However, BATTELLE, as a provider of such services, cannot
guarantee success; thus BATTELLE MAKES NO WARRANTY OR GUARANTEE, EXPRESS OR
IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR
PURPOSE OR MERCHANTABILITY, FOR ANY REPORT, DESIGN, ITEM, SERVICE, OR OTHER
RESULT TO BE DELIVERED UNDER THIS AGREEMENT.
Except for liability for injury to persons or damage to property occurring
during performance of the Project on BATTELLE-owned premises where fault of
CLIENT is not a contributing cause, CLIENT agrees: 1)
2
<PAGE>
Technical Services Agreement No. CP040801
to assume all responsibility for CLIENT's use, misuse, or inability to use the
Project results; 2) to release BATTELLE from any liability to CLIENT for
damages, including but not limited to any indirect, incidental or
consequential damages, arising from or in connection with this Agreement and
any services provided under it; and 3) to indemnify and hold BATTELLE harmless
from any and all liabilities, suits, claims, demands and damages, and all
costs and expenses in connection therewith, in any manner relating to this
Agreement or its performance, asserted by third parties from any cause
whatsoever.
7. NATURE OF SERVICES
CLIENT agrees that BATTELLE is an independent contractor and specifically
acknowledges that BATTELLE is a service provider, not a manufacturer or
supplier. CLIENT retains all final decision making authority and all
responsibility for the formulation, design, manufacture, assembly, packaging
marketing and sale of CLIENT's products, including, without limitation,
product labeling, warnings, instructions to users, and for obtaining any
governmental or other pre- or postmarket approvals, certifications,
registrations, licenses, or permits.
8. PRODUCT LIABILITY INSURANCE
CLIENT shall maintain adequate product liability insurance coverage in amounts
customary and prudent for a responsible entity in its industry in light of the
nature of its product(s). Such insurance shall specifically cover any CLIENT
products that may be developed in whole or in part based on BATTELLE's work
under this Agreement, and CLIENT shall provide evidence of such insurance upon
request.
9. FORCE MAJEURE
Neither CLIENT nor BATTELLE shall be liable in any way for failure to perform
any provision of this Agreement (except payment of monetary obligations) if
such failure is caused by any law, rule, or regulation, or any cause beyond
the control of the party in default.
10. EARLY TERMINATION
Either party shall have the right to terminate this Agreement upon thirty (30)
days' written notice for any good-faith basis. In the event of early
termination, BATTELLE agrees to provide CLIENT with all reports, materials, or
other deliverable items available as of the date of the termination, provided
that CLIENT is not in default of its obligations under this Agreement. In any
event, CLIENT agrees to pay all charges incurred or committed by BATTELLE,
including costs of termination, within thirty (30) days of receipt of a final
invoice.
11. ENTIRE AGREEMENT
This Agreement, including the Proposal incorporated herein, represents the
entire Agreement of the parties and supersedes any prior discussions or
understandings, whether written or oral, relating to the subject matter
hereof. This Agreement may be modified or amended only by mutual agreement in
writing. No course of dealing, usage of trade, waiver, or non-enforcement
shall be construed to modify or otherwise alter the terms and conditions of
this Agreement. In the event of any conflict or inconsistency between these
terms and conditions and the Proposal, these terms and conditions shall
control.
3
<PAGE>
Technical Services Agreement No. CP040801
12. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the laws
of and enforced within the jurisdiction of the State of Ohio.
13. MISCELLANEOUS
This Agreement may not be assigned in whole or in part without the prior
written approval of both parties. In any event, however, this Agreement shall
be binding upon, inure to the benefit of, and be enforceable by and against
the successors, assigns and transferees of the parties. If any part of this
Agreement shall be held invalid or unenforceable, such invalidity and
unenforceability shall not affect any other part of this Agreement. Captions
used as headings in this Agreement are for convenience only and are not to be
construed as a substantive part of this Agreement.
Computerized Thermal imaging, Inc. BATTELLE MEMORIAL INSTITUTE
Commercial Business Operations
By /s/ R.V. Secord By: /s/ Leslie F. Nikodem, Jr.
Name R.V. Secord Name Leslie F. Nikodem, Jr.
Title COO Title Contracting Officer
Date March 19, 1999 Date March 1, 1999
4
<PAGE>
<Letterhead of
Battelle
.... Putting Technology to Work
505 King Avenue Columbus, Ohio
43201-2693
Telephone (614) 424-6424
Facsimile (614) 424-5263>
August 25, 1999
Proposal/Agreement No. CP042481
Lynn Satterthwaite
Computerized Thermal Imaging, Inc.
476 Heritage Park Blvd, No. 210
Layton, UT 84041
Dear Lynn:
Continued Consulting Support for the Development
of an Infrared Imaging System for Breast Pathologies
Per our discussion, CTI desires to expand and continue the consulting effort
undertaken by Battelle on CTI's behalf. Recent trips to CTI by Steve Rust,
Patina Ripkey, and Bonnie Norman have been productive in helping CTI identify
key areas in the development of the thermal imager system. Areas where
Battelle assistance has been requested include the following:
* Support in Algorithm Development. Battelle has performed analysis of CTI's
classifier and feature extraction algorithms and has provided estimates of the
level of performance that can be expected from those algorithms. CTI has
requested additional work be done by Battelle to refine and improve the
performance of those algorithms.
* Organization of Design Files. Battelle had earlier suggested a plan for
assessing and organizing the Design History File for CTI. Afterthe audit of
the CTI files for the thermal imaging system, additional areas for
contribution by Battelle were identified. The predominant area of additional
assistance is in the creation of a Product Quality Plan for CTI, although the
scope of other subtasks can be increased as well.
* Statistical Consultation for FDA. CTI has requested continued involvement by
Battelle during interactions with the FDA, supporting discussions regarding
the impact of clinical approaches on the statistical validity of CTI data.
* Manufacturing Review. CTI has requested continued assistance in the
evaluation of contract manufacturers who could manufacture the CTI Patient
Positioning Device.
1999 Battelle - The information contained in this proposal is proprietary.
Please do not circulate to others not directly responsible for making a
decision regarding this proposal.
<PAGE>
Lynn Satterthwaite
August 25, 1999
Page 2
Our Approach
Battelle provided a task list in an earlier fax transmission to CTI. The
following table includes this task list and details the work that Battelle
expects to perform for CTI. As we discussed, the direction of work required by
CTI is dynamic, so the specifics for these tasks may depart somewhat from the
list in this proposal. Should the tasks depart from this list sufficiently
that the deliverables need to change for this project, CTI will be notified.
We will proceed with the tasks noted in the table with the team already
established at Battelle. The statistical portion of the work will be led by
Dr. Steve Rust, who will be supported by Loraine Sinnott. Patina Ripkey will
lead the effort for the Design History File work. Bonnie Norman will continue
to support Patina. Matt Fleming will continue to oversee this project.
Deliverables
The deliverables for the overall project have been modified to reflect the
current direction of the project. They now consist of the following:
As listed in our Proposal No. CP040801 dated March 1, 1999:
* Report summarizing the evaluation of the design review of the hardware and
software approach as it relates to the FDA submittal. (Generally, this is a
high-level review, which does not include details such as FMEA, fault-tree,
etc.).
* Report summarizing Battelle's analysis of statistical approach to training
data and verification data (initial report already delivered. Subsequent
updates will be provided to match work done in the statistics area as noted
above).
* Project plan for subsequent activities.
New Deliverables:
* DHF Audit Report (already delivered).
*Summary report at the end of this project detailing the findings/
recommendations for the statistical approach, including classifier and feature
extraction algorithms.
*A product quality plan for the thermal imager system.
* Summary report of design control evaluation and recommendations.
Please note that the following deliverable, as listed in our Proposal No.
CP040801 dated March 1, 1999 has been deleted from this modified scope of
effort.
* Review status of clinical trials and determine the need for additional
training data versus additional verification data.
<PAGE>
Lynn Satterthwaite
August 25, 1999
Page 3
<TABLE>
<CAPTION>
Task Subtasks
- ------------ ---------------------------------------- ----------------------------------
<S> <C> <C>
Battelle 1 . Clinical Trial Design * Other methods for classifier estimation
Statistics * Develop data analysis protocol - Data transformation before using EM
Support to CTI * Establish data quality objectives method
* Determine minimum sample sizes to meet - Linear and quadratic discriminant
data quality objectives analysis
2. Review methods used by TRW - Ridge discriminant analysis
A. Methods for classifier training and selection - Partial least squares discriminant
analysis
* EM method for density estimation and B. Methods to advance feature extraction
classifier estimation 4. Recommend methods and minimum sample
* Leave-one-out method for ROC sizes for training classifier
generation * Use bootstrap method to relate the width of
B. Methods for feature extraction confidence intervals for AUC and SPEC to:
* Double-exponential curve fitting - Training sample sizes
* Region-of-interest characterization - Methods used to train classifier
3. Develop new methods - Methods used to extract features
A. Methods to advance classifier development * Make recommendations on best methods to
* Bootstrap confidence intervals for area- extract features, best methods to train
under-ROC-curve (AUC) and classifier, and associated minimum sample
specificity-at-fixed-sensitivity (SPEC) sizes
- -------------------------------------------------------------------------------------------------------------------------
Statistical Approximately 1 week effort
Support at FDA
- -------------------------------------------------------------------------------------------------------------------------
Design History Review contents of documentation * Continue gathering information.
File and CIA * Review/input to QSIT document * Update the plan as it evolves
System * Interviews to document folklore Lead the effort in compiling existing documentation
Review HW/WSW status that will provide some history and traceability to
* Develop requirements and risk assessment the existing design.
* Develop Requirements Traceability * Gather all documentation that is generated or
provided. Label, organize, etc., the historical
* Req Pro Training documentation.
* Format the database tables * Establish a structure for the "new"design history
* Enter all appropriate design information file.
* Make appropriate linkages Create a necessary quality system procedures to
Assist CTI in the development of the Development meet QSR
Plan for the Breast Scanner System * Interview staff from CTI and TRW to learn about
* Define high-level tasks as they relate to the the existing process (design control, document
QSR. control, device master record, corrective actions,
etc).
* Determine what documentation meets the * Identify gaps in the existing process.
needs of each requirement. * Define responsibilities within the organizations
* Assign responsibilities and interfaces between
all parties involved in the design. * Create procedures to address QSR
* Determine review levels and control levels for requirements (a Product Quality Plan)
design documents * Train staff, as appropriate
Follow up and expedite all actions generated from Perform a follow-up audit against the Design
the design control audit. Control Audit Results and also the PQP
* Generate a plan of action / audit notes.
- -------------------------------------------------------------------------------------------------------------------------
Support for Approximately 1 week worth of consulting
manufacturing
qualification
</TABLE>
<PAGE>
Lynn Satterthwaite
August 25, 1999
Page 4
Estimated Cost and Schedule
[Redacted due to confidentiality: contains industry sensitive or intellectual
property provisions.]
Nature of Services
Battelle's performance of services for this project is that of a professional
service provider, and not a manufacturer or supplier. CTI will retain all
final decision-making authority and responsibility for the formulation,
design, manufacturing, marketing, and selling of its products. CTI will have
responsibility for providing product labels, warnings, and instructions for
the users of its products and will have responsibility for obtaining
regulatory approval for any product or device.
<PAGE>
Lynn Safterthwaite
August 25, 1999
Page 5
Key Assumptions
Key assumptions used to generate this proposal include the following:
* CTI will provide Battelle the data required to facilitate analysis of the
statistical approach to the classifiers and feature extraction algorithms in a
timely fashion.
* CTI will work with Battelle and facilitate TRW's participation in the
development of documentation to support the design history file.
To authorize this effort, please sign and return one original copy of the
enclosed extension agreement. This proposal is valid for 14 days. We are ready
to initiate work immediately upon authorization.
We look forward to assisting CTI in this effort. If you have any questions on
this proposal, please call Matt Fleming at (614) 424-7690. Questions of a
contractual nature may be directed to Mr. Les Nikodem at (614) 424-5723.
Sincerely,
/s/ Matt Flemming /s/ Leslie F. Nikodem Jr.
Matt Fleming Leslie F. Nikodem Jr.
Project Manager Contracting Officer
Product Development Group Commercial Business Operations
<PAGE>
CP042481
MN003763
EXTENSION OF SPONSORED RESEARCH PROJECT
BATTELLE MEMORIAL INSTITUTE
Commercial Business Operations
AND
Computerized Thermal Imaging, Inc.
1. Battelle Memorial Institute, through its Commercial Business Operations,
hereinafter called Battelle, is conducting for Computerized Thermal Imaging,
Inc. hereinafter called Client, research investigations relating to providing
technical consultation regarding a thermal imaging system for assistance in
diagnosis of breast cancer, and assist Client in filing regulatory submissions
to the FDA.
2. Client desires to extend these research investigations for a period of
three (3) months, substantially in accordance with Battelle's
proposal/agreement identified as CP042481, which is made a part hereof by
reference, and desires that Research Agreement CP040801, between Client and
Battelle, be continued as outlined above.
3. Battelle agrees to extend this research as specified in Paragraph 2. above
and, in consideration of this extension, Client agrees to continue to pay the
research costs and to increase the current appropriation by [Redacted due to
confidentiality: contains industry sensitive or intellectual property
provisions.] for costs and fee incurred, payable semi-monthly, upon
presentation of invoices.
4. Except as herein modified, the conditions of the research agreement will
remain in effect.
5. This agreement shall become void if not executed by Client and returned to
Battelle by September 20, 1999.
Computerized Thermal Imaging, Inc. BATTELLE MEMORIAL INSTITUTE
Commercial Business Operations
By: /s/ David A. Packer By: /s/ Leslie F. Nikodem Jr,
Name David A. Packer Name Leslie F. Nikodem, Jr.
Title President Title Contracting Officer
Date Aug. 30, 1999 Date August 20, 1999
Exhibit 10(hhh)
LETTER CO CONTRACT
David Packer, President May 7, 1999
Computerized Thermal Imaging Company
476 Heritage Park Blvd., Suite 210
Layton, Utah 84041
Computerized Thermal Imaging Company (hereafter CTI Co.), with headquarters in
Layton, Utah, and TRW Inc. intends to negotiate a contract for the provision
of professional services on a Time and Material Basis. Pending the completion
of negotiations and the execution of the definitized final Contract, CTI Co.
hereby authorizes TRW to proceed with providing professional services on a
time and material basis in the amount of not to exceed [Redacted due to
confidentiality: contains industry sensitive or intellectual property
provisions] through 1 July 1999 for the following initial tasks:
1. Review Transcan FDA minutes.
2. Support preparation of the FDA submission by the CTI Co. for breast cancer
thermal imaging
3. Review and incorporate new image and clinical data into software design and
perform subsequent performance evaluation.
4. Continue development and commercialization of the imaging processing and
classification software for breast cancer thermal imaging.
5. Support calibration, checkout, and maintenance of systems installed at
clinical sites.
6. Any additional tasking directed by subsequent letter.
CTI Co. shall pay for such services 30 days after receipt of TRW's invoice for
hours, materials and other direct charges in accordance with the following
table:
Labor Category Rate ($/hour
----------------------------- -------------
Administrative Assistant *
Project Control *
Engineer/Scientist Junior *
Engineer/Scientist Mid-Level *
Engineer/Scientist Senior *
Program Manager *
Program Executive *
Category Handling Fee( %
------------------------------ --------------
Travel *
Materials *
Other Direct Charges *
* [Redacted due to confidentiality: contains industry sensitive or
intellectual property provisions.]
TRW shall invoice each month. The invoice shall identify hours worked during
the billing period by Labor Category as well as any charges for Materials and
Other Direct Charges along with the applicable handling fee. The primary
technical personnel performing the professional services shall include: Scott
Birbeck, David Rich, Brent Higgs, Byran Hadley, and Jeannie Prothero. Other
support personnel and certain additional technical personnel will be used as
needed. Substitution of primary technical personnel shall occur only with the
prior notification to CTI Co.
/s/ David A. Packer /s/ signature illegible
- --------------------------- ---------------------------
David A. Packer, President TRW
CTI Co.
Exhibit 10(iii)
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the Effective Date (as defined
below) between Computerized Thermal Imaging, Inc., a Nevada corporation (the
"Company"), and Lynn Satterthwaite an individual residing in North Ogden, Utah
(the "Employee") (hereinafter collectively, the "Parties").
W I T N E S S E T H:
1. EMPLOYMENT. The Company hereby employs the Employee, and Employee
accepts such employment by the Company, upon all the terms and conditions
hereinafter stated, and as subject to termination as provided in Section 4
hereof. Employee is employed as Vice President of the Company and in such
capacity will report to the President of the Company in the performance of his
duties hereunder.
2. EXTENT OF SERVICE. The Employee shall devote his full time,
attention and energy to the business of the Company, and, except as may be
specifically permitted by the Board, shall not be engaged in any other
business activity during the term of this Agreement. The foregoing shall not
be construed as preventing the Employee from making passive investments in
other businesses or enterprises, if (i) such investments will not require
services on the part of the Employee which would in any way impair the
performance of his duties under this Agreement, (ii) such other businesses or
enterprises are not engaged in any business competitive with the business of
the Company, and (iii) the Employee has complied with Section 8 of this
Agreement with respect to such passive investment.
3. COMPENSATION.
(a) SALARY. (1) As payment for the services to be rendered during
the term of this Agreement, Employee shall be entitled to receive a salary of
$110,000.00 per year, payable in accordance with the payroll policies of the
Company in effect from time to time. During the term of this Agreement, the
Employee shall be entitled to participate in all employee benefit and
insurance plans maintained from time to time by the Company for the benefit of
its employees, in accordance with the policies of the Company in effect from
time to time. The employee benefit and insurance plan in effect a the time of
signing this agreement is contained in EXHIBIT C. The Employee shall be
entitled a minimum of Three weeks annual vacation time and to any additional
annual vacation time as determined in accordance with the vacation policies of
the Company in effect from time to time. All such benefit plans are subject
to change or termination from time to time by Company in its sole and absolute
discretion.
(b) OPTIONS. Employee shall receive, in addition to the salary,
employee benefits, and bonus specified in Section 3(a) above, an option to
purchase common stock of the Company, as more fully described and subject to:
(i) the conditions set forth in EXHIBIT A attached hereto and incorporated by
reference herein and (ii) that certain 1997 Incentive Stock Plan (the "Plan")
of the Company attached hereto as EXHIBIT B.
(c) REGISTRATION RIGHTS. All stock in the Company which Employee
obtains from the exercise of options granted to Employee in paragraph (b) of
this Section 3 will be subject to the following "piggy-back" registration
rights:
If the Company at any time proposes to file, or does file, any registration
statement covering the class of securities of the Company which you then hold,
whether that registration is for securities to be issued by the Company or
then held by another party, you will have the right to have any part or all of
the securities of the Company you then hold to be registered under such
proposed registration statement. If you wish to have any securities you then
hold to be so registered, you will notify the Company in writing of your
desire within thirty (30) days after the date you receive your notice of
proposed registration from the Company. Upon receipt of your timely request
for registration under this paragraph, the Company will add the securities you
requested be registered to the proposed registration statement; provided, that
if after you make a request for registration the Company decides not to
register or delay such registration, for any reason, the Company will give you
written notice of its decision. However, no such determination will prejudice
your rights to other and further registrations made by the Company or with
respect to Company securities from time to time. The Company will bear all
costs and expenses of each and all such registrations incurred in connection
with the exercise of rights by you under this paragraph.
4. TERM; TERMINATION.
(a) The term of this Employment Agreement shall commence on the
first date when Employee reports for work for the Company after the date
hereof (the "Effective Date") and shall continue thereafter for a period of
three (3) years, subject to the terms and conditions herein stated; provided
that Employee may terminate this Agreement at any time hereafter by giving the
Company at least fourteen (14) days' prior written notice. If Employee
voluntarily terminates this Agreement, Company shall have no further financial
liability to Employee beyond the effective date of such termination.
(b) If during the term of this Agreement Employee is prevented for
a continuous period of thirty (30) days from performing his duties hereunder
by reason of physical or mental disability ("Disability"), then the Company,
on seven days' prior written notice to the Employee, may terminate this
Agreement. In the event of a termination pursuant to this paragraph 4(b), the
Company shall be relieved of all of its obligations under this Agreement,
except that: (i) the Company shall pay to the Employee that portion of the
Employee's wages earned and accrued by Employee prior to Employee's
termination, and (ii) to the extent provided in the Plan, to exercise the
Options described in Paragraph 3(c) hereof.
(c) The Company may at any time discharge the Employee for Cause
(as hereinafter defined) and terminate this Agreement without any further
liability hereunder to the Employee or his spouse or estate, except for the
obligation of the Company to pay the Employee's wages earned to the date of
discharge. For purposes of this Agreement, the Company shall have "Cause" to
terminate the Employee's employment upon (i) the gross negligence of the
Employee in performing his duties hereunder (other than any such failure
resulting from the Employee's incapacity due to physical or mental illness),
(ii) the willful engaging by the Employee in conduct amounting to fraud or
embezzlement or any other act by Employee which is negligently or willfully
performed which has the effect of damaging the reputation of the Company or
its business, (iii) breach of fiduciary duty as an officer and/or director of
the Company, (iv) the violation by the Employee of any material provision of
this Agreement, including but not limited to the provisions of Sections 5, 6,
7, 8 or 10 hereof.
5. BUSINESS OPPORTUNITIES. Subject to the provisions of Paragraph 2(b),
for as long as the Employee shall be employed by the Company, the Employee
agrees that with respect to any new and future business opportunity or other
new and future business proposal which is offered to, or comes to the
attention of, the Employee during employment and which is in any way related
to, or connected with, the business of the Company or its affiliates, the
Company shall have the right to take advantage of such business opportunity or
other business proposal for its own benefit. The Employee agrees to promptly
deliver notice to the board of directors of the Company in writing (the
"Notice of Opportunity") of the existence of such opportunity or proposal and
the Employee may take advantage of such opportunity only if the Company does
not elect to exercise its right to take advantage of such opportunity within
thirty (30) days after receipt of the Notice of Opportunity. Thereafter, the
Company shall be deemed to have waived its rights to such opportunity and the
Employee shall have the right to pursue such opportunity upon the terms and
conditions set forth in this Agreement, specifically subject to the terms of
Section 2 of this Agreement.
6. INTELLECTUAL PROPERTY. Employee hereby assigns to the Company all
inventions, processes, discoveries and improvements (whether or not
patentable) which are conceived, made or learned by Employee alone or jointly
with others in the course of his employment with the Company that pertain to
the business interests of the Company or relating to areas which may be
reasonably anticipated to be encompassed by such business interests of the
Company at the time of conception. Employee at any time during or after his
employment will promptly disclose to the Company all such processes,
inventions, discoveries or improvements assigned hereby. Employee will also
at the Company's expense cooperate in all lawful acts which may be necessary
or desirable in the judgment of the Company to protect or vest title to such
inventions, processes, discoveries or improvements in the Company or its
nominee including, without limitation, applying for, obtaining, maintaining,
and enforcing patents thereon in all countries of the world, and including
execution of papers appropriate thereto.
7. CONFIDENTIAL INFORMATION. The Employee acknowledges that he will
receive or come in contact with, among other things, trade secrets (both
technical and non-technical), know-how, lists of customers, suppliers,
contractors, customers, employee records and other confidential and
proprietary information about the business of the Company (hereinafter
collectively referred to as "information"), all of which the Company considers
highly confidential, giving the Company significant advantage over
competitors, and which the Company desires to protect. The Employee
understands that such information is the sole property of the Company, and
that the information is confidential, and he agrees that both during and after
his employment with the Company he will not at any time use or reveal such
information to anyone except as permitted by the Company or required by
Employee's employment duties with the Company. Upon termination of employment
hereunder, the Employee agrees to surrender to the Company all papers,
documents, writings and other property produced by him or coming into his
possession by or through his employment hereunder, and the Employee agrees
that all such materials and information will at all times remain the property
of the Company.
8. RESTRICTIVE COVENANT. In consideration of $10.00 and other good and
valuable separate consideration given by Company to Employee, Employee agrees
that during the period of time that the Employee is employed by the Company
and for a period of two (2) year(s) following the termination of this
Agreement for any reason, the Employee shall not, except as expressly approved
in writing by the Board of Directors of the Company, directly or indirectly:
(a) (i) cause or be instrumental in the formation of, or
(ii) within any state in which the Company then conducts business
engage in, whether as principal, agent, trustee, member or
employee or through the agency of any corporation, partnership,
association, agent or agency, any business competitive with the
business then conducted by the Company or its subsidiaries or
affiliates (a "Competing Business");
(b) be the owner of more than one percent (1%) of the equity (whether
capital stock, membership or partnership interests) of any entity
(except for stock publicly traded on any recognized stock exchange)
which is engaged, directly or indirectly, in a Competing Business; or
(c) through any person, firm, association or corporation with which he
is now or may hereafter become associated, cause or induce any
present or future employee of the Company to leave the employ of the
Company or to accept employment with the Employee or with any
Competing Business.
The foregoing agreement not to compete shall not be held invalid or
unenforceable because of the scope of the territory or actions subject thereto
or restricted thereby, or the period of time within which such agreement is
operative, but any judgment of a court of competent jurisdiction may define
the maximum territory and actions subject to and restricted by this Section 8
and the period of time during which such agreement is enforceable. In the
event the Company shall cease to do business, this Section 8 shall not apply.
9. SPECIFIC PERFORMANCE; SURVIVAL. The Employee acknowledges that a
remedy at law for any breach or attempted breach of Sections 5, 6, 7 or 8 of
this Agreement will be inadequate, agrees that the Company shall be entitled
to specific performance and injunctive and other equitable relief in case of
any such breach of attempted breach, and further agrees to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such injunctive or any other equitable relief. The Parties
hereto acknowledge that the covenants contained in Sections 5, 6, 7, 8 and 9
shall survive the termination of this Agreement, by either party, for any
reason.
10. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by
or invalid under applicable law, such provision shall be ineffective to the
extent of such provision or invalidity only, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
11. BINDING EFFECT. This Agreement shall be binding on the parties
hereto when executed by Employee and the Chief Executive Officer of Company.
Employee acknowledges and agrees that no representative of Company other than
the Chief Executive Officer has any authority to enter into any employment
contract or bind Company unless authorized in writing by the Chief Executive
Officer of Company to do so.
12. UTAH LAW TO APPLY; ARBITRATION. This Agreement shall be governed by
and construed pursuant to the laws of the State of Utah, notwithstanding
conflicts of law principles thereof. Company and Employee hereby submit to
the jurisdiction of the courts, mediations and arbitral panels located in, and
agree that venue shall lie for all purposes in, Utah. EXCEPT FOR ACTIONS
INVOLVING REQUESTS BY COMPANY FOR RELIEF UNDER PARAGRAPH 9 HEREOF, EMPLOYEE
AND COMPANY HEREBY KNOWINGLY AND VOLUNTARILY AGREE THAT ANY DISPUTES OR
CONFLICTS IN ANY WAY ARISING OUT OF OR RELATING TO THE EMPLOYMENT RELATION
BETWEEN EMPLOYEE AND COMPANY CREATED BY THIS AGREEMENT SHALL BE MEDIATED OR
ARBITRATED, AT THE WRITTEN ELECTION OF EITHER PARTY HERETO. IF EITHER
EMPLOYEE OR COMPANY MAKE A PROPER ELECTION TO MEDIATE UNDER THIS PARAGRAPH 12,
BUT SUCH MEDIATION EFFORTS FAIL TO RESOLVE THE SUBJECT DISPUTE(S) BETWEEN THE
PARTIES, THE PARTIES SHALL BE BOUND TO RESOLVE THE SUBJECT DISPUTE(S) BY
BINDING ARBITRATION. WHERE THE SUBJECT DISPUTE(S) ARE ULTIMATELY RESOLVED BY
ARBITRATION, THE PARTIES HERETO IRREVOCABLY AGREE TO BE BOUND BY ALL FINDINGS
OF FACT AND CONCLUSIONS OF LAW OF THE ARBITRATOR(S) SELECTED. Either party
may elect under this paragraph 12 to proceed either to mediation or
arbitration by delivery of written notice to the opposing Party and to the
Judicial Arbitration and Mediation Services office where such proceeding is to
be held. Each mediation or arbitration proceeding hereunder will be conducted
in accordance with the rules of the Judicial Arbitration and Mediation
Services (the "JAMS Rules"), including selection of mediator(s) or
arbitrator(s). The mediation or arbitration will be held in Layton, Utah,
unless both parties agree to another location. All federal and state laws
applicable to this agreement relating to arbitration or mediation of conflicts
shall be fully complied with by the parties.
13. NOTICES. Any notices required by this Agreement shall be
effectively given if given in writing by personal delivery or by depositing
same in the United States mail, registered or certified, postage prepaid,
return receipt requested. For purposes of this provision, Company's address
shall be 476 Heritage Park Blvd., Suite 210, Layton Utah 84041, or at such
other place as may be designated by Company from time to time. Employee's
address shall be that set forth below or at such other place as may be
designated by Employee from time to time.
14. ASSIGNMENT. This Agreement may not be assigned by the Employee.
Neither the Employee, his spouse nor their estates shall have any right to
commute, encumber or dispose of any right to receive payments hereunder, it
being that such payments and the right thereto are nonassignable and
nontransferable.
15. ENTIRE AGREEMENT. This Agreement, together with all exhibits and
attachments hereto and all documents and instruments executed and delivered in
connection herewith, constitutes the entire agreement of the parties hereto,
and supersedes all prior understandings with respect to the subject matter
hereof.
16. ACKNOWLEDGMENT. Employee acknowledges that he has read and
understands this Agreement, and that he has received a fully executed copy of
same.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date.
THE COMPANY:
Computerized Thermal Imaging, Inc.
/s/ David A. Packer
By: ____________________________________
David A. Packer, President
THE EMPLOYEE:
5/24/99 /s/ Lynn Satterthwaite
Dated: ______________ ________________________________
Lynn Satterthwaite
1260 E. 2925 North
North Ogden, Utah 84414
801-782-6209
EXHIBITS
A - Stock Option ( 100,000 shares)
B - 1997 Incentive Stock Plan
C Employee Benefits and Insurance Plan
10(jjj)
DURBANO OFFICE BUILDING
476 Heritage Park Boulevard
Layton, Utah 84041
BASIC LEASE INFORMATION
------------------------
Date: July 15, 1997
Landlord: DURBANO PROPERTIES, L.C., A UTAH
CORPORATION
Tenant: COMPUTERIZED THERMAL IMAGING, INC.
Article 1 Premises: 1,993 Rentable Sq. Ft.
Article 2 Term Commencement: December 1, 1997
Article 2 Term Expiration: November 30, 2002
Article 4 Monthly Rental: As specified in Exhibit C
Article 5 Direct Operating Expense Stop: $4.50 per Sq. Ft.
Article 33 Security Deposit: $2,906.46
Article 35 Tenant's Address for Notices: Computerized Thermal Imaging, Inc.
476 Heritage Park Boulevard,
Suite 203
Layton, UT 84041
Article 40 Exhibit and Addenda: A,B,C,D
The provisions of the Lease identified in the margin are those provisions
where reference to particular Basic Lease Information appear. Each such
reference shall incorporate the applicable Basic Lease Information. In the
event of any conflict between any Basic Lease Information and the Lease, the
Lease shall control.
TENANT: LANDLORD:
COMPUTERIZED THERMAL DURBANO PROPERTIES, L.C.
IMAGING, INC.
By: /s/ David A. Packer By: /s/ Douglas M. Burbano
DAVID A. PACKER DOUGLAS M. DURBANO
Title: President Title: Managing Member
<PAGE>
1. PREMISES........................................................... 3
2. TERM, COMPLETION OF IMPROVEMENTS.................................... 3
3. NON-OCCUPANCY OF IMPROVED SPACE.................................... 3
4. RENTAL............................................................. 4
5. DIRECT OPERATING EXPENSE........................................... 4
6. USE ................................................................ 5
7. SERVICES .......................................................... 6
8. ALTERATIONS ....................................................... 7
9. LIENS ...............................................................7
10. REPAIRS ............................................................8
11. DESTRUCTION OR DAMAGE.............................................. 8
12. SUBROGATION....................................................... 9
13. INDEMNIFICATION.................................................... 9
14. COMPLIANCE WITH LEGAL REQUIREMENTS................................ 9
15. INSURANCE......................................................... 10
16. ASSIGNMENT AND SUBLETTING ......................................... 10
17. RULES............................................................. 10
18. ENTRY BY LANDLORD ................................................. 10
19. EVENTS OF DEFAULT ................................................. 11
20. TERMINATION UPON DEFAULT .......................................... 11
21. CONTINUATION AFTER DEFAULT........................................ 12
22. OTHER RELIEF ...................................................... 12
23. LANDLORD'S RIGHT TO CURE DEFAULTS................................. 12
24. ATTORNEYS' FEES.................................................... 13
25. EMINENT DOMAIN.................................................... 14
26. SUBORDINATION ..................................................... 14
27. NO MERGER ..........................................................14
28. SALE .............................................................. 14
29. ESTOPPEL CERTIFICATE.............................................. 15
30. NO LIGHT, AIR OR VIEW EASEMENT.................................... 15
<PAGE>
31. HOLDING OVER ..................................................... 15
32. ABANDONMENT ....................................................... 15
33. SECURITY DEPOSIT .................................................. 15
34. WAIVER............................................................ 16
35. NOTICES........................................................... 16
36. COMPLETE AGREEMENT................................................ 16
37. CORPORATE AUTHORITY ............................................... 16
38. GUARANTEE OF LEASE ................................................ 16
39. MISCELLANEOUS ..................................................... 16
40. EXHIBITS .......................................................... 17
41. SEVERABILITY .......................................................17
42. BROKERS ........................................................... 17
43. FORCE MAJEURE ......................................................17
44. FIRST MONTH'S RENT AND SECURITY DEPOSIT DUE ....................... 17
45. ENVIRONMENTAL DISCLOSURE ......................................... 17
46. AMERICANS WITH DISABILITIES ....................................... 18
47. NON-DISTURBANCE .................................................. 18
<PAGE>
DURBANO OFFICE BUILDING
476 Heritage Park Boulevard
Layton, Utah 84041
THIS LEASE, dated July 15, 1997, is entered into by and between Durbano
Properties, L.C., as Landlord, and Computerized Thermal Imaging, Inc., as
Tenant.
1.PREMISES
(a) Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term and subject to the agreements, conditions and
provisions hereinafter set forth, to each and all of which Landlord and Tenant
hereby mutually agree, those certain premises (the "Premises") shown outlined
on Exhibit A attached hereto and situated on the second floor, Suite 203, of
the Durbano Office Building located at 476 Heritage Park Boulevard in Layton
City, Utah, specified in the Basic Lease Information attached hereto, and
consisting of approximately 1,993 square feet of Rentable Area. As used in
this Lease, the term "Building" means that certain real property located at
the above-mentioned address and the building constructed thereon.
(b) The Premises shall include the appurtenant right to use, in common
with others, tile lobbies, entrances, stairs, elevators, restrooms and other
public portions of the Building. All of the outside walls and windows of the
Premises and any space in the Premises used for shafts, stacks, pipes,
conduits, ducts, and electric or other utilities, sinks or other Building
facilities, and the use thereof and access thereto through the Premises for
the purposes of operation, maintenance and repairs, are reserved to Landlord.
2. TERM, COMPLETION OF IMPROVEMENTS
The term of this Lease shall commence and, unless sooner terminated as
hereinafter provided, shall end on the dates respectively specified in the
Basic Lease Information. If Landlord, for any reason whatsoever, cannot
deliver possession of the Premises to Tenant at the commencement of said term,
as above specified, this Lease shall not be void or voidable (unless such
delay exceeds 90 days, in which event Tenant may elect to terminate this Lease
and any liability thereunder), nor shall Landlord be liable to Tenant for any
loss or damage resulting therefrom, but in that event, rental shall be waived
for the period between the commencement of said term and the time when
Landlord can deliver possession. No delay in delivery of possession shall
operate to extend the term hereof. Prior to the commencement of the term
hereof, Landlord shall complete, construct or install in the Premises the
improvements to be constructed or installed by Landlord pursuant to the
provisions of Exhibit B, if any. The Premises shall be deemed complete and
possession delivered when Landlord has substantially completed the Exhibit B
improvements. "Substantial Completion" shall mean when (1) installation of
Exhibit B improvements has occurred, and been approved by Tenant, (ii) Tenant
has direct access from street to the elevator lobby on the floor where the
leased premises are located, (iii) building services are furnished to the
leased premises, and (iv) Landlord's architects shall have issued a
certificate of Substantial Completion with respect to leased premises or that
portion of the building within which they are contained. Substantial
Completion shall be deemed to have occurred notwithstanding a requirement to
complete "punch list" or similar corrective work, which neither affects nor
impacts Tenant's use and enjoyment of the Premises. Landlord shall use its
best efforts to advise Tenant of the anticipated date of completion at least
30 days prior to such date, but the failure to give such notice shall not
constitute a default hereunder by Landlord.
3. NON-OCCUPANCY OF IMPROVED SPACE
In the event Tenant does not occupy the space designated herein, all
interior finishing costs become due and payable upon billing by Landlord;
provided, however, that if Tenant's failure to occupy the Premises is due to
Landlord's failure to complete improvements or to perform any other
Durbano Office Building Page - 3 -
<PAGE>
obligation set forth herein, them Tenant's obligation to pay interior
finishing Costs pursuant to this Section 3 shall be excused or waived.
4. RENTAL
Tenant shall pay to Landlord as rental for the Premises those amounts per
month throughout the term of this Lease specified in Exhibit C and in the
Basic Lease Information (subject to adjustment as provided in Article 5) on or
before the first day of the first full calendar month of the term hereof and
on or before the first day of each and every successive calendar month
thereafter during the term hereof In the event the term of this Lease
commences on a day other than the first day of a calendar month, then the
monthly rental for the first and fractional months of the term hereof shall be
appropriately prorated. Rental shall be paid to Landlord, without deduction,
abatement, counter claim, offset, or demand, in lawful money of the United
States of America, at 476 Heritage Park Boulevard, Suite 100, Layton, Utah,
84041, or to such other person or at such other place as Landlord may from
time to time designate in writing, except as expressly authorized in this
Lease. If any such rental payment is not received by Landlord within ten (10)
days of the date such rental payment is due, an additional amount equal to
five percent (5%) of such delinquent rental payment shall become due and
payable. Tenant recognizes that such additional amount is necessary to
reimburse Landlord for its loss of use of rental fees as well as to compensate
Landlord for the added administrative, legal and bookkeeping expenses
resulting from such delinquent rental payment.
5. DIRECT OPERATING EXPENSE
In the event the Direct Operating Expenses (as defined below) of Landlord
for the building and/or project of which the leased premises are a part shall,
in any calendar year during the term of this lease, exceed the sum of $4.50
per rentable square foot, Tenant agrees to reimburse Tenant's pro rata share
of such excess Direct Operating Expenses. Landlord shall endeavor to give
Tenant on or before the first day of March or as soon thereafter as possible
following the close of any calendar year for which reimbursable excess Direct
Operating Expenses are due under this paragraph, an invoice to Tenant for the
reimbursable excess Direct Operating Expenses. If Landlord fail to deliver to
Tenant an accounting of the excess Direct Operating Expenses on or before
March, this shall not constitute a waiver by Landlord of its rights to receive
reimbursement for excess Direct Operating Expenses, nor will it be considered
an event of default by Tenant.
During the term of this lease, Tenant shall pay to Landlord monthly in
advance and every month during the term, one-twelfth (1/12) of the amount of
such reimbursable excess operating expenses as estimated by Landlord in
advance and in good faith, to be due from the Tenant. Such excess shall be
paid on the first of each month together with in addition to the rent called
for by Articles Four and Five above.
If the invoice delivered at the close of a calendar year in accordance
with this Article 5 shows an amount owing by Tenant that is less than the sum
of the monthly payments made by Tenant in the previous calendar year, the
invoice shall show a credit of the excess by Landlord to Tenant. If such
invoice shows an amount owing by Tenant which is more than the sum of the
monthly payments made by Tenant in the previous calendar year, Tenant shall
pay such deficiency to Landlord within 10 days after receipt of the invoice.
Even though the term may have expired and Tenant has vacated the Premises when
the final determination is made of Tenant's excess Direct Operating Expenses
for the year in which this Lease terminates, Tenant shall pay immediately any
increase due over the amount already paid by Tenant. Landlord shall have the
right to withhold an amount from Tenant's security deposit which represents an
actual or estimated share of Direct Operating Expenses until such actual or
estimated payment has been made by Tenant.
The term "Direct Operating Expense" shall include all direct costs of
operation and maintenance, as determined by standard accounting practices, and
shall include the following costs by way of illustration, but not be limited
to: real property taxes and assessments; rent taxes, gross receipt taxes
(whether assessed against the Landlord or assessed against the Tenant and
collected by the Landlord, or both); water and sewer charges; insurance
premiums; utilities; janitorial services;
Durbano Office Building Page - 4 -
<PAGE>
security on-site office; maintenance equipment rental; project legal expense
and accounting costs, including the cost of audits by certified public
accountants; labor; costs incurred in management of the building, air
conditioning and heating; elevator maintenance, costs and upkeep of all
parking and common areas ("direct expenses" shall not include depreciation of
the building of which the premises are a part of, equipment therein, loan
payment, costs of capital improvements, special assessments, or real estate
broker's commission).
Landlord shall, on Tenant's written request (but not more than once per
year), promptly provide copies of invoices and Landlord's books relating to
Direct Operating Costs for review, inspection, and audit by Tenant. If an
audit results in a discrepancy of three percent (3%) or more between the
Tenant's actual share of the Direct Operating Expense for that year and the
amount originally invoiced to Tenant for its share of the Direct Operation
Expense for that year, Landlord shall reimburse Tenant the actual cost and/or
the value of employee time expended by Tenant in the conduct of the audit
however, if less than 3%, then Tenant shall, in like manner, reimburse
Landlord. If Tenant does not request an audit within six (6) months after
Landlord has issued a statement to invoice Tenant for a Direct Operating Cost
Excess, such right to request an audit is forfeited.
Landlord and Tenant both agree that the "Net Rentable Area" of the
premises is approximately 1,993 rentable square feet and the Net Rentable Area
of the building that is currently owned by Landlord is 27,004 rentable square
feet. Tenant's pro rata share is 7.38%.
6. USE
(a) The Premises shall be used for General Office purposes and no other.
Tenant shall not do or permit to be done in or about the Premises, nor bring
or keep or permit to be brought or kept therein, anything which is prohibited
by or will in any way conflict with any law, statute, ordinance or
governmental rule or regulation now in force or which may hereafter be enacted
or promulgated or which is prohibited by the standard form of fire insurance
policy, or will in any way increase the existing rate of or affect any fire or
other insurance upon the Building or any of its contents, or cause a
cancellation of any insurance policy covering the Building or any part thereof
or any of its contents. Tenant shall not do or permit anything to be done in
or about the Premises which will in any way obstruct or interfere with the
rights of other tenants of the Building, or injure or annoy them or use or
allow the Premises to be used for any improper, immoral, unlawful or
objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance
in, on or about the Premises or commit or Suffer to be committed any waste in,
on or about the Premises.
(b) Tenant shall not be allowed to use the name of the Building in which
the demised premises are located, or words to that effect, in connection with
any business carried on in said Premises (except as Tenant's address) without
written consent of Landlord. <Part of this Section 6(b) is struck out>
Durbano Office Building Page - 5 -
<PAGE>
7. SERVICES
(a) Landlord shall maintain the public and common areas of the Building,
such as lobbies, stairs, elevators, corridors and restrooms in reasonably good
order and condition except for damage occasioned by the act of Tenant, which
damage shall be repaired by Landlord at Tenant's expense.
(b) Landlord shall furnish the Premises with (1) electricity sufficient
to provide power for personal computers and other office machines of similar
low electrical consumption, but not including special lighting in excess of
building standard improvements, and any other item of electrical equipment
which (singly) consumes more than .5 kilowatts per hour at rated capacity or
requires a voltage other than one hundred twenty (120) volts single phase; and
but if the installation of such electrical equipment requires additional air
conditioning capacity above that provided by the building standard
improvements, then the additional air conditioning installation and operating
costs shall be paid by Tenant, (ii) heat and air conditioning to the extent
reasonably required for the comfortable occupation of the premises during
reasonable and usual business hours, 7:30 a.m. to 5:30 p.m. (exclusive of
Saturdays, Sundays and State and National holidays) or such shorter period
specified or prescribed by any applicable policies or regulations adopted by
any utility or government agency, (iii) elevator service, (iv) lighting
replacement (for building standard lights), (v) restroom supplies, (vi)
janitorial service on a five (5) day/week basis, excluding holidays; but if
tenant improvements are not consistent in quality and quantity with building
standard improvements, Tenant shall pay any cleaning and janitorial costs
attributable thereto, (vii) security for the building; but Landlord shall not
be liable to Tenant for losses due to theft or burglary, or for damages done
by unauthorized persons in or about the building, but Landlord will be liable
for damages caused by Landlords' negligence and the negligence of its'
employees and representatives. Landlord shall not be in default hereunder or
be liable for any damages directly or indirectly resulting from, nor shall the
rental herein reserved be abated by reason of (1) the installation, use or
interruption of use of any equipment in connection with the furnishing of any
of the foregoing services, (2) failure to furnish or delay in furnishing any
such services when such failure or delay is caused by accident or any
condition beyond the reasonable control of Landlord or by the making of
necessary repairs or improvements to the Premises or to the Building, or (3)
the limitation, curtailment, rationing or restrictions on use of water,
electricity, gas or any other form of energy serving the Premises or the
Building. Nevertheless, Landlord shall use commercially reasonable efforts to
remedy any interruption in the furnishing of such services, and if the
Premises are not habitable for Tenant's use for a period in excess of 49 hours
the Tenant's rental will be abated until the Premises are habitable and if the
Premises are not habitable in excess of 30 days, and it is within the control
of Landlord to remedy, then Tenant may elect to terminate this Lease by
written notice to Landlord.
(c) It is understood that Landlord does not warrant that any of the
services referred to above, or any other services which Landlord may supply,
will be free from commercially reasonable interruption. Tenant acknowledges
that any one or more such services may be suspended or reduced by reason of
accident or repairs, alterations or improvements necessary to be made, by
strikes or accident or by any cause beyond the reasonable control of Landlord,
or by orders or regulations of any federal, state, county or municipal
authority, subject to Tenant's remedies of rental abatement and termination
stated in the foregoing paragraph and paragraph 11.
Except as provided herein, any such interruption or suspension of
services shall never be deemed an eviction or disturbance to Tenant's use and
possession of the demised premises or any part thereof, or render Landlord
liable to Tenant for damages or relieve Tenant of performance of Tenant's
obligation under this Lease. Landlord will use its best reasonable efforts in
the event of a strike to secure parties not involved in the labor dispute to
provide minimum services for cleaning restrooms, waste removal, and janitorial
services. If such interruption or suspension results in Tenant's inability to
conduct business or provide its' usual and customary services for a period
exceeding forty-eight (48) hours, then Tenant shall receive an abatement of
rent during such interruption or suspension, but Landlord shall not be liable
to Tenant for lost profits or loss of business resulting therefrom.
Durbano Office Building Page - 6 -
<PAGE>
(d) Tenant shall notify Landlord of any need for an increase in power
usage. Failure to do so and should an increase in usage of power by Tenant be
recognized by Landlord, it shall be deemed that the increased amount of usage
shall have been initiated the first day of occupancy of premises by tenant.
(e) Whenever heat generating machines or equipment or lighting other than
building standard lights are used in the Premises by Tenant which affect the
temperature otherwise maintained by the air conditioning system, Landlord
shall have the right to install supplementary air conditioning units in the
Premises, and the cost thereof, including the cost of installation and the
cost of operation and maintenance thereof, shall be paid by Tenant to Landlord
upon billing by Landlord. If Tenant installs lighting requiring power in
excess of that required for normal office use as determined by Landlord in the
Building or if Tenant installs equipment requiring power in excess of that
required for normal desk-top oft-ice equipment or normal copying equipment as
determined by Landlord, Tenant shall pay to Landlord upon billing for the cost
of such excess power as additional rent, together with the cost of installing
any additional risers or other facilities that may be necessary to furnish
such excess power to the Premises.
8. ALTERATIONS
(a) Tenant will not make or suffer to be made any alterations, additions
or improvements to or of the Premises or any part thereof, or attach any
fixtures or equipment thereto, without first obtaining Landlord's written
approval. Any alterations, additions or improvements (except the initial
improvements covered by Exhibit B) to the Premises consented to by Landlord
shall be made by Tenant at Tenant's sole cost and expense, and any contractor
or other person selected by Tenant to make the same shall be subject to
Landlord's prior written approval. All alterations, additions, fixtures and
improvements, including all improvements made pursuant to Exhibit B, whether
temporary or permanent in character, made in or upon the Premises either by
Tenant or Landlord, shall immediately become Landlord's property and, at the
end of the term hereof, shall remain on the Premises without compensation to
Tenant, except for Tenant's trade fixtures, equipment, furniture panels and
other items Tenant may provide to Landlord in writing.
(b) Any alteration, addition, or improvement shall, when completed, be of
such a character as not to lessen the value of the Premises or such
improvements as may be then located thereon. Any alteration, addition or
improvement shall be made promptly and in a good workmanlike manner and in
compliance with all applicable permits and authorizations and building and
zoning laws and with all other laws, ordinances, orders, rules, regulations
and requirements of all federal, state and municipal governments, departments,
commissions, boards and offices. The costs of any such alterations, addition
or improvement shall be paid by Tenant, so that the Premises of liens for
services performed, labor and material supplied or claimed to have been
supplied. Before any alteration, addition or improvement shall be commenced,
Tenant shall pay the amount of any increase in premiums on insurance policies
(provided for under this Lease) on account of endorsements to be made thereon
covering the risk during the course of such alteration, addition or
improvement.
9. LIENS
Tenant shall keep the Premises and the Building free from any mechanics'
and/or materialmen's liens or other liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. Tenant shall notify
Landlord in writing at least seventy-two (72) hours before any work or
activity is to commence on the Premises which may give rise to such liens and
Landlord shall have the right to post and keep posted on the Premises any
notices that may be provided by law or which Landlord may deem to be proper
for the protection of Landlord, the Premises and the Building from such liens.
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10. REPAIRS
Unless Tenant notifies Landlord in writing at the time of delivery stated
in paragraph 2 and 11 hereunder, Tenant accepts the Premises as being in the
condition in which Landlord is obligated to deliver the Premises. Tenant
shall, at all times during the term hereof and at Tenant's sole cost and
expense, keep the Premises and every part thereof in good condition and
repair, ordinary wear and tear, damage thereto by fire, earthquake, act of God
or the elements excepted, and except as expressed in paragraph 7 of this
Lease, Tenant hereby waiving all rights to make repairs at the expense of
Landlord in lieu thereof or to vacate the Premises as provided by law, statue
or ordinance now or hereafter in effect. Tenant shall at the end of the term
hereof surrender to Landlord the Premises and all alterations, additions and
improvements thereto in the same condition as when received, ordinary wear and
tear and damage by fire, earthquake, act of God or the elements excepted.
Landlord has no obligation and has made no promise to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof, except as may be
specified in Exhibit B. No representations respecting the condition of the
Premises or the Building have been made by Landlord to Tenant, except as
specifically herein set forth.
In addition to the ordinary wear and tear exception (carpet, paint,
etc.), Tenant shall not be responsible for repairs beyond Tenant's control
(structural cracks, vandalism, etc.).
11. DESTRUCTION OR DAMAGE
(a) If the Premises shall be damaged or destroyed during the term of this
Lease by any casualty insured under Landlord's standard fire and casualty
insurance, Landlord shall, except as otherwise provided in this Lease and
subject to any delay or inability from causes beyond its control, repair
and/or rebuild the same substantially to what had been the condition thereof
immediately prior to such damage or destruction.
(b) If the Premises or the Building shall be damaged or destroyed to the
extent of fifty percent (50%) or more of the insurable value thereof, or if
such casualty shall not have been insured against by Landlord's standard fire
and casualty policies, then Landlord or Tenant may terminate this Lease or
elect to repair such damage or rebuild the Premises. If Landlord elects to
repair or rebuild the Premises, Landlord shall perform such repair or
rebuilding as provided in Subsection 11 (a) above, and rent shall be abated
proportionately as provided in Subsection 11 (f) below. Within thirty (30)
days after any such casualty, Landlord shall notify Tenant whether Landlord
intends to repair or rebuild the Premises. If Landlord elects not to repair or
rebuild, the Lease shall terminate without further notice and all further
obligations of both parties hereunder shall cease (other than those which
shall theretofore have accrued), effective as of the date on which Tenant
ceases doing business in the Premises. If such damage or destruction occurs
and this Lease is not terminated by Landlord, then Tenant may, at its' option,
terminate this Lease. If Tenant elects not to terminate this Lease, then this
Lease shall remain in full force and effect, and the Landlord and Tenant waive
the provisions of any law to the contrary.
(c) If Landlord elects to repair the Premises, and if Landlord's repairs
are not substantially completed within one hundred twenty (120) days following
the date of the casualty, if Tenant has not previously terminated this Lease,
then Tenant, upon not less than thirty (30) days written notice to Landlord,
may terminate this Lease if Landlord has not substantially completed such
repairs within the time period (which shall not be less than 30 days) set
forth in such notice. Substantial completion, as used herein, shall mean that
the Premises are restored to the condition that they may be Occupied and
utilized for their intended purpose, notwithstanding that there may be
additional "punch list" or other non-essential items to be completed, which
neither affect not impact Tenant's use and enjoyment of the Premises.
Nevertheless, Landlord shall diligently pursue the completion of all remaining
work in a timely manner.
(d) During any period of reconstruction or repair of the Premises,
provided Tenant has not elected to terminate this Lease, Tenant shall continue
the operation of Tenant's business in the Premises to the extent reasonably
practicable from the standpoint of good business practice.
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(e) Notwithstanding anything contained in this Section 11 to the
contrary, in the event of any damage or destruction affecting the Premises,
Tenant shall, unless this Lease is terminated pursuant to Subsection 11 (b) or
(c) above, forthwith replace or fully repair all improvements, trade fixtures,
equipment and other property originally installed by Tenant in the Premises.
Except as otherwise provided in this Lease, Landlord shall have no interest in
the proceeds of any insurance carried by Tenant with respect to Tenant's
interest in the Premises, improvements, trade fixtures, equipment and other
property, or this Lease, and Tenant shall have no interest in the proceeds of
any insurance carried by Landlord.
(f) During any period in which, by reason of any damage or destruction
not resulting from the negligence of Tenant, Tenant's employees, agents or
invitees, Tenant is unable to occupy all or a portion of the Premises,
Tenant's rent shall be appropriately abated for that part of the Premises
rendered unusable for the conduct of Tenant's business. Such abatement shall
continue for the period commencing with such destruction or damage and ending
with the substantial completion by Landlord or Landlord's repair and/or
rebuilding of the Premises, as required by this Lease.
12. SUBROGATION
Landlord and Tenant shall each, prior to or immediately after the
execution of this Lease, procure from each of the insurers under all policies
of fire, theft, public liability, workmen's compensation (or any alternative
permitted by applicable law) and other insurance now or hereafter existing
during the term hereof and purchased by either of them insuring or covering
the Building or any Portion thereof or operations therein, a waiver of all
rights of subrogation which the insurer might otherwise, if at all, have
against the other.
13. INDEMNIFICATION
Notwithstanding provisions of this Lease to the contrary, Landlord and
Tenant hereby waive all claims against each other, its agents, employees and
contractors for damage to any property or injury to or death of any person in,
upon or about the Premises arising at any time and from any cause other than
by reason of the primary negligence, gross negligence, reckless or intentional
conduct, or misconduct of Landlord or Tenant, its agents, employees or
contractors, and Tenant and Landlord shall hold each other harmless from any
damage to any property or injury to or death of any person arising from the
use of the Premises by Tenant, except such as is caused by reason of the
primary negligence, gross negligence, reckless or intentional conduct, or
misconduct of Landlord or Tenant, its agents, employees or contractors. The
foregoing indemnity obligation of Tenant and Landlord shall include reasonable
attorney's fees, investigation costs and all other reasonable costs and
expenses incurred by Landlord or Tenant from the first notice that any claim
or demand is to be made or may be made. The provisions of this paragraph 13
shall survive the termination of this Lease with respect to any damage, injury
or death occurring prior to such termination.
14. COMPLIANCE WITH LEGAL REQUIREMENTS
Landlord and Tenant shall, at its sole cost and expense, promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now in force or which may hereafter be in force, with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted, with any direction or occupancy certificate issued
pursuant to any law by any public officer or officers, as well as the
provisions of all recorded documents affecting the Premises, insofar as any
thereof relate to or affect the condition, use or occupancy of the Premises,
excluding requirements of structural changes not related to or affected by
improvements made by or for Tenant or Tenant's acts. Landlord represents that
at the time of delivery of the Premises, the Premises will be free of
hazardous waste, toxic materials, and asbestos, and indemnifies Tenant against
all claims, damages, expenses, and fees resulting from the presence or
discharge thereof.
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15. INSURANCE
Tenant shall procure and maintain throughout the term of this Lease a
public liability policy or policies or insurance, at its sole cost and
expense, insuring both Landlord and Tenant against all claims, demands or
actions arising out or in connection with: (i) the Premises; (ii) the
condition of the Premises; (iii) Tenant's operation in and maintenance and use
of the Premises; (iv) Tenant's liability assumed under this Lease, the limits
of such policy or policies to be in the amount of not less than one million
dollars ($1,000,000.00) per occurrence in respect of injury to persons
(including death), and in the amount of not less than five hundred thousand
dollars ($500,000.00) per occurrence in respect of property damage or
destruction, including loss of use thereof. All such policies shall be
procured by Tenant from responsible insurance companies satisfactory to
Landlord. Certificates of insurance together with evidence of payment of
premiums therefor, shall be delivered to landlord prior to the commencement
date of the Lease. Not less than fifteen (15) days prior to the expiration
date of any such policies, certified copies of the renewals thereof (bearing
notations evidencing the payment of renewal premium) shall be delivered to
Landlord. Such policies shall further provide that not less than thirty (30)
days written notice shall be given to Landlord before Such policy may be
canceled or changed to reduce insurance provided hereby. Landlord is required
to obtain and continue in force during the Lease term a fire and casualty
insurance policy covering 100% replacement cost of the Building and Premises.
16. ASSIGNMENT AND SUBLETTING
In the event Tenant should desire to assign this lease or sublet the
leased premises or any part thereof, Tenant shall give Landlord written notice
of such desire at least sixty (60) days in advance of the date on which Tenant
desires to make such assignment or sublease. Landlord shall then have a period
of thirty (30) days following receipt of such notice within which to notify
Tenant in writing that Landlord elects either (i) to terminate this lease as
to the space so affected as of the date so specified by Tenant, in which event
Tenant will be relieved of all further obligations hereunder as to such space,
or (ii) to permit Tenant to assign or sublet such space, subject, however, to
prior written approval of the proposed assignee or Tenant by Landlord, such
consent not to be unreasonably withheld so long as the use of the leased
premises by which proposed assignee or Tenant would be a permitted use and the
proposed assignee or Tenant is of sound financial condition as determined by
Landlord. If Landlord should fail to notify Tenant in writing of such election
within said thirty (30) day period, Landlord shall have deemed to have waived
option (i) above, but written approval by Landlord of the proposed assignee or
Tenant shall be required. Failure by Landlord to approve a proposed Tenant or
assignee shall not cause a termination of this Lease. Any other rent or other
consideration realized by Tenant under any such sublease and assignment in
excess of the rental payable hereunder, after amortization of the reasonable
cost of tenant extra improvements for which Tenant has paid and reasonable
subletting and assignment costs, shall be divided and paid ninety percent
(90%) to Landlord and ten percent (10%) to Tenant. No assignment or subletting
by Tenant shall relieve Tenant of any obligation under this Lease. Any
assignment or subletting which conflicts with the provisions hereof shall be
void.
17. RULES
Tenant shall faithfully observe and comply with the rules and regulations
as Outlined in Exhibit "D" to this Lease and, after notice thereof, all
commercially reasonable modifications thereof and additions thereto from time
to time promulgated in writing by Landlord. Landlord shall not be responsible
to Tenant for the non-performance by any other tenant or occupant of the
Building of any of said rules and regulations, unless such non-performance
prevents the use or quiet possession of the Premises by Tenant, for which
Landlord will be responsible to prevent.
18. ENTRY BY LANDLORD
Landlord may, upon twenty-four (24) hours prior notice to Tenant, enter the
Premises at reasonable hours to (a) inspect the same, (b) exhibit the same to
prospective purchasers, lenders or
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tenants, (c) determine whether Tenant is complying with all of Tenant's
obligations hereunder, (d) supply janitor service and any other service to be
provided by Landlord to Tenant hereunder, (e) post notices of non-
responsibility and (f) make repairs required of Landlord under the terms
hereof or repairs to any adjoining space or utility service or make repairs,
alterations or improvements to any other portion of the Building, but that all
such work must be done as promptly as possible and, so as to cause as little
interference to Tenant as reasonably possible. Landlord shall at all times
have and retain a key with which to unlock all of the doors in, on or about
the Premises (excluding Tenant's furniture and fixtures, vaults, safes and
similar areas designated in writing by Tenant in advance); and Landlord shall
have the right to use any and all means which Landlord may deem proper to open
said doors in an emergency in order to obtain entry to the Premises, and such
entry to the Premises obtained by Landlord by any of said means, or otherwise,
shall not under any circumstances be construed or deemed to be a forcible or
unlawful entry into or a detainer of the Premises or an eviction, actual or
constructive, of Tenant from the Premises, or any portion thereof In
exercising such right of entry, Landlord shall use every reasonable effort not
to disrupt Tenant's business in the Premises, including, at Tenant's request,
entering the Premises during hours arranged with Tenant either prior to or
after Tenant's usual business hours.
19. EVENTS OF DEFAULT
The occurrence of any one or more of the following events ("Events of
Default") shall constitute a breach of this Lease by Tenant: (a) if Tenant
shall fail to pay any rental or other sum when, and as the same becomes due
and payable and such failure shall continue for more than 10 days; or (b) if
Tenant shall fail to perform or observe any other term hereof or of the rules
and regulations described in Paragraph 14, "Compliance with Legal
Requirements," to be performed or observed by Tenant, such failure shall
continue for more than 30 days after written notice thereof from Landlord and
Tenant shall not within such period commence with due diligence and dispatch
the curing of such default, or, having so commenced, shall thereafter fail or
neglect to prosecute or complete with due diligence and dispatch the curing of
such default; or (c), Tenant shall make a general assignment for the benefit
of creditors, or shall admit in writing its inability to pay its debts as they
become due or shall file a petition in bankruptcy, or shall be adjudicated as
bankrupt or insolvent, or shall file a petition seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, or shall file
any answer admitting or shall fail timely to contest the material allegations
of a petition filed against it in any such proceeding, or shall seek or
consent to or acquiesce in the appointment of any trustee, receiver or
liquidator of Tenant or any material part of its properties; or, (d) if within
90 days after the commencement of any proceeding against Tenant seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceeding shall not have been dismissed, or if, within 90
days after the appointment without the consent or acquiescence of Tenant, of
any trustee, receiver or liquidator of Tenant or of any material part of its
properties, such appointment shall not have been vacated; or (e) vacation or
abandonment of the lease premises for a continuous period in excess of thirty
(30) business days unless rent is current; or (f) if this Lease or any estate
of Tenant hereunder shall be levied upon under any attachment or execution
against Tenant and such attachment or execution is not vacated within thirty
(30) days.
20. TERMINATION UPON DEFAULT
If an Event of Default shall occur and Landlord desires to terminate this
Lease, Landlord at any time after such Event of Default shall give a written
termination notice to Tenant, and on the date specified in such notice (which
shall be not less than thirty (30) days after the giving of such notice), and
provided Tenant shall have failed to cure such default. Tenant's right to
possession shall terminate and this Lease shall terminate, unless on or before
such date all arrears or rental and all other sums payable by Tenant under
this Lease (together with interest thereon at the rate of 10% per annum) and
all costs and expenses incurred by or on behalf of Landlord hereunder shall
have been paid by Tenant and all other breaches of this lease by Tenant at the
time existing shall have been fully remedied to the satisfaction of Landlord.
Upon such termination, Landlord may recover from Tenant: (a) the unpaid rental
which had been earned at the time of termination and future rental as it
becomes
Durbano Office Building Page -11 -
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due, without acceleration, less any rental received by Landlord for reletting
the Premises; (b) and any other amount necessary to compensate Landlord for
all the actual damages approximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom excluding any punitive, exemplary, or
consequential damages. Failure of Landlord to declare any default immediately
upon Occurrence thereof, or delay in taking any action in connection
therewith, shall not waive such default, but Landlord shall have tile right to
declare any such default at any time thereafter. Landlord shall be obligated
to make reasonable and diligent efforts to mitigate its' damages by reletting
the Premises at reasonable and current market rates in a timely manner.
21. CONTINUATION AFTER DEFAULT
Even though Tenant has breached this Lease and abandoned the Premises,
this Lease shall continue in effect, provided that Landlord has neither taken
possession nor relet the Premises, and as long as Landlord does not terminate
Tenant's right to possession, and Landlord may enforce all of its rights and
remedies under this Lease, including the right to recover the rental as it
becomes due under this Lease. Acts of maintenance or preservation or efforts
to relet the Premises or the appointment of a receiver upon initiative of
Landlord to protect Landlord's interest under this Lease shall not constitute
a termination of Tenant's right to possession. If any fixture, equipment,
improvement, installation or appurtenance which, as herein provided, shall be
required to be removed from the building by Tenant specified therefore, then
Landlord (in addition to all other rights and remedies to which Landlord may
be entitled at any time) may, at its election by written notice to such effect
to Tenant, deem that the same has been abandoned by Tenant to Landlord, or
Landlord may remove the same and restore the demised premises to its original
condition at the expense of Tenant and Tenant shall reimburse Landlord for
such expense, as additional rent within ten (10) days after written notice to
Tenant of the amount of such expense.
22. OTHER RELIEF
The rights and remedies provided for Landlord and Tenant in this Lease
are in addition to any other remedies available at law or in equity by statute
or otherwise, except as expressly limited or waived under the provisions of
this Lease.
23. LANDLORD'S RIGHT TO CURE DEFAULTS
Except as expressly stated in this Lease, all agreements and provisions
to be performed by Tenant under any of the terms of this Lease shall be at its
sole cost and expense and without any abatement of rental. If Tenant shall
fail to pay any sum of money, other than rental, required to be paid by it
hereunder or shall fail to perform any other act on its part to be performed
hereunder and such failure shall continue for 30 days after notice thereof by
Landlord, Landlord may, but shall not be obligated to do so, and without
waiving or releasing Tenant from any obligations of Tenant, make any such
payment or perform any such other act on Tenant's part to be made or performed
as provided in this Lease. All sums so paid by Landlord and all necessary
incidental costs shall be deemed additional rent hereunder and shall be
payable to Landlord within ten (10) days of written demand, and Landlord shall
have (in addition to any other right or remedy of Landlord, the same rights
and remedies in the event of the nonpayment thereof by Tenant as in the case
of default by Tenant in the payment of rental.
(a) Landlord's Default: Landlord further covenants with Tenant that if
Landlord violates or neglects any covenant, agreement of stipulation herein
contained on its part to be kept, performed or observed that materially and
adversely affects Tenant's enjoyment of the Leased Premises for its intended
use, and any such default continues for thirty (30) days after written notice
thereof is given by Tenant to Landlord, or if such default is of such a nature
that it cannot reasonably be cured within said thirty (30) day period and
Landlord has not within said thirty (30) days proceeded with reasonable
diligence and good faith to commence to cure such default, then, and in
addition to, and not to the exclusion of, the other remedies or courses of
action now or hereafter provided by law,
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Tenant may, at its option, either; (i) abate the rental due hereunder, until
the default is Cured; (ii) cancel and annul this Lease Agreement; or, (iii)
remedy the condition or need referred to in Such event of any dispute between
the parties as to the right of Tenant to such deduction as provided in (iii)
above. Landlord further covenants and agrees that it will not give Tenant any
notice of termination of this Lease Agreement, or demand to vacate the
Premises unless Tenant fails to pay to Landlord the amount of any such
deduction within ten (10) days after receipt of notice by Tenant of a final
and unappealable judgment with respect thereto in favor of Landlord. The
remedy of cancellation is not available to Tenant if the failure to cure any
such default by Landlord is beyond Landlord's control.
(b) Notice of Default to Mortgagee: At any time when there is an
outstanding mortgage, Deed of Trust or similar security instrument covering
Landlord's interest in the Premises, Tenant may not exercise any remedies for
default (unless said default creates an emergency situation) by Landlord
hereunder unless and until the holder of the indebtedness secured by any such
mortgage, Deed of Trust or similar security instrument has been given thirty
(30) days written notice of such default. The term "Landlord" as used herein
means the owner or owners from time to time of the Property. It is agreed that
upon the transfer by any owner of his interest in the Property, such owner is
released and discharged from performance or liability thereafter accruing
under any covenant, obligation or provision set forth in this Lease Agreement.
Tenant agrees that it will from time to time upon request by Landlord, execute
and deliver to Landlord a statement in recordable form certifying that this
Lease Agreement is unmodified and in full force and effect (or if there have
been modifications, that the same is in full force and effect as so modified).
(c) Waiver of Landlord's Lien: Landlord agrees that none of the
property, including food, suppl ies, merchandise, inventory, furniture,
fixtures, machinery, equipment, cash, or any proceeds therefrom that are
placed upon or permitted to be upon the Premises by Tenant, or any of Tenant's
sublessees, assigns or successors, during the term of the Lease or any renewal
thereof, are subject to a contractual Landlord's lien; or the hens created in
favor of Landlord pursuant to the applicable laws of the State of Utah for the
collection of rent or any other obligations of Tenant under this Lease.
Landlord agrees, upon demand by Tenant, to execute and deliver such documents
and /or instruments evidencing the waiver of the Landlord lien rights, set out
in this paragraph 23, to any bank, other lending institution or third party.
It is recognized that Landlord has the right to negotiate the terms of said
waiver documents or instrument with the bank, lending institution or third
party which has requested such document. It is further recognized that time is
of the essence in such negotiations and Landlord agrees to use its best
efforts to complete said negotiations and execute said documents within
fifteen (15) days of the time originally requested.
24. ATTORNEYS' FEES
In the event either party places the enforcement of this Lease, or any
part thereof, or the collection of any rental due, or to become due hereunder,
or recovery of the possession of the leased premises in the hands of an
attorney, or file suit upon the same, that prevailing party shall recover its
reasonable attorneys' fees and court costs.
25. EMINENT DOMAIN
If all or any part of the Premises shall be taken or conveyed as a result
of tile exercise of tile power of eminent domain, this Lease shall terminate
as to the part so taken as of the date of taking, and, in the case of a
partial taking, either Landlord or Tenant shall have the right to terminate
this Lease as to the balance of the Premises by written notice to the other
within 30 days after Such date; provided, however, that a condition to the
exercise by Tenant of such right to terminate shall be that the portion of the
Premises taken or conveyed shall be of such extent and nature as substantially
to handicap, impede or impair Tenant's use of the balance of the Premises. In
the event of any taking, Landlord shall be entitled to any and all
compensation, damages, income, rent awards or any interest therein whatsoever
which may be paid or made in connection therewith, and Tenant shall have no
claim against Landlord for the value of any unexpired term of this Lease or
otherwise, provided that
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Tenant shall be entitled to any and all compensation, damages, income, rent or
awards paid for or on account of Tenant's moving expenses, trade fixtures,
equipment and any leasehold improvements in the Premises, the cost of which
was borne by Tenant, to the extent of the then unamortized value of such
improvements for the remaining term of the Lease. In the event of a taking of
the Premises which does not result in a termination of this Lease, the monthly
rental herein shall be apportioned as of the date of such taking or conveyance
so that thereafter the rent to be paid by Tenant shall be in the ratio that
the area of the portion of the Premises not so taken or conveyed bears to the
total area of the Premises prior to such taking.
26. SUBORDINATION
This Lease, at Landlord's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modification, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Tenant's right to quiet possession of the premises shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay the rent and observe
and perform all of the provisions of the Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground lessor
shall elect to have this Lease prior to the hen of its mortgage, deed of trust
or ground lease, and shall be deemed prior to such mortgage, deed of trust or
ground lease, whether this Lease is dated prior or subsequent to the date of
said mortgage, deed of trust or ground lease or the date of recording thereof,
Tenant agrees to execute any documents required to effectuate such
subordination or to make this Lease prior to the lien of any mortgage, deed of
trust or ground lease, as the case may be, and failing to do so within 10 days
after demand, does hereby make, constitute and irrevocably appoint Landlord as
Tenant's attorney in fact and in Tenant's name, place and stead, to do so.
27. NO MERGER
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to it of any or all such
subleases or subtenancies.
28. SALE
In the event the original Landlord hereunder, or any successor owner of
the Building, shall sell or convey the Building, all liabilities and
obligations on the part of the original Landlord, or such successor owner,
under this Lease accruing thereafter shall terminate, and thereupon all such
liabilities and obligations shall be binding upon the new owner.
29. ESTOPPEL CERTIFICATE
At any time and from time to time but on not less than 10 days prior
written request by Landlord, Tenant will execute, acknowledge and deliver to
Landlord, promptly upon request, a certificate certifying (a) that this Lease
is unmodified and in full force and effect (or, if there have been
modifications, that this Lease is in full force and effect, as modified, and
stating the date and nature of each modification), (b) the date, if any, to
which rental and other Sums payable hereunder have been paid, (c) that no
notice has been received by Tenant of any default which has not been cured,
except as to defaults specified in said certificate and (d) such other matters
as may be reasonably requested by Landlord. Any such certificate may be relied
upon by any prospective purchaser, mortgagee or beneficiary under any deed of
trust of the Building or any part thereof, as an estoppel without liability of
Tenant. The failure of Tenant so to deliver such certificate within the time
specified above shall be deemed to be a material breach of this Lease and
shall entitle Landlord without notice to terminate this Lease.
Durbano Office Building Page - 14 -]]
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30. NO LIGHT, AIR OR VIEW EASEMENT
Any diminution or shutting off of fight, air or view by any structure
which may be erected on lands adjacent to the Building shall in no way affect
this lease or impose any liability on Landlord.
31. HOLDING OVER
If, without objection by Landlord, Tenant holds possession of the Premises
after expiration of the term of this Lease, Tenant shall become a tenant from
month to month upon the terms herein specified, but at a monthly rental
equivalent to 110% the gross rental at the end of the term pursuant to all the
provisions of Articles 4 and 5, paid by Tenant at the expiration of the term
of this Lease, payable in advance on or before the tenth day of each month.
Each party shall give the other notice at least one month prior to the date of
termination of such monthly tenancy of its intention to terminate such
tenancy.
32. ABANDONMENT
If Tenant shall abandon (that term as defined by Utah law) or surrender
the Premises, or be dispossessed by process of law or otherwise, any personal
property belonging to Tenant and left on the Premises shall be deemed to be
abandoned, at the option of Landlord, except such property as may be mortgaged
to Landlord.
33. SECURITY DEPOSIT
Tenant will, upon execution of the Lease, deposit with Landlord the sum
of $2,906.46 specified in the Basic Lease Information (the "Security
Deposit"). The Deposit shall be held by Landlord as security for the faithful
performance by Tenant of all of the provisions of this Lease to be performed
or observed by Tenant. In the event Tenant fails to perform or observe any of
tile provisions of this Lease to be performed or observed by it, then, at the
option of the Landlord, Landlord may (but shall not be obligated to do so)
apply the Deposit, or so much thereof as may be necessary to remedy such
default or to repair damages to the Premises caused by Tenant. In the event
Landlord applies any portion of the Deposit to remedy any such default or to
repair damages to the Premises caused by the Tenant, Tenant shall pay to
Landlord, within 30 days after written demand for such payment by Landlord,
all monies necessary to restore the Deposit up to the original amount. Any
portions of the Deposit remaining upon termination of this Lease shall be
returned to Tenant. The Deposit shall be refunded within 30 days from the
termination date of the Lease.
34. WAIVER
The waiver by Landlord of any agreement, condition or provision herein
contained shall not be deemed to be a waiver of any subsequent breach of the
same or any other agreement, condition or provision herein contained, nor
shall any custom or practice which may grow upon between the parties in the
administration of the terms hereof be construed to waive or to lessen the
right of' Landlord to insist upon the performance by Tenant in strict
accordance with said terms. The subsequent acceptance of rental hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant
of any agreement, condition or provision of this Lease, other than the failure
of Tenant to pay the particular rental so accepted, regardless of Landlord's
knowledge Of such preceding breach at the time of acceptance of such rental.
35. NOTICES
All notices and demands which may or are required to be given by either
party to the other hereunder shall be in writing and shall be deemed to have
been fully given when deposited in the
Durbano Office Building Page - 15 -
<PAGE>
United States mail, certified or registered, postage prepaid, and addressed as
follows: to Tenant at the address specified in the Basic Lease Information, or
to such other place as Tenant may from time to time designate in a notice to
Landlord; Durbano Properties, L.C., 476 Heritage Park Boulevard, Layton, Utah,
84041, or to such other place as Landlord may from time to time designate in a
notice to Tenant. Tenant hereby appoints as its agent to receive the service
of all dispossessory or distraint proceedings and notices thereunder the
person in charge of or occupying the Premises at the time, and, if no person
shall be in charge of or occupying the same, then such service may be made by
attaching the same on the main entrance of the Premises.
36. COMPLETE AGREEMENT
There are no oral agreements between Landlord and Tenant affecting this
Lease, and this Lease supersedes and cancels any and all previous
negotiations, arrangements, brochures, agreements and understandings, if any,
between Landlord and Tenant with respect to the subject matter of this Lease.
This Lease may not be altered, changed or amended, except by an instrument in
writing signed by both parties hereto.
37. CORPORATE AUTHORITY
If Tenant signs as a corporation, each of the persons executing this
Lease on behalf of Tenant does hereby covenant and warrant that (a) Tenant is
a duly authorized and validly existing corporation, (b) Tenant has and is
qualified to do business in Utah, (c) the corporation has full right and
authority to enter into this Lease, and (d) each person executing this Lease
on behalf of tile corporation is authorized to do so.
38. GUARANTEE OF LEASE
Tenant guarantees, upon execution of this Lease, to occupy the Premises
specified herein. Except as otherwise provided herein, any failure to occupy
the Premises does not release the Tenant from the obligation of paying rent or
any other provisions set forth herein.
39. MISCELLANEOUS
The words "Landlord" and "Tenant" as used herein shall include the plural
as well as the singular. If there be more than one Tenant, the obligations
hereunder imposed upon Tenant shall be joint and several. Time is of the
essence of this Lease and each and all of its provisions. Submission of this
instrument or examination or signature by Tenant does not constitute a
reservation of or option for lease, and it is not effective as a lease or
otherwise until execution and delivery by both Landlord and Tenant. The
agreements, conditions and provisions herein contained shall, subject to the
provisions as to assignment, apply to and bind the heirs, executors,
administrators, successors and assigns of the parties hereto. Tenant shall
not, without the written consent of Landlord, use the name of the Budding for
any purpose other than as the address of the business to be conducted by
Tenant in the Premises. All amounts of money payable by Tenant to Landlord
hereunder, if not paid when due, shall bear interest from the due date until
paid at the rate of 10% per annum. If any provision of this Lease shall be
determined to be illegal or unenforceable, such determination shall not affect
any other provision of this Lease and all such other provisions shall remain
in full force and effect. This Lease shall be governed by and construed in
accordance with the laws of the State of Utah.
40. EXHIBITS
The exhibits and addenda, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a part
thereof.
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<PAGE>
41. SEVERABILITY
If any term or provision of this Lease, or the application thereof to any
person or circumstance, shall to any extent be invalid or unenforceable, the
remainder of this Lease, or the application of such provision to persons or
circumstances other than those as to which it is invalid or unenforceable,
shall not be affected thereby, and each provision of this Lease shall be valid
and shall be enforceable to the extent permitted by law.
42. BROKERS
Tenant warrants that it has no dealings with any real estate broker or
agents in connection with the negotiation of this lease excepting only Barlow
@Nielsen Associates, Inc. and it knows of no other real estate broker or agent
who is entitled to a commission in connection with this lease.
43. FORCE MAJEURE
Landlord shall have no liability whatsoever to Tenant on account of (1)
the inability of Landlord to fulfill, or delay in fulfilling, any of
Landlord's obligations under this Lease by reason of strike, other labor
trouble, governmental preemption of priorities or other controls in connection
with national or other public emergency, or shortages of fuel, supplies or
labor resulting therefrom or any other cause, whether similar or dissimilar to
the above, beyond Landlord's reasonable control; or (2) any failure or defect
in the supply, quantity or character of electricity or water furnished to the
Premises ises, by reason of any requirement, act or omission of the public
utility or others furnishing the building with electricity or water, or for
any other reason, whether similar or dissimilar to the above, beyond
Landlord's reasonable control. If this Lease specifies a time period for
performance of an obligation of Landlord, that time period shall be extended
by the period of any delay in Landlord's performance caused by any of the
events of force majeure described above, but all events not to exceed ninety
(90) days.
44. FIRST MONTH'S RENT AND SECURITY DEPOSIT DUE
First month's rent and the security deposit are due upon execution of
this lease.
45. ENVIRONMENTAL DISCLOSURE
Landlord represents and warrants without independent investigation other
than the Phase I Environmental report it obtained, that it has no knowledge of
any deposit, storage, disposal, removal, burial, discharge, spillage,
uncontrolled loss, seepage or filtration of oil, petroleum or chemical liquids
or solids, liquid or gaseous products or any hazardous wastes or hazardous
substances (collectively, "Hazardous Substances"), as those terms are used in
any appropriate and applicable law, code or ordinance including, but not
limited to, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 at, upon, under or within the Premises as a consequence
of ownership or other use thereof prior to the Lease Term Commencements of
this Lease by Landlord, its employees, agents or servants or any party acting
pursuant to a right or interest therein from Landlord.
46. AMERICANS WITH DISABILITIES
Landlord shall be responsible for compliance with the Americans With
Disabilities Act. In the event it becomes necessary to make modifications to
the floor plan as approved by Tenant in order to comply with provisions of ADA
or other applicable buildings codes, such modifications shall not be grounds
for termination of this Lease by Tenant, so long as modifications do not
Substantially impair Tenants intended use of the Premises.
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<PAGE>
47. NON-DISTURBANCE
So long as the Tenant is not in default in the payment of rent or
additional rent or in the performance of any of the terms of the Lease, Tenant
shall peaceably and quietly hold and enjoy the Premises for the term hereby
demised without hindrance or interruption by Landlord or any other person or
persons lawfully or equitably claiming by, through, or under Landlord, and the
Tenant's possession of the leased property and the Tenant's rights and
privileges under the Lease or any renewal thereof shall not be diminished or
interfered with by the Mortgagee.
IN WITNESS WHEREOF, the parties have executed this Lease dated the day
and year first above written.
TENANT LANDLORD
COMPUTERIZED THERMAL DURBANO PROPERTIES, L.C.
IMAGING, INC.
By: David A. Packer By: /s/ Douglas M. Durbano
DAVID A. PACKER DOUGLAS M. DURBANO
Its: President Its: Managing Member
Durbano Office Building Page - 18 -
<PAGE>
Exhibit A - Floor Plan
<PAGE>
Exhibit B- Building Standard Turnkey Finish
<PAGE>
Exhibit C- Monthly Rental
Monthly Rental:
December 1, 1997 - November 30, 1998 $ 2,906.46 per month
December 1, 1998 - November 30, 1999 $ 3,022.72 per month
December 1, 1999 - November 30, 2000 $ 3,143.63 per month
December 1, 2000 - November 30, 2001 $ 3,269.38 per month
December 1, 2001 - November 20, 2002 $ 3,400.15 per month
<PAGE>
Exhibit D - Rules and Regulations
10(kkk)
This INDENTURE OF LEASE, made and entered into this 1st day of September,
1990, by and between Dean A. Clark, hereinafter called the lessor and Dave
Johnston, dba: CTI, hereinafter called the lessee.
WITNESSETH, In consideration of the covenants, agreements and
stipulations herein contained on the part of the lessee to be paid, kept and
faithfully performed, lessor does hereby lease, demise and let unto the said
lessee those certain premises, as is, situated in the City of Portland, County
of Multnomah and State of Oregon, known and described as follows:
Lots 1,2, and 24, block 7, south Portland,
City of Portland, Multnomah County, Oregon.
Also known as 6105 S.W. Macadam.
Ground floor level
To have and to Hold the said described premises unto the said lessee for a
period of time commencing with the 1st day of September, 1990, and ending at
midnight on the 31 day of August, 1999, at and for a rental of $2525.00/ MO
for the whole of said term payable in lawful money of the United States at
6105 S.W. Macadam/Dean Clark, City of Portland, State of Oregon, at the
following times and in the following amounts, to-wit:
Month 1 $0.00
Month 2-60 $2525.00 per month
This lease included triple net charges (taxes, maintenance
utility costs)
* See addendum to lease regarding property tax increases
In consideration of the leasing of said premises and of the mutual
agreements herein contained, each party hereto does hereby expressly covenant
and agree to and with the other as follows:
<PAGE>
LESSEE'S ACCEPTANCE OF LEASE/ USE OF PREMISES:
(1) The Lessee accepts said letting and agrees to pay to the order of the
lessor of the rentals above stated for the full term of this lease, in
advance, at the times and in the manner aforesaid.
(2a) The lessee shall use said demised premises during the term of this
lease for the conduct of the following business: General office use, and for
no other purpose whatsoever without lessor's written consent.
(2b) The lessee will not make any unlawful or improper or offensive use
of said premises; he will not suffer any strip or waste thereof; he will not
permit any objectionable noise or odor to escape or be emitted from said
premises or do anything or permit anything to be done upon or about said
premises in any way tending to create a nuisance; he will not sell or permit
to be sold any spirituous, vinous or malt liquors on said premises, excepting
such lessee may be licenses by law to sell and as may be herein expressly
permitted; nor will he sell or permit to be sold any controlled substance on
or about the premises.
(2c) The lessee will not allow the leased premises at any time to fall
into such a state of repair or disorder as to increase the fire hazard
thereon; he shall not install any power machinery on said premises except
under the supervision and with the written consent of the lessor; he shall
not store gasoline or other highly combustible materials on said premises at
any time; he will not sue said premises in such a way or for such purpose
that the fire insurance rate on the building in which said premises are
located is thereby increased or that would prevent the lessor from taking
advantage of any rulings of any agency of the state in which said leased
premises are situated or its successors which would allow the lessor to obtain
reduced premium rates for long term fire insurance policies.
(2d) Lessee shall comply at lessee's own expense with all laws and
regulations of municipal, county, state, federal or other public authority
respecting the use of said premises.
(2e) The lessee shall regularly occupy and use the demised premises for
the conduct of lessee's business and shall not abandon or vacate the premises
for more than ten days without written approval of lessor.
UTILITIES
(3) The lessee shall pay for all heat, light, water, power, and other
services or utilities used in the above demised premises during the term of
the lease.
REPAIRS AND IMPROVEMENTS
(4a) The lessor shall not be required to make any repairs, alterations,
additions or improvements to or upon said premises during the term of the
lease, except only in those hereinafter specifically provided for; the lessee
hereby agrees to maintain and keep said premises including all interior and
exterior doors, heating, ventilating and cooling systems, interior wiring,
plumbing and drain pipes to sewers of septic tank, in good order and repair
during the entire term of this lease at lessee's own cost and expense, and to
replace all glass which may be broken or damaged during the term hereof in the
windows and doors of said premises with glass of as good or better quality as
that now in use; lessee further agrees that he will make no alterations,
additions or improvements to or upon said premises without written consent of
the lessor first being obtained.
(4b) The lessor agrees to maintain in good order and repair during the
term of the lease the exterior walls, roof, gutters, downspouts and
foundations of the building in which the demised premises are situated and the
sidewalks thereabouts. It is understood and agreed that the lessor reserves
and at any and all times shall have the right to alter, repair or improve the
building of which said demised premises are a part, or to add thereto and for
that purpose at any time may erect scaffolding and all other necessary
structures about and upon the demised premises and lessor and lessor's
representatives, contractors and workmen for that purpose may enter in or
about the said demised premises with such materials as lessor may deem
necessary therefor, and lessee waives any claim to damages, including loss of
business resulting therefrom.
LESSOR'S RIGHT OF ENTRY
(5) It shall be lawful for the lessor, his agents and representatives, at any
reasonable time to enter into or upon said premises for the purpose of
examining the condition thereof, or any other lawful purposes.
RIGHT OF ASSIGNMENT
(6) The lessee will not assign, transfer, pledge, hypothecate, surrender or
dispose of this lease, or any interest herein, sub let, or permit any other
person or persons whomsoever to occupy the demised premises without the
written consent of the lessor first being obtained in writing; this lease is
personal to said lessee; lessee's interest, in whole or in part, cannot be
sold, assigned, transferred, seized or taken by operation of law, or under or
by virtue of any execution or legal process, attachment or proceedings
instituted against the lessee or under or by virtue of any bankruptcy or
insolvency proceedings had in regard to the lessee or in any other manner,
except as above mentioned.
LIENS
(7) The lessee will not permit any lien of any kind, type or description to
be placed or imposed upon the building in which said leased premises are
situated, or any part thereof, or the real estate on which it stands.
ICE SNOW DEBRIS
(8) If the premises herein leased are located at street level, then at all
times lessee shall keep the sidewalks in front of the demised premises free
and clear of ice, snow, rubbish, debris and obstruction; and if the lessee
occupies the entire building, he will not permit rubbish, debris, ice or snow
to accumulate on the roof of said building so as to stop up or obstruct
gutters or downspouts or cause damage to said roof, and will save harmless and
protect the lessor against any injury whether to lessor or lessor's property
or to any other person or property caused by his failure in that regard.
OVERLOADING OF FLOORS
(9) The lessee will not overload the floors of said premises in such a way as
to cause any undue or serious stress or strain upon the building in which said
demised premises are located, or any part thereof, and the lessor shall have
the right at any time, to call upon any competent engineer or architect whom
the lessor may choose, to decide whether or not floors of said premises, or
any part thereof, are being overloaded so as to cause any undue or serious
stress or strain on said building, or any part thereof, and the decision of
said engineer or architect shall be final and binding upon the lessee; and in
the event the that the engineer or architect so called upon shall decide that
in his opinion the stress or strain is such as to endanger or injure the
building, or any part thereof, then and in that event the lessee agrees
immediately to relieve said stress or strain either by reenforcing the
building or lightening the load which caused the stress or strain in a manner
satisfactory to the lessor.
ADVERTISING SIGNS
(10) The lessee will not use the outside walls of said premises, or allow
signs or devices of any kind to be attached thereto or suspended therefrom,
for advertising or displaying the name or business of the lessee or for any
purpose whatsoever without the written consent of lessor; however, the lessee
may make use of the windows of said leased premises to display the lessee's
name and business when the workmanship of such signs shall be of good quality
and permanent nature; provided further that the lessee may not suspend or
place within said windows or paint thereon any banners, signs, sign-boards or
other devices in violation of the intent and meaning of this section.
LIABILITY INSURANCE
(11) The lessee further agrees at all times during the term hereof, at his
own expense, to maintain, keep in effect, furnish and deliver to lessor
liability insurance policies in form and with an insurer satisfactory to the
lessor, insuring both the lessor and the lessee against all liability for
damages to person or property in or about said leased premises; the amount of
said liability insurance shall not be less than $ * for injury to one
person, $ * for injuries arising out of any one accident and not less
than $ * for property damage. Lessee agrees to and shall indemnify
* combined single limit of $500,000
<PAGE>
and hold lessor harmless against any and all claims and demands arising from
the negligence of the lessee, his officers, agents, invitees, and/or
employees, as well as those arising from lessee's failure to comply with any
covenant of this lease on his part to be performed, and shall at his won
expense defend the lessor against any and all suits or actions arising out of
such negligence, actual or alleged, and all appeals therefrom and shall
satisfy and discharge any judgment which may be awarded against lessor in any
such suit or action.
FIXTURES
(12) All partitions, plumbing, electrical wiring, additions to or
improvements upon said leased premises, whether installed by lessor or lessee,
shall be and become part of the building as soon as installed and the property
of the lessor unless otherwise herein provided .
LIGHT AND AIR
(13) This lease does not grant any rights of access to light and air over
property.
DAMAGE BY CASUALTY, FIRE AND DUTY TO REPAIR
(14) In the event of the destruction of the building in which said leased
premises are located by fire or other casualty, provided, however, that in the
event of damage to said building by fire or other casualty to the extent of 50
per cent or more of the sound value of the building, the lessor may or may not
elect to repair said building; written notice of lessor's said election shall
be given lessee within fifteen days after the occurrence of said damage; if
said notice is not so given, lessor conclusively shall be deemed to have
elected not to repair; in the event the lessor elects not to repair the
building, then in that event this lease shall terminate with the date of said
damage; but if the building in which said leased premises are located be but
partially destroyed and the damage so occasioned shall not amount to the
extent indicated above, or if greater than said extent and lessor elects to
repair, as aforesaid, then the lessor shall repair said building with all
convenient speed and shall have the right to take possession and occupy, to
the exclusion of the lessee, all or any part of said building in order to make
the necessary repairs, and the lessee hereby agrees to vacate upon request,
all or any part of said building which the lessor may require for the purpose
of making the necessary repairs, and for the period of time between the day of
such damage and until such repairs have been substantially completed there
shall be such an abatement of rent as the nature of the injury or damage and
its interference with the occupancy of said leased premises by said lessee
shall warrant; however, if the premises be but slightly injured and the
damage so occasioned shall not cause any material interference with the
occupation of the premises by said lessee, then there shall be no abatement of
rent and the lessor shall repair damage with all convenient speed.
WAIVER OR SUBROGATION RIGHTS
(15) Neither the lessor nor the lessee shall be liable to the other for loss
arising out of damage to or destruction of the leased premises, of the
building or improvement of which the leased premises are a part of with which
they are connected, or the contents of any thereof, when such loss is caused
by any of the perils which are or could be included within or insured against
by a standard form of fire insurance with extended coverage, including
sprinkler leakage insurance, if any, All such claims for any and all loss,
however caused, hereby are waived. Such absence of liability shall exist
whether or not the damage or destruction is caused by the negligence of either
lessor or lessee or by any of their respective agents, servants or employees.
It is the intention and agreement of the lessor and lessee that the rentals
reserved by this lease have been fixed in contemplation that each party shall
fully provide his own insurance protection at his own expense, and that each
party shall look to his respective insurance carriers for reimbursement of any
such loss, and further, that the insurance carriers involved shall not be
entitled to subrogation under any circumstances against any party to this
lease. Neither the lessor nor the lessee shall have any interest or claim in
the other's insurance policy or policies, or the proceeds thereof, unless
specifically covered therein as a joint assured.
EMINENT DOMAIN
(16) In case of the condemnation or purchase of all or any substantial part
of the said demised premises by any public or private corporation with the
power of condemnation this lease may be terminated, effective on the date
possession is taken, by either party hereto on written notice to the other and
that case the lessee shall not be liable for any rent after the termination
date. Lessee shall not be entitled to and hereby expressly waives any right to
any part of the condemnation award or purchase price.
FOR SALE AND FOR RENT SIGNS
(17) During the period of 120 days prior to the date above fixed for the
termination of said lease, the lessor herein may post on said premises or in
the windows thereof signs of moderate size notifying the public that the
premises are "for sale" or "for lease."
DELIVERING UP PREMISES ON TERMINATION
(18) At the expiration of said term or upon any sooner termination thereof,
the lessee will quit and deliver up said leased premises and all future
erections or additions to or upon the same, broom-clean, to the lessor or
those having lessor's estate in the premises, peaceable, quietly, and in good
order and condition, reasonably use and wear thereof, damage by fire,
unavoidable casualty and the elements alone excepted, as the same are now in
or hereafter may be put in by the lessor.
ADDITIONAL COVENANTS OR EXCEPTIONS.
(19) See attached addendum.
<PAGE>
ATTACHMENT BANKRUPT DEFAULT
PROVIDED, ALWAYS, and these presents are upon these conditions that (1)
if the lessee shall be in arrears in the payment of said rent for a period of
ten days after the same becomes due, or (2) if the lessee shall fail or
neglect to do, keep, perform or observe any of the covenants and agreements
contained herein if lessee's part to be done, kept, performed and observed and
such default shall continue for ten days or more after written notice of such
failure or neglect shall be given to lessee, or (3) if the lessee shall be
declared bankrupt or insolvent according to law, or (4) if any assignment of
lessee's property shall be made for the benefit of creditors, or (5) if on the
expiration of this lease lessee fails to surrender possession of said leased
premises, then and in either or any of said cases or events, the lessor or
those having lessor's estate in the premises, may terminate this lease and,
lawfully, at his or their option immediately or at any time thereafter,
without demand or notice, may enter into and upon said demised premised and
every part thereof and repossess the same as of lessor's former estate, and
expel said lessee and those claiming by, through and under losses and remove
lessee's effects at lessee's expense, forcibly if necessary and store the
same, all without being deemed guilty of trespass and without prejudice to any
remedy which otherwise might be used for arrears of rent or preceding breach
and covenant.
Neither the termination of this lease by forfeiture nor the taking or
recovery of possession of the premises shall deprive the lessor of any other
action, right or remedy against lessee for possession, rent or damages, nor
shall any omission by lessor to enforce any forfeiture right or remedy to
which lessor may be entitled be deemed a waiver by lessor of the right to
enforce the performance of all terms and conditions of this lease by lessee.
In the event of any re-entry by lessor, lessor may lease or relet the
premises in whole or in part to any tenant or tenants who may be satisfactory
to lessor, for any duration, and for the best rent, terms and conditions as
lessor may reasonably obtain. Lessor shall apply the rent received from any
new tenant first to the cost of retaking and reletting the premises, including
remodeling required to obtain any new tenant, and then to any arrears of rent
and future rent payable under this lease and any other damages to which lessor
may be entitled hereunder.
Any property which lessee leaves on the premises after abandonment or
expiration of the lease, or for more than ten days after any termination of
the lease by landlord, shall be deemed to have been abandoned, and lessor may
remove and sell said property at public or private sale as lessor sees fit,
without being liable for an prosecution therefor or for damages by reason
thereof, and the net proceeds of said sale shall be applied toward the
expenses of landlord and rent as aforesaid, and the balance of such amounts,
if any, shall be held for and paid to the lessee.
BOLDING OVER
In the event the lessee for any reason shall hold over after the
expiration of this lease, such holding over shall not be deemed to operate as
a renewal or extension of this lease, but shall only create tenancy from month
to month which may be terminated at will at any time by lessor.
ATTORNEY FEES AND COURT COSTS
In case suit or action is instituted to enforce compliance with any of the
terms, covenants or conditions of this lease, or to collect rental which may
become due hereunder, or any portion thereof, the losing party agrees to pay
such sum as the trial court may adjudge reasonable as attorney's fees to be
allowed the prevailing party in such suit or action and in the event any
appeal is taken from any judgment or decree in such suit or action, the losing
party agrees to pay such further sum as the appellate court shall adjudge
reasonable as prevailing party's attorney's fees on such appeal. The lessee
agrees to pay and discharge all lessor's costs and expenses, including
lessor's reasonable attorney's fees that shall arise from enforcing any
provision or covenants of this lease even though no suit or action is
instituted.
WAIVER
Any waiver by the lessor of any breach of any covenant herein contained to
be kept and performed by the lessee shall not be deemed or considered as a
continuing waiver, and shall not operate to bar or prevent the lessor from
declaring a forfeiture for any succeeding breach, either of the same condition
or covenant or otherwise.
NOTICES
Any notice required by the terms of this lease to be given by one party
hereto to the other or desired so to be given, shall be sufficient if in
writing contained in a sealed envelope, deposited in the U.S. Registered Mails
with postage fully prepaid, and if intended for the lessor herein then it
addressed to said lessor at 6105 S.W. Macadam/Dean Clark and if intended for
the lessee, then it addressed to the lessee at 6105 S.W. Macadam Ave.
Portland, Oregon 97201. Any such notice shall be deemed conclusively to have
been delivered to the addressee thereof forty-eight hours after the deposit
thereof in said U.S. Registered Mails.
HEIRS AND ASSIGNS
All rights, remedies and liabilities herein given to or imposed upon
either of the parties hereto shall extend to, inure to the benefit of and
bind, as the circumstances may require, the heirs, executors, administrators,
successors and, so far as this lease is assignable by the term hereof, to
assigns of such parties.
In construing this lease, it is understood that the lessor or the lessee
may be more than one person; that if the context so requires, the singular
pronoun shall be taken to mean and include the plural, the masculine, the
feminine and the neuter, and that generally all grammatical changes shall be
made, assumed and implied to make the provisions hereof apply equally to
corporations and to individuals.
IN WITNESS WHEREOF, the respective parties have executed this instrument
in duplicate on this, the day and year first hereinabove written, any
corporation signature being by authority of its Board of Directors.
By: /s/ Dave Johnston
- ------------------- -----------------------------
DEAN A. CLARK Dave Johnston
/s/ Beverly Johnston
-----------------------------
Beverly Johnston Witness
<PAGE>
Dated: July 19, 1990
Lessor: Dean A. Clark
Lessee: Dave Johnston
Property: 6105 S.W. Macadam Avenue
Portland, Oregon
19. TAXES. In addition to the basic rental payable as provided above, Lessee
further agrees that if, for any tax year which includes any part of the term
hereof, the real property taxes levied against the land and building of which
the leased premises is a part shall exceed the amount of taxes levied thereon
for the tax year ending June 30, 1990, Lessee shall pay to lessor a sum
equivalent to Forty-Five percent (45%) of the amount by which the taxes for
such later tax year, applicable and pro-rated to any part of the term hereof,
shall exceed the amount of taxes, or pe-rated part thereof, levied against
said real property for the tax year ending June 30, 1990. Any additional
rental which may become due under the provisions of this subparagraph shall be
paid by Lessee to Lessor promptly upon Lessee's receiving appropriate billing
therefor from Lessor.
Initials: /s/ DJ
----------
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0
0
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