<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
RESALE OF 36,209,606 SHARES OF COMMON STOCK
This Prospectus relates to the resale of 36,209,606 shares of the
common stock of Computerized Thermal Imaging, Inc., a Nevada corporation (the
"Company"), which may be sold by the holders thereof (the "Selling
Stockholders") from time to time as market conditions permit in the market, 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 (the "Common Stock"), to be
resold include: (i) 18,229,167 shares to be purchased by an unrelated investor
(the "Newly Issued Shares"); (ii) 2,552,083 shares to be issued upon the
exercise of warrants to be issued to such investor (the "Compensation Warrants")
which become exercisable upon issuance at variable prices based on the sales
price of the shares of the Common Stock and expire on the fifth anniversary of
the date of issuance; (iii) 5,337,741 shares currently issued and outstanding;
(iv) 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 (the "Resale Warrants"); and (v) 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"). Unless otherwise
specified, the Compensation Warrants and the Resale Warrants are sometimes
collectively referred to herein as the "Warrants." See "Management - Stock
Options and Restricted Stock," "Management - Certain Transactions," "Description
of Securities," and "Plan of Distribution and Selling Stockholders." As used
herein, the term "Offering" includes all shares of the Common Stock covered by
this Prospectus. The registration of the Newly Issued Shares and the shares
underlying the Compensation Warrants only applies to the resale of such shares
by Bristol Asset Management, L.L.C. Shares offered by the Selling Stockholders
may be sold in unsolicited ordinary brokerage transactions or privately
negotiated transactions between the Selling Stockholders and purchasers without
a broker-dealer. A current prospectus must be in effect at the time of the sale
of the shares of the Common Stock to which this Prospectus relates. Each Selling
Stockholder or dealer effecting a transaction in the registered securities,
whether or not participating in a distribution, is required to deliver a current
prospectus upon such sale. The Company will not receive any proceeds from the
resale of the Common Stock by the Selling Stockholders. Unless otherwise
exempted, the Selling Stockholders and their agents engaged in the resale of the
Common Stock may be deemed underwriters under the Securities Act of 1933, as
amended (the "Securities Act"). Bristol Asset Management, L.L.C. is deemed to be
an underwriter under the Securities Act with regard to the resale of the Newly
Issued Shares and shares issued upon exercise of the Compensation Warrants. The
Common Stock is quoted on the OTC Bulletin Board of The Nasdaq Stock Market
under the symbol "COII." On January 6, 1999, the closing bid and ask prices of
the Common Stock were $0.70 and $0.73 per share, respectively. There can be no
assurance that an active trading market will be sustained. See "Price Range of
Common Stock and Dividend Policy."
---------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
ANYONE WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
THE DATE OF THIS PROSPECTUS IS JANUARY 8, 1999
<PAGE>
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS"
WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE
NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..........................................................3
Prospectus Summary.............................................................4
Risk Factors..................................................................10
Price Range of Common Stock And Dividend Policy.............................. 23
Capitalization............................................................... 24
Management................................................................... 45
Principal Stockholders....................................................... 57
Description of Securities.................................................... 62
Plan of Distribution And Selling Stockholders................................ 69
Legal Matters................................................................ 71
Experts...................................................................... 72
Index to Financial Statements...............................................F- 2
</TABLE>
2
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO OR FROM ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE BUSINESS OR AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE AS OF WHICH SUCH INFORMATION IS FURNISHED.
AVAILABLE INFORMATION
The Company has not been previously subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), although it will become subject to the reporting requirements of the
Exchange Act following the registration of the securities described herein. In
accordance with the Exchange Act, the Company will file reports, proxy
statement, and other information with the Securities and Exchange Commission
(the "Commission"). In addition, the Company intends to furnish its stockholders
with annual reports containing audited financial statements and such interim
reports as it deems appropriate.
Pursuant to the Securities Act, the Company has filed a Registration
Statement on Form SB-2 with the Commission of which this Prospectus forms a
part. This Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits thereto, certain parts of which have
been omitted in accordance with rules of the Commission. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission are not
necessarily complete, and, in each instance, reference is made to the copy of
the document so filed for a more complete description of the matter involved,
and each such statement is qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto are on file with, and may be
examined without charge, at the following public reference facilities of the
Commission: 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7 World
Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained, at prescribed rates, from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
The Commission maintains an Internet web site that contains information,
including registration statements, of issuers who file electronically with the
Commission. The address of that web site is http://www.sec.gov.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN, THE
FINANCIAL, BUSINESS ACTIVITIES, MANAGEMENT AND OTHER PERTINENT INFORMATION
HEREIN RELATE ON A CONSOLIDATED BASIS TO THE COMPANY AND ITS 80 PERCENT OWNED
SUBSIDIARY, THERMAL MEDICAL IMAGING, INC. INVESTORS ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY AND CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE HEADING "RISK FACTORS." ADDITIONALLY, UNLESS OTHERWISE INDICATED, ALL
COMMON STOCK SHARE AND PER SHARE DATA AND INFORMATION IN THIS PROSPECTUS ASSUME
NO EXERCISE OF THE OUTSTANDING RESALE OPTIONS OR WARRANTS INTO SHARES OF THE
COMMON STOCK, OR THE ISSUANCE OF ANY UNVESTED SHARES OF THE RESTRICTED STOCK.
MOREOVER, UNLESS OTHERWISE INDICATED, ALL MONETARY AMOUNTS HAVE BEEN EXPRESSED
IN UNITED STATES DOLLARS.
THE COMPANY
Computerized Thermal Imaging, Inc. (the "Company") was incorporated on
June 10, 1987 in the State of Nevada as Business Helpers, Inc. 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. 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. In 1988, the Company,
through the issuance of shares of its Common Stock, acquired substantially all
of the assets of Thermal Imaging, Inc., an Oregon corporation (herein sometimes
referred to as "TII"), which assets consisted primarily of certain intellectual
property regarding thermal imaging intellectual property.
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 free
standing 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. As of the
date of this Prospectus, the PRC's Ministry of Public Health has been unable to
obtain funding for a project for which the Company initially contracted in 1995,
although persons in China working with the Ministry of Public Health maintain
their intention to pursue placement of the CTI System in its hospitals. The
Company does not plan to make material expenditures for this project until
funding is obtained from the PRC.
The CTI System is currently composed of four elements. One element is a
climate controlled lab (herein referred to as a "QTA Lab"). The second element
is the examination unit, consisting of an infra-red camera, imaging monitor,
high resolution printer, computer and proprietary software and telemedicine
interface. The third element of the CTI System is 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. The fourth element is a proprietary medical protocol.
The Company's 80 percent owned subsidiary, Thermal Medical Imaging, Inc., a
Nevada corporation (herein sometimes referred to as "TMI") 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 (the "TMI System"), and which is comprised of an infra-red camera, a
central processing unit, a display unit, examination equipment, and a power
distribution unit. The TMI System employs a proprietary patient positioning
system in the data acquisition process for which a patent application has been
filed. In November 1998, TMI filed a provisional patent application covering the
algorithm process relating to the TMI System.
As of the date of this Prospectus, neither the CTI System nor the TMI
System has been formally approved by the United States Federal Drug
Administration (the "FDA"). Management believes that the CTI System has
clearance
4
<PAGE>
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. As a
practical matter, the market for the CTI System is impeded because specific
insurance and Medicare payment codes are not available for patients to obtain
cost reimbursement for use of a specific medical imaging system without further
FDA approval establishing the efficacy or specific medial claims.
The sale of the TMI System in the United States for use in the
detection of breast cancer requires FDA approval. Management believes that no
other thermography or thermal imaging procedures currently being used for
medical purposes, even with FDA approval, are equivalent to the TMI System.
Consequently, the TMI System is presently undergoing clinical testing by
physicians at four 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. See "Business." While TMI hopes to receive PMA
within the next 12 months, various factors, including the length of the time
needed to collect sufficient research data, analyze patient images, submit
comparison findings to the FDA, and obtain independent FDA consultant review,
could effect delays, and there is no guarantee that any or all of the stages
will be completed or achieved. In addition, the cost associated with completing
clinical trials of the TMI System is estimated to be approximately $3,000,000,
but this figure could vary depending on numerous factors, including the length
of the clinical trials, the efficiency of the prototype TMI System, the testing
methods employed, and the results of the FDA review. The inability of the
Company and/or TMI to raise sufficient working capital to fund the clinical
trials could adversely affect the ability of TMI to complete the PMA process.
Several risk factors exist which should be carefully reviewed by
prospective investors prior to making a decision to invest in the Company. These
factors include, but are not limited to, the effect of the following events or
contingencies on the business of the Company: (i) lack of working capital and
guaranteed sources of financing; (ii) investigations or claims in connection
with prior offerings of shares of the Common Stock, Warrants and Debentures by
stockholders or state or federal securities regulators could delay effective
dates or increased legal fees in defense thereof (see "Risk Factors - Select
Capital Advisors, Inc. Debentures and Warrants" and "Business - Litigation");
(iii) the failure of the Company, before March 16, 1998, to provide stockholders
with an opportunity to exercise preemptive rights; (iv) accounts payable to a
primary creditor, TRW, and substantial indebtedness to the Company's primary
legal counsel; (v) the unknown but substantial cost required both to obtain FDA
approval to make any medical claims for efficacy and to obtain insurance payment
code authorizations for each procedure using the CTI System and TMI System; and
(vi) dependence on key employees.
The Company will require an estimated $6,000,000 over the next 12
months for its research and development programs, preclinical and clinical
testing, development of its sales and distribution efforts, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs; results of 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; developments and changes in the Company's existing
research, licensing and other relationships; and the terms of any new
collaborative, licensing and other arrangements that the Company may establish.
During the three years prior to the date of this Prospectus, 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 $3,900,000 to the capital of the Company in exchange for shares of
the Common Stock. The Company believes that its current assets and potential
additional contributions from affiliates of the Company and certain accredited
investors, as needed, will be sufficient to meet the Company's short-term
operating expenses and capital expenditures. At the present time, however, there
is no commitment from anyone 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 one or more substantial new investors.
In order to meet its expected capital needs for the next 12 months, the
Company executed the Investment Agreement with Bristol Asset Management, L.L.C.
("Bristol") on January 20, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." Subject to certain conditions, the Company may require Bristol to
purchase up to $7,000,000 worth of the Common Stock during the remaining portion
of the three year term of the Investment Agreement. The obligations of Bristol
to purchase such shares are subject to a number of conditions precedent. Such
conditions precedent include, but are not limited to, the
5
<PAGE>
unrestrained trading of the Common Stock on the principal exchange on which the
shares are traded (as of the date of this Prospectus, such exchange is the OTC
Bulletin Board operated by The Nasdaq Stock Market), and the registration for
resale of the Newly Issued Shares of the Common Stock under the Securities Act.
In addition, the Common Stock must be registered pursuant to the Exchange Act.
If the Company fails to maintain its status under the Exchange Act, or the
Common Stock is delisted from the principal exchange on which the Common Stock
is traded, Bristol shall have no obligation to contribute any additional funds
to the Company, or if no such funds have been contributed, to contribute any
funds to the Company. In addition, if Bristol were to become the owner of at
least 4.9 percent of the issued and outstanding shares of the Common Stock,
Bristol may elect not to purchase any further shares of the Common Stock, even
though the full $7,000,000 worth of the Common Stock has not been purchased. In
computing the 4.9 percent limitation, all shares of the Common Stock owned or
deemed to be owned pursuant to Section 13(d) of the Exchange Act and the rules
promulgated thereunder, shall count towards the ownership limitation. As a
result of these conditions, it is possible that Bristol's total investment under
the Investment Agreement, if any, could be limited to an aggregate cash
contribution well below the $7,000,000 commitment. For example, assuming the
Company had satisfied all conditions precedent and market conditions as of May
and June 1998 remained constant, if Bristol actually purchases shares of the
Common Stock, such shares when coupled with the shares deemed to be owned under
Section 13(d) of the Exchange Act and the rules promulgated thereunder (E.G.,
the Warrant Shares discussed below), Bristol would only be able to purchase
approximately $1,377,465 worth of the Common Stock before the 4.9 percent
limitation would be reached. The Company has no access to the financial
statements of Bristol, a privately owned company, and relies upon Ambient
Capital Group, Inc., its financial adviser, to attest for Bristol's ability to
perform. See "Principal Stockholders - Bristol Asset Management, L.L.C.
Investment Agreement."
On each closing date with respect to the purchase of shares of the
Common Stock by Bristol, the Company shall also deliver to Bristol Compensation
Warrants to purchase shares of the Common Stock (the "Warrant Shares"), which
Compensation Warrants shall expire on the fifth anniversary of the date of
issuance thereof. The Compensation Warrants issuable at any such closing shall
entitle the holder thereof to purchase a number of Warrant Shares equal to 12
percent of the number of shares of the Common Stock purchased at the closing in
question at an initial exercise price, subject to the provisions of the
Investment Agreement, equal to 100 percent of the average closing sales price
for the Common Stock on the principal exchange on which the shares are traded
and as noted by Bloomberg (or other appropriate published source) during the
Look Back Period (defined below) in question.
Subject to certain limitations and conditions precedent, the Company
may require Bristol to purchase shares of the Common Stock on a monthly basis.
Within ten days after the end of each calendar month, the Company may require
Bristol to purchase a maximum amount of shares of the Common Stock not to exceed
the lesser of (i) $7,000,000 less all amounts previously paid by Bristol, and
(ii) the product of (x) the number of shares of the Common Stock traded on the
principal exchange on which the shares of the Common Stock traded for the
preceding calendar month, multiplied by (y) the average of the closing bid
prices noted in Bloomberg (or other appropriate published source) for the Common
Stock during the prior calendar month, multiplied by (z) 14 percent. For
example, if a total of 1,000,000 shares of the Common Stock traded during
January of a particular year and the average of the closing bid prices was
$2.00, on or before February 10 the Company could request a draw down not to
exceed 14 percent of the $2,000,000 or $280,000, so long as such amount was
available under the Investment Agreement. Payment of the draw down amount must
be made by Bristol on the fifth business day following the proper delivery of a
Put Notice.
Simultaneously with the receipt of the funds from Bristol in the amount
of the draw down, the Company shall issue and sell to Bristol the number of
shares of the Common Stock equal to the draw down divided by 74 percent of the
lowest sales price for the Common Stock on the principal exchange on which the
shares are traded and as noted in Bloomberg (or other appropriate published
source) (the "Lowest Sale Price" during the 10 trading days prior to the Put
Notice Date (the "Look Back Period"). For example, if the Lowest Sale Price for
the Look Back Period was $2.00 and the draw down was $500,000, the number of
shares of the Common Stock to be issued would be 337,837 shares. Notwithstanding
the foregoing, in the event that the Lowest Sale Price during the 20 trading
days after a particular closing is less than 95 percent of the Lowest Sale Price
applicable to such closing, then the Company shall promptly issue to Bristol an
additional number of shares of the Common Stock with respect to such closing
such that the number of shares of the Common Stock issued to Bristol at such
closing plus such additional number of shares are equal to the funds drawn down
at such Closing divided by 74 percent of the Lowest Sale Price during such 20
trading day period. Bristol shall also be issued additional Compensation
Warrants equal to 12 percent of the number of additional shares
6
<PAGE>
so issued and the exercise price of such additional Compensation Warrants and
the Compensation Warrants issued at such closing shall be adjusted to 100
percent of the Lowest Sale Price during such 20 trading day period.
Other than Bristol, there are no other known sources of liquidity. The
Company's cash requirements may vary materially from those now forecasted due to
potential future acquisitions, the progress of research and development
programs, results of clinical testing, relationships with strategic partners, if
any, competitive and technological advances, decisions of the FDA and foreign
regulatory processes and other factors. There can be no assurance, however, 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 TMI, or
to license third parties the rights to commercialize products or technologies
that the Company would otherwise seek to develop on its own.
As noted above, Bristol will obtain essentially a 26 percent discount
on the purchase price of shares of the Common Stock pursuant to the Investment
Agreement. In addition, Bristol has the right to have additional shares and
additional Compensation Warrants issued to it if there has been a certain
decrease in the market price of the shares. The intention behind these two
provisions is to protect Bristol's relative stock position vis a vis other
stockholders who may acquire shares of the Common Stock at a time when the
market price per share has declined. Management does not believe that these two
provisions should adversely affect the market price for the shares of the Common
Stock, inasmuch as the various purchases of shares of the Common Stock by
affiliates of the Company over the past couple of years have involved discounts
of up to 50 percent without any seeming negative effect. Likewise, management
does not believe that the provisions of the Investment Agreement should
adversely affect the ability of the Company to raise capital in the future. No
other stockholder of the Company has any preemptive right to acquire any
additional shares of the Common Stock upon purchases by Bristol. Management does
not believe that Bristol's warrants to acquire additional shares that accompany
each purchase will have any long-term adverse effect on the decision by any
other investor to invest in the Company. However, the fact that there will be a
large number of shares of the Common Stock registered for resale by means of
this Prospectus might adversely affect the ability of the Company to raise
capital in the future due to the fact that so many stockholders could sell their
shares at any time and thereby drive down the market value of the shares of the
Common Stock, at a time when price stability would be an important issue for any
new investor.
If the Company does not commence generating adequate revenues, or if it
does not attract new capital sufficient to meet its operating needs, the Company
will not be able maintain the existing clinical trials to obtain FDA approval
for the TMI System or to obtain insurance payment codes for the CTI System. In
such event, the Company would have difficulty selling its products in the United
States. The Company would then be forced to focus on sales to foreign markets
that do not require FDA approval.
The Company's principal executive office is located at 476 Heritage
Park Boulevard, Suite 210, Layton, Utah 84041, and its telephone number is (801)
776-4700. TMI's principal executive office is located at 1760 South Telegraph
Road, Suite 202, Bloomfield Hills, Michigan 48302, and its telephone number is
(248) 745-4960.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Outstanding Prior
to the Offering................................................. 48,834,512 shares (1)
Common Stock to be Resold......................................... 36,209,606 shares (2). See "Plan of
Distribution and Selling Stockholders."
OTC Bulletin Board Symbol......................................... COII
</TABLE>
- ------------------------
(1) Includes shares of the Common Stock issued and outstanding as of October
29, 1998. Does not include (i) 18,229,167 shares proposed to be issued as
Newly Issued Shares; (ii) 2,552,083 shares underlying the Compensation
Warrants; (iii) 3,840,615 shares underlying the Resale Warrants; and (iv)
6,250,000 shares underlying the Resale Options. See "Management - Stock
Options and Restricted Stock" and "Description of Securities."
(2) Includes: (i) 18,229,167 Newly Issued Shares. (ii) 2,552,083 shares to be
issued upon the exercise of the Compensation Warrants. The number of Newly
Issued Shares and the shares underlying the Compensation Warrants being
registered hereby generally are calculated based on the formula set forth
in the Bristol Asset Management, L.L.C. Investment Agreement (the
"Investment Agreement"). The formula used to calculate the number of Newly
Issued Shares being registered hereunder is as follows: $7,000,000 / 74
percent x $0.52 (the lowest sales price for the Common Stock on the
principal exchange of the Company during the 10 trading days prior to
January 30, 1998) = 18,229,167 shares of the Common Stock. The number of
shares of the Common Stock underlying the Compensation Warrants was
calculated as follows: 18,229,167 x 14 percent = 2,552,083 shares. If the
sales price for the Common Stock used in the formula is different than the
example of $0.52 contained herein, then the number of Newly Issued Shares
and the number of shares underlying the Compensation Warrants will change.
However, for the purposes of this Prospectus, the formula price of $0.52
per share is being used. If the sales price is greater than $0.52 per
share, a lesser number of shares of the Common Stock will be issued
pursuant to the Investment Agreement. (iii) 5,337,741 shares issued and
outstanding. (iv) 3,840,615 shares underlying the Resale Warrants. (v)
6,250,000 shares underlying the Resale Options. See "Plan of Distribution
and Selling Stockholders." The registration of the Newly Issued Shares and
the shares underlying the Compensation Warrants only applies to the resale
of such shares by Bristol Asset Management, L.L.C.
8
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical data of the Company on
a consolidated basis as of September 30, 1998 and 1997 and for the fiscal years
ended June 30, 1998 and 1997, respectively, which present the consolidated
results of continuing operations of the Company and its 80 percent owned
subsidiary, Thermal Medical Imaging, Inc. This historical data as of September
30, 1998 and 1997 and for the fiscal years ended June 30, 1998 and 1997 has been
derived from the Company's audited and unaudited Financial Statements included
elsewhere in this Prospectus. The summary historical consolidated financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended Years Ended
September 30, June 30,
------------- --------
1998 1997 1998 1997
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues, net....................................... - - - $55,815
Other income........................................ $733 $333 $3,307 $ 5,762
------ ------ ------- -------
Total revenues...................................... $733 $333 $3,307 $61,577
Loss from operations................................ ($1,204,935) ($728,316) ($6,009,522) ($3,349,614)
Extraordinary item.................................. - - $65,637 -
Net loss............................................ ($1,204,935) ($728,316) ($5,943,885) ($3,349,614)
Net loss per weighted-average shares
of common stock outstanding....................... ($0.02) ($0.02) ($0.14) ($0.10)
Weighted average Shares of Common Stock
outstanding......................................... 48,336,957 36,945,206 41,943,867 33,803,045
BALANCE SHEET DATA:
Current assets...................................... $177,707 $226,940 $232,268 $196,056
Total assets........................................ $316,061 $553,171 $381,525 $528,675
Current liabilities................................. $4,001,466 $1,890,261 $2,861,995 $1,671,448
Total liabilities................................... $4,308,339 $2,440,261 $3,168,868 $2,346,448
Stockholders' equity (deficit)...................... ($3,992,278) ($1,887,090) ($2,787,343) ($1,817,773)
Working capital (deficit)........................... ($3,823,759) ($1,663,321) ($2,629,727) ($1,475,392)
</TABLE>
9
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES CERTAIN RISKS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY REVIEW THE FOLLOWING FACTORS TOGETHER WITH THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION.
DEVELOPMENT STAGE COMPANY. Since inception, the Company has been
engaged almost exclusively in organizational and research and development
activities, and has only recently begun product commercialization. Accordingly,
as a development stage company, the Company has a limited operating history upon
which an evaluation of the Company's prospects can be made. Consequently, the
likelihood of success must be considered in view of all of the risks, expenses
and delays inherent in the establishment of a new business, including, but not
limited to, expenses and delays of commencing a new business, slower than
forecasted manufacturing and marketing activities, the uncertainty of market
assimilation of the Company's products and other unforeseen factors.
Furthermore, there can be no assurance that the Company's proposed business as
described herein will prove successful or that the Company will ever be able to
operate profitably.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES. The Company was
formed in June 1987 and has not generated significant revenues to date. As of
June 30, 1998, the Company had an accumulated deficit of $20,682,969 funded by
paid in capital. For the fiscal years ended June 30, 1998 and 1997, the Company
had operating losses of $5,943,885 and $3,349,614, 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.
INDEPENDENT ACCOUNTANTS' REPORT; GOING CONCERN QUALIFICATION. The
report from the Company's independent accountants includes an explanatory
paragraph which describes substantial doubt concerning the ability of the
Company to continue as a going concern, without continuing additional
contributions to capital. The Company may incur losses for the foreseeable
future due to the significant costs associated with manufacturing, marketing and
distributing its CTI System and TMI System (hereinafter sometimes collectively
referred to as the "Systems" and individually referred to as a "System") and due
to continual research and development activities which will be necessary to
develop applications for the Company's thermal imaging technology. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements - Report of Independent Accountants."
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 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
UNCERTAIN ABILITY TO MEET CAPITAL NEEDS. The Company will require an
estimated $6,000,000 over the next 12 months for its research and development
programs, preclinical and clinical testing, development of its sales and
distribution efforts, operating expenses, regulatory processes and manufacturing
and marketing programs. The Company's capital requirements will depend on
numerous factors, including the progress of its research and development
programs; results of 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;
developments and changes in the Company's existing research, licensing and other
relationships; and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. During the three years prior to the
date of this Prospectus, 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 $3,900,000 to the capital of the
Company in exchange for shares of the Common Stock. The Company believes that
its current assets and potential additional contributions from affiliates of the
Company and certain accredited investors, as needed, will be sufficient to meet
the Company's short-term operating expenses and capital expenditures. At the
present time, however, there is no commitment from
10
<PAGE>
anyone 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 one or more substantial new investors.
In order to meet its expected capital needs for the next 12 months, the
Company executed the Investment Agreement with Bristol Asset Management, L.L.C.
("Bristol") on January 20, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." Subject to certain conditions, the Company may require Bristol to
purchase up to $7,000,000 worth of the Common Stock during the remaining portion
of the three year term of the Investment Agreement. The obligations of Bristol
to purchase such shares are subject to a number of conditions precedent. Such
conditions precedent include, but are not limited to, the unrestrained trading
of the Common Stock on the principal exchange on which the shares are traded (as
of the date of this Prospectus, such exchange is the OTC Bulletin Board operated
by The Nasdaq Stock Market), and the registration for resale of the Newly Issued
Shares of the Common Stock under the Securities Act. In addition, the Common
Stock must be registered pursuant to the Exchange Act. If the Company fails to
maintain its status under the Exchange Act, or the Common Stock is delisted from
the principal exchange on which the Common Stock is traded, Bristol shall have
no obligation to contribute any additional funds to the Company, or if no such
funds have been contributed, to contribute any funds to the Company. In
addition, if Bristol were to become the owner of at least 4.9 percent of the
issued and outstanding shares of the Common Stock, Bristol may elect not to
purchase any further shares of the Common Stock, even though the full $7,000,000
worth of the Common Stock has not been purchased. In computing the 4.9 percent
limitation, all shares of the Common Stock owned or deemed to be owned pursuant
to Section 13(d) of the Exchange Act and the rules promulgated thereunder, shall
count towards the ownership limitation. As a result of these conditions, it is
possible that Bristol's total investment under the Investment Agreement, if any,
could be limited to an aggregate cash contribution well below the $7,000,000
commitment. For example, assuming the Company had satisfied all conditions
precedent and market conditions in May and June 1998 remained constant, if
Bristol actually purchases shares of the Common Stock, such shares when coupled
with the shares deemed to be owned under Section 13(d) of the Exchange Act and
the rules promulgated thereunder (E.G., the Warrant Shares discussed below),
Bristol would only be able to purchase approximately $1,377,465 worth of the
Common Stock before the 4.9 percent limitation would be reached. The Company has
no access to the financial statements of Bristol, a privately owned company, and
relies upon Ambient Capital Group, Inc., its financial adviser, to attest for
Bristol's ability to perform. See "Principal Stockholders - Bristol Asset
Management, L.L.C. Investment Agreement."
On each closing date with respect to the purchase of shares of the
Common Stock by Bristol, the Company shall also deliver to Bristol Compensation
Warrants to purchase shares of the Common Stock (the "Warrant Shares"), which
Compensation Warrants shall expire on the fifth anniversary of the date of
issuance thereof. The Compensation Warrants issuable at any such closing shall
entitle the holder thereof to purchase a number of Warrant Shares equal to 12
percent of the number of shares of the Common Stock purchased at the closing in
question at an initial exercise price, subject to the provisions of the
Investment Agreement, equal to 100 percent of the average closing sales price
for the Common Stock on the principal exchange on which the shares are traded
and as noted by Bloomberg (or other appropriate published source) during the
Look Back Period (defined below) in question.
Subject to certain limitations and conditions precedent, the Company
may require Bristol to purchase shares of the Common Stock on a monthly basis.
Within ten days after the end of each calendar month, the Company may require
Bristol to purchase a maximum amount of shares of the Common Stock not to exceed
the lesser of (i) $7,000,000 less all amounts previously paid by Bristol, and
(ii) the product of (x) the number of shares of the Common Stock traded on the
principal exchange on which the shares of the Common Stock traded for the
preceding calendar month, multiplied by (y) the average of the closing bid
prices noted in Bloomberg (or other appropriate published source) for the Common
Stock during the prior calendar month, multiplied by (z) 14 percent. For
example, if a total of 1,000,000 shares of the Common Stock traded during
January of a particular year and the average of the closing bid prices was
$2.00, on or before February 10 the Company could request a draw down not to
exceed 14 percent of the $2,000,000 or $280,000, so long as such amount was
available under the Investment Agreement. Payment of the draw down amount must
be made by Bristol on the fifth business day following the proper delivery of a
Put Notice.
Simultaneously with the receipt of the funds from Bristol in the amount
of the draw down, the Company shall issue and sell to Bristol the number of
shares of the Common Stock equal to the draw down divided by 74 percent of the
lowest sales price for the Common Stock on the principal exchange on which the
shares are traded and as noted in
11
<PAGE>
Bloomberg (or other appropriate published source) (the "Lowest Sale Price"
during the 10 trading days prior to the Put Notice Date (the "Look Back
Period"). For example, if the Lowest Sale Price for the Look Back Period was
$2.00 and the draw down was $500,000, the number of shares of the Common Stock
to be issued would be 337,837 shares. Notwithstanding the foregoing, in the
event that the Lowest Sale Price during the 20 trading days after a particular
closing is less than 95 percent of the Lowest Sale Price applicable to such
closing, then the Company shall promptly issue to Bristol an additional number
of shares of the Common Stock with respect to such closing such that the number
of shares of the Common Stock issued to Bristol at such closing plus such
additional number of shares are equal to the funds drawn down at such Closing
divided by 74 percent of the Lowest Sale Price during such 20 trading day
period. Bristol shall also be issued additional Compensation Warrants equal to
12 percent of the number of additional shares so issued and the exercise price
of such additional Compensation Warrants and the Compensation Warrants issued at
such closing shall be adjusted to 100 percent of the Lowest Sale Price during
such 20 trading day period.
Other than Bristol, there are no other known sources of liquidity.
Moreover, the Company at the present time does not have any party working on any
other source of capital. The Company's cash requirements may vary materially
from those now forecasted due to potential future acquisitions, the progress of
research and development programs, results of clinical testing, relationships
with strategic partners, if any, competitive and technological advances,
decisions of the FDA and foreign regulatory processes and other factors. There
can be no assurance, however, 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 TMI, or to license third parties the rights to
commercialize products or technologies that the Company would otherwise seek to
develop on its own.
As noted above, Bristol will obtain essentially a 26 percent discount
on the purchase price of shares of the Common Stock pursuant to the Investment
Agreement. In addition, Bristol has the right to have additional shares and
additional Compensation Warrants issued to it if there has been a certain
decrease in the market price of the shares. The intention behind these two
provisions is to protect Bristol's relative stock position vis a vis other
stockholders who may acquire shares of the Common Stock at a time when the
market price per share has declined. Management does not believe that these two
provisions should adversely affect the market price for the shares of the Common
Stock, inasmuch as the various purchases of shares of the Common Stock by
affiliates of the Company over the past couple of years have involved discounts
of up to 50 percent in some instances without any seeming negative effect.
Likewise, management does not believe that the provisions of the Investment
Agreement should adversely affect the ability of the Company to raise capital in
the future. No other stockholder of the Company has any preemptive right to
acquire any additional shares of the Common Stock upon purchases by Bristol.
Management does not believe that Bristol's warrants to acquire additional shares
that accompany each purchase will have any long-term adverse effect on the
decision by any other investor to invest in the Company. However, the fact that
there will be a large number of shares of the Common Stock registered for resale
by means of this Prospectus might adversely affect the ability of the Company to
raise capital in the future due to the fact that so many stockholders could sell
their shares at any time and thereby drive down the market value of the shares
of the Common Stock, at a time when price stability would be an important issue
for any new investor.
The registration of the Newly Issued Shares and the shares underlying
the compensation Warrants only applies to the resale of such shares by Bristol
Asset Management, L.L.C.
SECURITIES LAWS ISSUES. During 1998, certain secondary transactions
involving the transfer of shares of the Common Stock deemed to be "restricted
securities," as that term is defined in Rule 144 of the Securities Act, may have
an adverse effect on the Company's ability to rely on Section 4(2) of the
Securities Act in order to exempt the original issuances of the shares. On
January 22, 1998, the Company issued 1,827,250 shares of the Common Stock to
TII, an affiliate of the Company, in an exempt transaction effected in reliance
upon Section 4(2) of the Securities Act. On April 8, 1998 and May 5, 1998, TII
transferred 100,000 shares and 300,000 shares, respectively, to a total of four
separate purchasers. The transfers by TII were made in reliance upon Section
4(1) of the Securities Act. All of the certificates representing shares of the
Common Stock issued to TII and its transferees had appropriate legends
restricting their sale and transfer, except in compliance with the Securities
Act.
12
<PAGE>
A separate chain of transactions involving Manhattan Financial Group
("MFG") and PDH, Ltd. and P.D. Investments, affiliates of Doug Holt, took place
during the spring of 1998. The Company issued to MFG 2,394,000 shares of the
Common Stock on March 24, 1998 in reliance upon Section 4(2) of the Securities
Act. On April 29, 1998, MFG transferred 74,200 shares of the Common Stock,
originally acquired in the March 24, 1998 transaction, to two separate
purchasers. In a second transaction on May 11, 1998, MFG transferred an
additional 420,800 shares of the Common Stock, originally acquired in the March
24, 1998 transaction, to three purchasers, two of which were PDH, Ltd and P.D.
Investments. On May 19, 1998, PDH, Ltd. transferred 165,000 shares of the Common
Stock, acquired from MFG on May 11, 1998, to six separate purchasers.
Additionally, on June 2, 1998, P.D. Investments transferred 102,000 shares of
the Common Stock, acquired from MFG on May 11, 1998, to three purchasers. All of
the transfers involving MFG, PDH, Ltd., and P.D. Investments were made in
reliance on exemptions from registration under Section 4(1) of the Securities
Act. All of the certificates representing shares of the Common Stock issued to
MFG and its transferees had appropriate legends restricting their sale and
transfer, except in compliance with the Securities Act.
In the event that the subsequent transfers of "restricted" shares of
the Common Stock by TII, MFG, PDH, Ltd., and P.D. Investments are deemed to be
in violation of the Securities Act, the exemptions from registration, relied
upon by the Company for the initial issuance of those shares, could be lost.
Moreover, if an exemption from registration for the issuances is not available,
and the Company is found to have engaged in a public offering of securities, the
Company may face claims by the subsequent purchasers for rescission and/or
administrative sanctions, fines and penalties. However, the Company took the
step of applying legends to the stock certificates in question, and the
Company's transfer agent was well-experienced in the requirement that stock
certificates bearing a legend restricting their sale or transfer should not be
issued in a new name unless there was an available exemption from registration.
There were 14 parties involved in the above-described transactions, all
of whom held securities of the Company prior to or at the time the shares of the
Common Stock were purchased. Given the small number of parties involved in the
above-described transactions and the precautions taken by the Company,
management does not believe that there was any public offering of the Company's
shares of the Common Stock, and consequently, the exemption available to the
Company at the time of the issuance of the securities was not forfeited.
However, in order to lessen any problems which may emanate from the transfer of
the above-described shares of the Common Stock, on September 17, 1998, the
Company, TII, MFG, PDH, Ltd., and P.D. Investments offered to rescind the sales
of all such shares, pursuant to the securities laws of the various states where
the transfers took place. The Company made its rescission offer in the form of
an offering exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and in conformity with the applicable state
securities laws. All of the stockholders in question elected to reject the
rescission offers. Consequently, management does not believe that the Company
has any material exposure in connection with the issuance of such shares. It
should be pointed out that the rescission offers with respect to state
securities laws do not cure any potential federal securities laws problems, and
any purchaser who elected to reject or accept a rescission offer may still elect
to pursue his remedies under federal law. In connection with the above-described
transactions, management has estimated that the Company is at risk for an amount
not to exceed $306,873, which amount has been reflected in the Consolidated
Financial Statements, including the Notes thereto, appearing elsewhere in this
Prospectus.
PREEMPTIVE RIGHTS ISSUES. Pursuant to Title 7, Chapter 79 of the Nevada
Revised Statutes, stockholders of corporations organized before October 1, 1991,
with certain limited exceptions set out in the statute, have preemptive rights
to acquire pro rata unissued shares, treasury shares or securities convertible
into such shares, being offered for sale, except to the extent limited or denied
by the corporation's articles of incorporation. Prior to October 1, 1991, among
other circumstances, preemptive rights did not exist with respect to (i) shares
issued to directors, officers or employees of the Company pursuant to a vote of
the stockholders, or pursuant to a plan authorized by the stockholders, (ii)
shares sold for a consideration other than cash, and (iii) shares issued at the
same time that the stockholder who claims a preemptive right acquired his
shares. The Company was incorporated on June 10, 1987, and prior to March 16,
1998, its Articles of Incorporation did not provide for any limitation with
respect to preemptive rights. In the various offerings of its securities, the
Company did not offer to its existing stockholders preemptive rights to acquire
any of the securities so offered other than to persons in exchange for services
rendered. The applicable remedy, if any, for the failure by the Company to offer
to its stockholders the preemptive rights is not certain after the passage of
time and Common Stock price fluctuations. Under Nevada law, the preemptive right
is only an opportunity to acquire shares upon such terms as the Board of
Directors fixes for the purpose of providing a fair and reasonable opportunity
for the exercise of such right. If a stockholder were to timely demand
preemptive rights for a particular non-excepted prior sale, the Company might be
required in equity to sell additional shares of the Common Stock to the
complaining stockholder
13
<PAGE>
at previously offered prices to enable a stockholder exercising such rights to
maintain his ownership percentage for prior sales that would effect preemptive
rights. To the extent that any stockholders were entitled to the right to
purchase shares of the Common Stock upon the exercise of any such preemptive
rights, the Company plans to allow any such requesting stockholder the right to
purchase his pro rata amount of such shares at the same price per share to which
he would have been entitled if such preemptive rights had been offered in
conformity with Nevada law. Any such offering of preemptive rights will be in
conformity with the Securities Act and the various states where any such
stockholders may be located. If any stockholders were to exercise their
preemptive rights within the applicable statute of limitations for any sale of
securities which carried a preemptive right prior to March 16, 1998, the
percentage interests of investors may be diluted by any such sales of additional
securities and the contributions to the Company from such sales, if required to
be offered at the price of previous issuances and if such price is below the
current market value, could result in contributions to the Company at a per
share contribution less than the current market value. The Company cannot
speculate whether any stockholders would elect such preemptive rights, if the
statute of limitations has not barred such rights, or how much additional
capital would be raised or how many shares would be issued or whether other
remedies would be available. Thus, the Company assigns no liability to this
contingency. As of the date of this Prospectus, management is not aware of any
stockholder who intends to make any claim with respect to the failure by the
Company to offer any such preemptive rights. On February 4, 1998, a majority of
the stockholders, by written consent, voted to amend the Articles of
Incorporation of the Company to deny preemptive rights with respect to each new
issuance of shares of the Common Stock. However, the amendment to the Articles
of Incorporation will have no effect with respect to preemptive rights which may
have existed for certain sales of the Common Stock prior to such amendment. See
"Description of Securities - Preemptive Rights."
SELECT CAPITAL ADVISORS, INC. DEBENTURES. On December 9, 1997, the
Company filed suit against Select Capital Advisors, Inc. ("Select"), Ronald G.
Williams ("Williams"), and various other parties in the United States District
Court for the Southern District of Florida for damages and recission with
respect to the fraudulent sale of certain 12% Series A Senior Subordinated
Convertible Debentures issued by the Company. In March 1997, the Company was
introduced to Select and Williams who represented that they had the experience,
reputation and resources to raise the needed capital and to provide needed
equipment and operating financing of approximately $6,000,000. The Company
entered into an agreement with Select to raise the funds and perform certain
financial advisory services. In April 1997, Select negotiated the offering and
issuance of the convertible debentures for approximately $530,000 in proceeds.
Following the attempted conversion of the debentures by the investors, the
Company discovered evidence to indicate that numerous false and misleading
statements were made by unauthorized persons in connection with the sale of the
debentures; various documents were changed without the knowledge of the Company;
unlicensed broker-dealers sold the debentures; and Williams and Select made
material omissions to the Company and to the purchasers. The Company filed suit
but has since reached settlements with all of the investors. The Company plans
to continue with the prosecution of its claims against Select and Williams.
Management believes that it will prevail in the litigation against Select and
Williams. See "Business - Litigation."
CLAIMS INVOLVING STOCKHOLDERS. The Company has initiated a suit in
Nevada to recover shares issued and damages from a former director for failure
of consideration. During the year ended June 30, 1994, the Company issued
1,000,000 shares of the Common Stock to a former director of the Company based
upon the director's representation that he would arrange large-scale financing
and capital from certain proposed contributors. During the year ended June 30,
1997, actions were taken to cancel the shares of the Common Stock because the
Company contended that the issuance was conditional upon performance by the
former director to consummate the financing. In 1997, the Company learned that a
lender to the former director asserted a pledge of 500,000 shares of the Common
Stock as collateral for a loan. The 500,000 pledged shares of the Common Stock
issued to the director are included as issued and outstanding shares in the
accompanying Consolidated Financial Statements at June 30, 1998 and 1997. See
"Business - Litigation."
PAST DUE ACCOUNTS. Over the last several months, the Company has had
discussions with its primary systems development vendor, TRW, Inc., an Ohio
corporation ("TRW"), regarding past due accounts. TRW has and continues to
perform software development and strategic integration and management services
regarding the testing, development and deployment of the Systems. The Company
became delinquent in the payment of costs and fees under contracts with TRW (see
Note 6 to the Consolidated Financial Statements that are included elsewhere in
this Prospectus) and, accordingly, TRW, although not having filed formal legal
actions, threatened the Company that it would withhold delivery of source codes
of developed software, if the past due amounts were not paid. The Company and
TRW verbally agreed that the Company would make payments at the rate of three
times TRW's weekly on-going costs with respect
14
<PAGE>
to work performed for the benefit of the Company, plus a fee equal to 15 percent
of costs, until the past due accounts were liquidated. As of the date of this
Prospectus, the Company has been making payments agreed to be made to TRW, and
management expects that the Company will continue to do so. The payable to TRW
at one time had been as high as $897,762, but as of July 6, 1998 the outstanding
account balance was approximately $225,000. If the Company defaults in its
agreed payment schedule, and TRW carries through with its threat to withhold the
delivery of the source codes or other key deliverables, the TMI operations would
be shut down, or severely restricted from analyzing clinical data. See "Business
- - Litigation."
As of April 21, 1998, the Company owed approximately $397,745.56 in
legal fees to the law firm of Looper, Reed, Mark & McGraw Incorporated (the
"Attorneys"). The Company executed a Promissory Note dated May 1, 1998
consolidating the balance of fees owed to the Attorneys through April 21, 1998
(the "Promissory Note") the principal of which increases by any additional fees
or expenses incurred by the Attorneys. The terms of the Promissory Note provided
for interest to accrue on the unpaid principal at a rate of one percent per
month. The Company is obligated to make monthly payments of $50,000, including
accrued interest, which may increase in the event the Company obtains a certain
level of financing, until all principal and interest are paid in full. The
Promissory Note incorporates the terms of two pledge agreements executed by the
Company and TMI which provide security for the amounts due under the Promissory
Note and on future outstanding accounts with the Attorneys (the "Pledge
Agreements"). The security interests granted pursuant to the Promissory Note and
Pledge Agreements cover the Company's common stock holdings in TMI and the
intellectual property of both the Company and TMI. See "Business - Past Due
Accounts." If an event of default were to occur under the Promissory Note or the
Pledge Agreements, the Company's interest in TMI, its 80 percent subsidiary
(including the TMI System), and/or the intellectual property relating to the CTI
System could be sold to satisfy the outstanding debt. As of October 8, 1998, the
total amount due on the Promissory Note and for subsequent fees was
approximately $273,704. As of the date of this Prospectus, the Company has made
all payments due under the Promissory Note, and management expects that the
Company will continue to do so.
NEW PRODUCT DEVELOPMENT AND INTEGRATION; TECHNOLOGICAL CHANGE. Upon
first introduction, many physicians may equate the Systems with the predecessor
technology of "thermography," an analog infra-red camera system without the
Company's computer algorithm analysis using computed thermal data gathered by
high quality digital thermal imaging cameras, and educating physicians that the
Systems are new technology may take more time than anticipated by management.
The market for the Systems 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. Timeliness of delivery of
either a System when ordered or services for a System delivered is of critical
importance to certain customers, and the Company's failure to successfully
develop and ship such products in a timely manner could result in cancellation
of customer orders which would have a material adverse effect on the Company's
business and results of operations. TMI has no assurance that it can finance its
development, marketing, or production costs. In an effort to raise the needed
capital, the Company has executed the Investment Agreement with Bristol Asset
Management, L.L.C. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." At the
date of this Prospectus there is no known financing source for TMI, so the
Company must fund or finance the balance of the clinical trials and any
subsequent development, operating costs, marketing and production costs until
TMI develops its business and either arranges financing or is profitable. All
risk factors set out in this Prospectus for the Company also apply to the risks
of the Company's investment in TMI. There can be no assurance that the Company
will be successful in completing its product integration efforts or in
developing and marketing new products or product enhancements on a timely or
cost-effective basis, and such failure could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business - Products."
DEPENDENCE ON THE CTI SYSTEM AND THE TMI SYSTEM; UNCERTAINTY OF MARKET
ACCEPTANCE. The Company's success is dependent on the development and market
acceptance of its CTI System and the TMI 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 as planned by management.
In the event that the Company's market does not develop as anticipated, the
Company's
15
<PAGE>
business, financial condition and results of operations would be adversely
effected. The rate of deploying the TMI 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 TMI
System as complementary to mammography to detect breast cancer (the only claim
authorized for ongoing clinical trials) or as an independent examination
technology. TMI management believes the TMI System results will be accepted by
the medical community.
The commercial success of the Systems will depend upon their acceptance
by the medical community as useful and cost-effective. There can be no assurance
that the Company can market the Systems or that the Company will introduce new
products that achieve significant market acceptance in the future. Moreover,
when the Systems are being marketed for sale or use, new product introductions
or enhancements by the Company's competitors or the use of other technologies
could cause a decline in sales or loss of market acceptance of the Systems. 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. In management's view, the acceptability and
adaptability of the Systems could be enhanced by such a decrease because the
Systems are less costly to use and deploy than magnetic resonance imaging
("MRI") or computed tomography ("CAT") scan. Third-party payors may require FDA
approval before authorizing any payment codes solely for use of either of the
Systems, although physicians might still use the Systems as a diagnostic tool
even without separate payment codes. In the event that the Systems and products
under development do not achieve market acceptance, the Company's business,
financial condition and results of operations could be adversely effected. See
"Business - Products" and "-Third-Party Reimbursement."
TMI DEPENDENCE ON THE COMPANY. TMI is an 80 percent owned subsidiary of
the Company that has developed the TMI System exclusively using contributions of
capital from the Company. The efficacy of the TMI System is currently subject to
confirmation in FDA clinical trials as a tool complementary to mammography. TMI
will have no source of revenue, other than contributions to its capital made by
the Company, until the clinical trials are successfully concluded and TMI or the
Company then is able to market for sale or use the TMI System. TMI 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 TMI
develops its business and then is capable of financing its operations.
Management believes that the Investment Agreement should provide the Company
with a sufficient amount of capital to fund the completion of FDA clinical
trials on the TMI System after the Registration Statement becomes effective to
which this Prospectus relates, a prerequisite to the obligations thereunder to
make contributions to the Company. All risk factors set forth in this Prospectus
for the Company also apply to the risk of the Company's investment in TMI.
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 "Business - Risks of Doing Business in
the PRC and Other Foreign Countries."
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. 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
anticipated cost of production could increase if the Company is required to seek
and make arrangements for different manufacturers to
16
<PAGE>
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.
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 premarket 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.
The CTI System includes a thermal camera, basic software, an
application protocol, and Quantitative Thermal Analysis ("QTA") Lab. The Company
does not have, and has not applied for, specific FDA approval for the basic CTI
System. The Company has concluded that the CTI System, as configured, can be
marketed and sold in the United States without any further FDA approval pursuant
to any exemption under Section 510(k) of the FDC Act. A 510(k) exemption has
been issued by the FDA for the manufacturer of the camera and software currently
used by the Company in the basic CTI System. The Company intends to use thermal
imaging devices that would qualify under such 510(k) exemption. As a result,
management believes no additional FDA approval is required in order for health
care providers or radiologists in the United States to use the CTI System.
However, if the CTI System is marketed under the 510(k) exemption, any health
care provider could only rely upon non-specific payment codes for billing
purposes in connection with third-party reimbursement, which could limit the
incentive for health care providers to use the CTI System. Nevertheless, as long
as the Company uses a thermal imaging collection system that has been cleared
for 510(k) exemption in favor of the third-party manufacturer by the FDA,
management believes that the Company may sell the CTI System in the United
States without any further action by the FDA. The Company could add additional
analytical software to the basic system which may require the Company to apply
for a particular 510(k) exemption, or even for a PMA for a specific medical use
of the CTI System, in which case the 510(k) exemption process may take a few
months. Any PMA application will require substantial cost and many months of
clinical trials and independent examinations to confirm any specific medical
claims under which the CTI System may be sold in the United States. Sales of the
basic CTI System outside the United States may require governmental approvals in
some countries and may require no approvals in others.
The TMI System consists of the same camera and software as the basic
CTI System along with additional image processing and analytical software and a
patient-positioning table. Because of the additional image processing and
analytical software, the TMI System will require FDA approval for its sale and
use. Consequently, TMI is conducting clinical trials, the results of which will
be submitted to the FDA for a PMA to enable the sale of the TMI System.
Management expects that the TMI System, after completion of the clinical trials
and confirmation, will be a unique process which is complementary to mammography
to identify and distinguish malignant from benign tumors. TMI has been
conducting clinical trials for almost one year, after completion of pre-testing
examinations and development of data required to qualify for the PMA. See
"Business - Government Regulation." To make any further medical efficacy claims
for use of the TMI System independent of mammography or any other imaging
modality, TMI would necessarily be required to conduct other clinical trials
further authorized by the FDA, which would require substantial cost and
additional time for development and conduct of pre-test and clinical trials. The
PMA process for the TMI System may not be successfully completed. If the Company
is unable to raise the necessary money to fund the ongoing clinical trials which
are a part of the PMA process for the TMI System, the Company would be forced to
abandon its attempt to obtain a PMA from the FDA. If the PMA is not successfully
completed, it could substantially restrict the sales of the TMI System in the
United States. Sales of the TMI System outside the U.S. may require governmental
approvals in some countries and may require no approvals in others.
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
17
<PAGE>
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
and other health requirements, to engage in extensive record keeping and
reporting, and to comply with the FDA's product labeling, promotional and
advertising requirements. See "Business - Government Regulation."
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 TMI, 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 TMI, 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 "Business" and
"Management."
ABILITY TO MANAGE PROJECTED GROWTH. Should the Company's growth
strategy prove successful, a significant strain may be placed on the Company's
customer service and support operations, sales, administrative personnel and
other resources. The Company's ability to manage future growth, if any,
effectively will require the Company to continue to improve its operational,
management and financial systems and controls and to train, motivate and manage
its employees. In particular, if financing or equity raising efforts are
successful, the Company will be required in the near future to recruit a
significant number of technically qualified personnel to expand its direct sales
force and customer support group. As a result, the Company is subject to certain
growth-related risks, including the risk that it will be unable to retain the
necessary personnel or acquire other resources necessary to service such growth
adequately. There can be no assurance that the Company can expand this resource
as rapidly as necessary or finance the working capital needed for such
expansion. If the Company's management is unable to effectively manage future
growth, if any, the Company's business, financial condition and results of
operations could be adversely effected.
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 "Business - Competition."
UNCERTAIN PROTECTION FOR INTELLECTUAL PROPERTY; POSSIBLE CLAIMS OF
OTHERS. The Company generally does not rely solely on patent protection with
respect to its products. However, the Company does rely on a combination of
copyright and trade secret laws, employee and third-party nondisclosure
agreements, and other protective measures to protect intellectual property
rights pertaining to its products and technology. As of the date of this
Prospectus, no patents have been issued to the Company. However, TMI has filed a
formal patent application with respect to its proprietary patient positioning
system and a provisional patent application covering the algorithm process
involved with the TMI System, and expects to file additional patent applications
in the future. In the meantime, there can be no assurance that applicable
copyright or trade secret law or nondisclosure agreements will provide
meaningful protection of the Company's copyrights, trade secrets, know-how or
other proprietary information in the event of any unauthorized
18
<PAGE>
use, misappropriation or disclosure of such copyrights, trade secrets, know-how
or other proprietary information. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States. There can be no assurance that the
Company or TMI will be able to protect its intellectual property successfully.
The Systems and component technology incorporate subject matter that
the Company believes is in the public domain or that it otherwise has the right
to use. There can be no assurance that third parties will not assert patent,
copyright or other intellectual property infringement claims against the Company
with respect to the Systems or technology or other matters. There may be third
party patents, copyrights and other intellectual property relevant to the
Systems and technology which are not known to the Company. Although no third
party has asserted that the Company is infringing such third party's patent
rights, copyrights or other intellectual property, there can be no assurance
that litigation asserting such claims will not be initiated, that the Company
would prevail in any such litigation, or that the Company would be able to
obtain any necessary licenses on reasonable terms if at all. Any such claims
against the Company, with or without merit, as well as claims initiated by the
Company against third parties, can be time consuming and expensive to defend or
prosecute and to resolve. See "Business - Patents and Intellectual Property."
LICENSE WITH TMI. Upon the formation of TMI, the Company entered a
License Agreement licensing to TMI all of its intellectual property, medical
protocols, CTI System configurations, independent contractor component trade
secrets and similar technology for the purpose of enabling TMI to proceed to
develop its TMI System for the detection of breast cancer in North America only.
Under the terms of the License Agreement, improvements made to the CTI System
were cross-licensed to both parties to use, royalty free, while ownership of
such improvements were retained by the party making the improvement. The
technology that continued to be owned by TMI after the expiration of the License
Agreement is the refinement made to the technology originally licensed by CTI to
TMI. This includes improvements made to the patient positioning bed and
improvements and automation applied to the system software. The License
Agreement executed on June 8, 1996 has now expired by its terms, but before such
expiration, the Company and TMI entered into the Stock Transfer Agreement dated
January 28, 1997 by which the Company obtained controlling interest (over 80
percent) of the outstanding common stock of TMI. In the Stock Transfer
Agreement, TMI agreed, in consideration for the Company's contributions for the
development of its technology and for clinical trials, that TMI and the Company
would cross-license each other for all technology developments with respect to
breast cancer imaging. The Company has not entered a separate written license
agreement with TMI, relying at this time only on the above-referenced agreement
requiring a reasonable cross-license as consideration for such contributions,
the terms of which would be further delineated in the event the Company were to
decide to transfer control of TMI.
Although the Company has voting control over TMI as of the date of this
Prospectus, certain events could occur, such as an event of bankruptcy or the
possible exercise of rights by any vendor in the event of a collateral or
statutory materialman's lien, that could result in the loss of control by the
Company over TMI or its technology. In such an event, the absence of a binding
license agreement could result in the loss by the Company of the TMI System
technology. The Company has granted to the Attorneys a lien on all of the shares
of the common stock of TMI owned by the Company. In addition, the Attorneys also
have a lien on all of TMI's technology in the TMI System. Both liens have been
granted to the Attorneys to secure a negotiable promissory note for outstanding
and accrued legal fees. See "Business - Patents and Intellectual Property"; also
see "Business - Litigation - Past Due Accounts."
UNCERTAINTY IN U.S. HEALTH CARE INDUSTRY. Cost containment measures
instituted by health care providers as a result of regulatory reform or
otherwise could result in greater selectivity in the allocation of capital
funds. Such selectivity could have a material adverse effect on the Company's
ability to sell the Systems and services. See "Business - Third Party
Reimbursement."
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The manufacture and
sale of medical image information systems entail significant risk of product
liability claims. The Company believes it needs no product liability insurance
now because the Systems are either in development or operated by TMI, which
carries insurance for its clinical trials. There can be no assurance that the
Company can obtain insurance coverage with limits adequate to protect the
Company from any liabilities it might incur in connection with the sale of the
Systems. The Company anticipates obtaining product liability coverage as
products are commercialized. Such insurance is expensive and in the future may
not be available on acceptable terms, if at all. A successful product liability
claim or series of claims brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's business,
financial
19
<PAGE>
condition and results of operations. The Company believes thermal imaging is a
completely safe procedure, without the harmful radiation produced with X-rays,
but the Company could still be required to defend claims as a defendant for a
claim for failure to detect a malady. Even though the CTI System is only a tool
and does not diagnose, the Company could be called upon to devote its capital
toward defense costs. In the opinion of management, the Company's liability
should be limited to any foreseeable damages proximately resulting from improper
operation of a CTI System, but lawsuits without insurance protection could
occur.
NO COMMITMENT TO PURCHASE SHARES. No entity or individual, including
any selling agent, the Company, its officers or its directors, has any
obligation to purchase any of the shares of the Common Stock to be resold or
underlying the Compensation Warrants, Resale Warrants, or Resale Options . Any
of the shares of the Common Stock which may be offered for sale by the Selling
Stockholders will be offered through the secondary market, and consequently no
assurance can be given that any such shares will be sold or that the Selling
Stockholders or subsequent purchasers will be able to sell their shares of the
Common Stock for the same price as they were purchased. Pursuant to the terms of
the Investment Agreement, the Company may require Bristol Asset Management,
L.L.C. ("Bristol") to purchase the Newly Issued Shares. However, the number of
the Newly Issued Shares which the Company may require Bristol to purchase is
subject to various monthly and aggregate limitations. Moreover, Bristol is not
required to purchase any of the Newly Issued Shares until the Company has
fulfilled certain conditions precedent set forth in the Investment Agreement.
SALES OF SHARES OF THE COMMON STOCK TO CERTAIN PARTIES. Prior to the
date of this Prospectus, certain officers, directors and related parties engaged
in business transactions with the Company. Primarily, the Company sold shares of
the Common Stock for cash and in exchange for services rendered to the Company
by Thermal Imaging, Inc. (herein sometimes referred to as "TII"), a company
controlled by affiliates of David B. Johnston, the Chairman of the Board, to
Daron Dillia doing business as Manhattan Financial Group, a consultant to the
Company, and to PDH, Ltd., a company controlled by Doug Holt, a consultant to
the Company. All shares of the Common Stock issued to those persons were
restricted securities pursuant to Rule 144 promulgated under the Securities Act
("Rule 144"), and were priced at a value of about 50 percent of the then current
trading price of free trading shares. Management believes that the terms of
these transactions were as favorable to the Company as those which could have
been obtained from unaffiliated third parties under similar circumstances. All
future transactions between the Company and its affiliate will be on terms no
less favorable than could be obtained from unaffiliated third parties and will
be approved by a majority of the disinterested members of the Board of Directors
of the Company. See "Management - Certain Transactions."
POSSIBLE CONFLICTS OF INTEREST. Many of the officers and directors of
the Company are also officers and/or directors of other companies, some of which
are affiliates of the Company. David B. Johnston is the Chairman of the Board
and Chief Executive Officer of the Company and also is a director and represents
a controlling stockholder (by attribution among family members) of TII, which
beneficially owed approximately 16.7 percent of the Common Stock as of October
29, 1998. Potential conflicts could arise in the future whenever the Company
prices restricted shares of the Common Stock to be sold to TII or any other
affiliate of the Company. Additionally, some decisions to be made by Mr.
Johnston as a director on behalf of the Company could be in conflict with the
interest of a Selling Stockholder. David A. Packer, President of the Company,
is also President and Chief Operating Officer of TMI. General Richard V.
Secord is an officer and director of the Company, a director and the Chief
Executive Officer of TMI and the Chief Operating Officer of TriSun/CTI Asia,
Ltd., a no-asset company formed in Cyprus to purchase the Systems for
installation in hospitals in the PRC. Each of the foregoing companies can be
construed as affiliated with the Company or a company with which the Company
has material contracts. There are numerous possibilities of conflicts of
interest which could arise based upon the common control of the Company and
the roles of Mr. Johnston, Mr. Packer and General Secord, and their
respective roles in management of the affiliates. Although each of the
officers and directors of the Company will make every effort to work in the
best interests of the Company, there is no assurance that if a conflict
arises it will be resolved in favor of the Company.
RETENTION OF CONTROL. The Company's officers, directors and principal
stockholders beneficially will own approximately 34 percent of the outstanding
shares of the Common Stock at the completion of the Offering, without taking
into account any of the Newly Issued Shares, any shares of the Common Stock
underlying the Compensation Warrants, or Resale Warrants. As a result, the
officers, directors and principal stockholders of the Company will have the
ability to control the day-to-day affairs and the fundamental policies of the
Company. Voting together, such stockholders, including the officers and
directors of the Company, could possibly block any major corporate transactions,
such as a merger or a sale of substantially all of the Company's assets, which
under Nevada law require
20
<PAGE>
the affirmative vote of holders of a majority of the outstanding shares of the
Common Stock of the Company. See "Management" and "Principal Stockholders."
ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain provisions that may have the effect of discouraging certain
transactions involving an actual or threatened change of control of the Company.
In addition, the Board of Directors has the authority to issue up to 3,000,000
shares of the Preferred Stock defined hereinafter in one or more series and to
fix the preferences, rights and limitations of any such series without
stockholder approval. The ability to issue shares of the Preferred Stock could
have the effect of discouraging unsolicited acquisition proposals or making it
more difficult for a third party to gain control of the Company, or otherwise
could adversely affect the market price of the Common Stock. See "Description of
Securities." In addition, TMI's Articles of Incorporation likewise provide for
the issuance of preferred shares which could have anti-takeover implications,
but the Company maintains an 80 percent controlling interest to change those
terms if the Company desires to do so.
DIVIDEND POLICY. The Company has not paid or declared any cash
dividends with respect to the Common Stock, nor does it anticipate any such
payments or declarations in the foreseeable future. Any future dividends will be
declared at the discretion of the Board of Directors and will depend, among
other things, on the Company's earnings, if any, its financial requirements for
future operations and growth, and such other factors as the Company may then
deem appropriate. Investors should not rely on the receipt of dividends in the
near future or at any time in the future when evaluating the merits of an
investment in the shares of the Common Stock. See "Price Range of Common Stock
and Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock in the public market following the completion of the Offering could
have an adverse effect on the market price of the Common Stock. As of October
29, 1998, there were approximately 48,834,512 shares of the Common Stock issued
and outstanding. Upon completion of the Offering, all of the shares of the
Common Stock being registered hereby and approximately 33,263,187 shares of the
Common Stock held by current stockholders of the Company will be immediately
eligible for public sale without restrictions. The remaining approximately
10,233,584 shares of the Common Stock are "restricted securities" as that term
is defined under Rule 144 promulgated under the Securities Act. No prediction
can be made as to the effect, if any, that future sales of additional shares of
the Common Stock or the availability of such shares for sale under Rule 144,
other applicable exemptions or otherwise will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of the
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect prevailing market prices of the Common Stock. See
"Principal Stockholders."
IMPACT ON MARKET OF DEBENTURE CONVERSION OR WARRANT OR OPTION EXERCISE.
In the event of the exercise of a substantial number of the outstanding Warrants
and Resale Options within a reasonably short period of time after the right to
convert or exercise commences, the resulting increase in the amount of the
Common Stock in the trading market could substantially affect the market price
of the Common Stock. See "Description of Securities."
NO ASSURANCE OF ACTIVE PUBLIC MARKET; POSSIBLE VOLATILITY OF THE COMMON
STOCK. Although the Common Stock is quoted on the OTC Bulletin Board, there can
be no assurance that an active public market for the Common Stock will be
sustained after the Offering. The trading price of the Common Stock could be
subject to wide fluctuations in response to quarter to quarter variations in
operating results, announcements of innovations or new products by the Company
or its competitors, and other events or factors. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations which
affects the market price of securities of publicly traded companies and which
have often been unrelated to the operating performance of these companies. Broad
market fluctuations may adversely affect the market price of the Common Stock.
See "Price Range of Common Stock and Dividend Policy" and "Description of
Securities."
"PENNY STOCK" ISSUES. The shares of the Common Stock are "penny stocks"
as defined in the Exchange Act, which are traded in the over-the-counter market
on the OTC Bulletin Board. As a result, an investor may find it more difficult
to dispose of or obtain accurate quotations as to the price of the shares of the
Common Stock being registered hereby. In addition, the "penny stock" rules
adopted by the Commission under the Exchange Act subject the sale of the shares
of the Common Stock to certain regulations which impose sales practice
requirements on broker-dealers. For example, broker-dealers selling such
securities must, prior to effecting the transaction, provide their customers
with a
21
<PAGE>
document which discloses the risks of investing in such securities. Furthermore,
if the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker-dealer, the broker-dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker-dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of the Common Stock.
If the Company can meet the listing requirements in the future,
management intends to apply to include the shares of the Common Stock being
registered hereby for quotation on The Nasdaq SmallCap Market operated by The
Nasdaq Stock Market. The Common Stock has not yet been approved for quotation on
The Nasdaq SmallCap Market and there can be no assurance that an active trading
market will develop or if such market is developed that it will be sustained.
The Nasdaq Stock Market recently approved changes to the standards for companies
to become listed on The Nasdaq SmallCap Market, including, without limitation,
new corporate governance standards, a new requirement that companies seeking
listing have net tangible assets of $2,000,000, market capitalization of
$35,000,000 or net income of $500,000 and other qualitative requirements. If the
Company is unable to satisfy the requirements for quotation on The Nasdaq
SmallCap Market, trading in the Common Stock being registered hereby would
continue to be conducted on the OTC Bulletin Board. Even if the shares of the
Common Stock are listed for quotation on The Nasdaq SmallCap Market, the market
price of the shares must remain above $5.00 per share or else such shares will
be subject to the "penny stock" rules of the Commission discussed above. If the
market price of such shares falls below $1.00 per share, such shares will be
delisted from The Nasdaq SmallCap Market and will once again be quoted on the
OTC Bulletin Board.
In addition to the recent changes in The Nasdaq SmallCap Market listing
requirements discussed above, the National Association of Securities Dealers,
Inc. (the "NASD") has recently announced changes in the requirements for
continued quotation on the OTC Bulletin Board. Essentially the new rules require
OTC Bulletin Board companies to file quarterly and annual reports, required
under the Exchange Act, with the Commission or appropriate banking or insurance
regulators. If companies currently quoted on the OTC Bulletin Board do not
comply with the new NASD rules, their shares will only be quoted in the less
automated "Pink Sheets," a system run by the National Quotation Bureau, Inc. As
stated in this Prospectus, the Company is seeking registration under the
Exchange Act and consequently will be obligated to make all filings required
under the Exchange Act. If for some reason the Company should fail in its
registration efforts described in this Prospectus or not file its required
reports pursuant to the Exchange Act, it is possible that the Company would no
longer be eligible for quotation on the OTC Bulletin Board and would be
relegated to the "Pink Sheets." There can be no assurance that an active trading
market will develop for the shares of the Common Stock in the "Pink Sheets" or
if such market is developed that it will be sustained.
Moreover, various state securities laws impose restrictions on
transferring "penny stocks," and as a result, investors in the Common Stock may
have their ability to sell their shares of the Common Stock impaired. For
example, the Utah Securities Commission prohibits brokers from soliciting buyers
for "penny stocks," which makes selling them more difficult.
NEED TO MAINTAIN A CURRENT PROSPECTUS. The Company must maintain a
current prospectus in order for the Selling Stockholders to sell the shares of
the Common Stock to which this Prospectus relates. In the event that the Company
is unable to maintain a current prospectus due to lack of sufficient financial
resources or for other reasons, the Selling Stockholders may be unable to resell
their shares of the Common Stock in any public market.
SHARES RESERVED FOR ISSUANCE. The Company has 12,642,698 shares of the
Common Stock reserved for issuance upon the exercise of the Warrants and the
Resale Options. These convertible securities are convertible or exercisable at
prices that range from fixed prices of $0.60 to $5.00 per share and at variable
prices depending on the market price of the Common Stock and expire on various
dates extending to June 12, 2005. There can be no assurance that any of these
securities will be sold or converted or exercised, or that the Company will
receive any proceeds from the conversion or the exercise thereof. The exercise
or conversion of these securities, and the resale of the underlying shares of
the Common Stock, could have a dilutive effect on the prevailing market price of
the Common Stock. See "Management - Stock Options" and "Description of
Securities."
22
<PAGE>
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.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. Management believes
that this Prospectus contains forward-looking statements, including statements
regarding, among other items, the Company's future plans and growth strategies
and anticipated trends in the industry in which the Company operates. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described herein,
including, among others, regulatory or economic influences. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this Prospectus will in fact transpire or 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.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
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 1996 LOW HIGH
- ------------------ ------------------ --------------
<S> <C> <C>
Third Quarter $0.94 $2.84
Fourth Quarter $1.19 $2.13
CALENDAR YEAR 1997 LOW HIGH
- ------------------ ------------------ --------------
First Quarter $1.00 $2.00
Second Quarter $0.50 $1.25
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
</TABLE>
As of September 30, 1998, there were approximately 48,336,957 shares of
the Common Stock issued and outstanding. The Company believes that the Common
Stock was held by approximately 4,800 persons on that date.
The Company has not paid or declared any dividends with respect to the
Common Stock, nor does it anticipate paying any cash dividends or other
distributions on the Common Stock in the foreseeable future. Any future
dividends will be declared at the discretion of the Board of Directors and will
depend, among other things, on the Company's
23
<PAGE>
earnings, if any, its financial requirements for future operations and growth
and such other facts as the Company may then deem appropriate.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1998 and September 30, 1998. This table should be read in conjunction
with the Company's Financial Statements and Notes thereto that are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1998 (1) September 30, 1998 (1)
----------------- ----------------------
<S> <C> <C>
Stockholders' deficit:
Common Stock, $0.001 par value,
100,000,000 shares authorized;
47,565,757 issued and outstanding
on June 30, 1998 and September 30, 1998, respectively ......... $ 47,566 $ 47,566
Additional paid-in capital..................................... 18,373,060 18,373,060
Subscription receivable (2).................................... (525,000) (525,000)
Losses accumulated during the development stage................ (20,682,969) (21,887,904)
Total stockholders' deficit...................................... ($2,480,470) ($3,992,278)
---------- ----------
---------- ----------
</TABLE>
- ---------------------
(1) Does not give the effect to the issuance of (i) 18,229,167 shares of
the Common Stock upon the purchase of the Newly Issued Shares; (ii)
2,552,083 shares of the Common Stock upon exercise of the Compensation
Warrants; (iii) 3,840,615 shares of the Common Stock upon exercise of
the Resale Warrants; (iv) 6,250,000 shares of the Common Stock upon
exercise of the Resale Options; and (v) 771,200 shares of the Common
Stock issued and outstanding but subject to rescission offers.
(2) See "DESCRIPTION OF SECURITIES: STOCK NOT PAID UP."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Prospectus. 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.
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 Prospectus as "TRW") to design a plan for systems
integration to implement the Golden Health Telemedicine Contract and related
contracts entered by a subsidiary affiliate of the Company (TriSun/CTI Asia,
Ltd.) and a company formed by the Ministry of Public Health in the People's
Republic of China. 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 TMI System. The Company has deferred any further
expenditures toward the Golden Health Telemedicine Contract 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
24
<PAGE>
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
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 primarily upon the decision of the Company to channel all of its resources
to TMI for completion of the FDA clinical trials. The Company intends to resume
its Asian relationships and to commence that business when funds become
available.
In 1996, the Company entered into a License Agreement with TMI and
initiated the development by TMI of a new configuration of the CTI System to
develop the TMI System for use in the detection of breast cancer for marketing
in North America. When TMI was incapable of financing its activities, and when
TMI 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 TMI 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 TMI to
pay for the examinations using the TMI System as complementary medical
technology with mammography. Commencement of the clinical trials also has
resulted in TMI engaging QBRI, an independent consultant authorized by the FDA
to verify clinical examination results.
GENERAL
From inception through the most current fiscal period ending June 30,
1998, the Company has been involved in the research, development and 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 Prospectus, 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.
CERTAIN MATERIAL CONTRACTS
In addition to other agreements discussed elsewhere herein, the Company
and TMI have entered into several material contracts over the last two years.
TRW AGREEMENT. On October 29, 1996, the Company and TRW, Inc. - Systems
Integration Group, Strategic Systems Division ("TRW") entered into an agreement
wherein TRW agreed to provide systems management services, including testing,
development, training, engineering, integration, and installation support, with
regard to the CTI System (the "CTI-TRW Agreement"). Under the terms of the
CTI-TRW Agreement, unless otherwise agreed to by the parties, the fee to be paid
to TRW for its services shall be equal to the total costs associated with the
performance of such services plus a fee of 15 percent of such costs. Payment
terms are net 30 days after the date of invoice. The scope of work to be
performed by TRW is established by the Company and may be revised from time to
time based on the development of the CTI System. The term of the CTI-TRW
Agreement is for two years from the date of execution and has not been extended.
Either party may terminate the agreement at any time upon the giving of 30 days
notice. All intellectual property developed by the parties during the term of
the CTI-TRW Agreement will become the sole and exclusive property of the
Company. In the event that new intellectual property is developed, the Company
agrees to license, without royalty or fee, to TRW the right to use such property
in non-medical applications or medical applications that do not involve the use
of thermal imaging or soft tissue disorders. Moreover, the Company retains all
ownership rights in and to any medical data collected or processed in connection
with the agreement, free of any licensing obligations. In addition, the parties
agree not to disclose certain confidential information exchanged under the
agreement for a period of 3 years from the date of receipt.
25
<PAGE>
TMI-TRW AGREEMENT. TMI, the Company's 80 percent owned subsidiary,
entered into a separate technical management and support agreement with TRW on
June 19, 1996, wherein TRW agreed to provide technical management and support
services to TMI in connection with clinical trials being conducted during TMI's
breast cancer screening program (the "TMI-TRW Agreement"). Specifically, TRW is
responsible for program management, subcontract management, systems engineering,
system integration, testing, software analysis, documentation, delivery,
installation, technician training and maintenance for each project phase. Under
the terms of the TMI-TRW Agreement, unless otherwise agreed to by the parties,
the fee to be paid to TRW for its services shall be equal to the total costs
associated with the performance of such services plus a fee of 12.8 percent of
such costs. Payment terms are net 30 days after the date of invoice. The scope
of work to be performed by TRW is established by TMI and may be revised from
time to time based on the development of the project. The term of the TMI-TRW
Agreement is for a period of time until approximately 10,000 cases have been
collected and analyzed. As clinical trials of the breast cancer screening
program have progressed the parties have concluded that the original estimate of
10,000 cases will not be necessary to obtain sufficient patient data. As such,
the parties plan to amend the TMI-TRW Agreement to establish a more definitive
duration of the agreement.
All intellectual property developed by the parties during the term of
the TMI-TRW Agreement will become the sole and exclusive property of TMI. In the
event that new intellectual property is developed, TMI agrees to license,
without royalty or fee, to TRW the right to use such property in non-medical
applications or medical applications that do not involve the business of thermal
imaging for breast cancer detection or examination. Moreover, TMI retains all
ownership rights in and to any medical data collected or processed in connection
with the agreement, free of any licensing obligations. In addition, the parties
agree not to disclose certain confidential information exchanged under the
agreement for a period of three years from the date of receipt.
USC AGREEMENT. TMI and the University of Southern California ("USC"), a
California nonprofit educational institution, entered into a clinical trial
agreement (the "USC Agreement") on May 5, 1997. Under the terms of this
agreement, USC 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 TMI 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 TMI System. The USC Agreement provides that the
study will be conducted in accordance with a protocol established by TMI. The
estimated period of performance for the USC Agreement was undetermined at the
time of its execution. By its terms, total costs to TMI under the USC 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 TMI. All right, title, and interest to any intellectual
property which are conceived or made jointly by one or more employees of TMI and
USC shall belong jointly to TMI and USC. All right, title, and interest to any
other intellectual property developed or conceived under the study shall be
considered property of USC.
HRA AGREEMENT. TMI 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 USC Agreement. (See above). Under the terms of this
agreement, 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 TMI System. The goal of such study is to
establish a specific confidence interval associated with the use of the TMI
System for the detection of breast cancer. The HRA Agreement provides that the
study will be conducted in accordance with a protocol established by TMI. The
protocol for the HRA Agreement is identical to the protocol established for the
USC Agreement. The estimated period of performance for this agreement is from
September 1, 1997 through September 1, 1998. By its terms, total costs to TMI
under the HRA 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 TMI. All right, title, and
interest to any intellectual property which are conceived or made jointly by one
or more employees of TMI and HRA shall belong jointly to TMI and HRA. All right,
title, and interest to any other intellectual property developed or conceived
under the study shall be considered property of HRA.
PROVIDENCE HOSPITAL AGREEMENT. TMI 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
26
<PAGE>
potentially cancerous tissue by using clinical examination and mammography with
and without the use of the TMI System. The goal of such study is to establish a
specific confidence interval for the detection of breast cancer utilizing the
TMI System.
The Providence Hospital Agreement provides that the study will be
conducted by Providence Hospital in accordance with a protocol established by
TMI. 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
TMI System shall belong to TMI. 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.
MT. SINAI MEDICAL CENTER AGREEMENT. TMI 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. Under the terms of the Mt. Sinai Agreement, Mt. Sinai 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 TMI System. The goal of such study
is to establish a specific confidence interval for the detection of breast
cancer utilizing the TMI System.
The Mt. Sinai Agreement provides that the study will be conducted by
Mt. Sinai in accordance with a protocol established by TMI. The estimated term
of the Mt. Sinai Agreement is from June 1, 1998 to December 31, 1998.
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
TMI System shall belong to TMI. In addition, Mt. Sinai agrees not to disclose
certain confidential information exchanged in connection with the Mt. Sinai
Agreement and agrees to prevent disclosures of such information to all third
parties in a manner in which it treats its own similar information.
MARKETING AGREEMENT. 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 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.
RESULTS OF OPERATIONS
FIRST QUARTER ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997. The
Company incurred a loss of $1,204,935 for the quarter ended September 30, 1998,
as compared to a loss of $728,649 for the period ending September 30, 1997. The
Company had no revenues in either period. The increase in losses was
attributable to additional research costs associated with clinical testing of
patients at four different clinical testing sites, and increased spending on
legal and accounting fees in connection with the preparation of this Prospectus.
General and administrative expenses increased from $262,210 during the
first quarter of 1997 to $394,957 during the same period in 1998. This increase
was due to increased legal and accounting fees for 1998 over 1997 and increases
in salaries and personnel between the two periods. The Company's general and
administrative activities focused on fund raising and support of research
activities which included primarily, clinical testing in 1998 and development
expenses with TRW in 1997. The Company did not utilize its common stock to fund
compensation expenses in either quarter.
27
<PAGE>
During the first quarter of 1998, the Company spent $642,222 on
research an development expenses compared with $351,884 in during the same
period in 1997. Clinical testing costs during the first quarter of 1998 rose to
$156,415 from $15,297 in the prior year's quarter. The Company's expenses
incurred in connection with the TRW contracts increased to $235,038 in the first
quarter of 1998 as compared to $216,587 in 1997. The Company will decrease its
expenditures with TRW during the balance of the year and increase its clinical
testing costs. The costs incurred for research equipment during the first
quarter of 1998 were $85,769 and FDA consulting costs were $19,140 with no
comparable expense in 1997. Interest expense increased to $168,489 from $114,555
during the first quarter of 1998 versus 1997 due to the realization of a
$150,000 discount on a note payable to MFG. This discount is attributable to the
fact that the notes are convertible into common stock at a rate of fifty percent
(50%) of the market price of the Company's common stock at maturity.
Depreciation expense increased in the first quarter of 1998 to $11,522 from
$6,388 in 1997.
The Company funded operations during the first quarters of 1998 and
1997 from advances from TII, PDH, Ltd. and MFG. See "Certain Transactions." The
Company received funding of $596,548 in non-interest bearing advances in 1998
and $753,019 in non-interest bearing advances in the first quarter of 1997. The
Company received loans from MFG in the amount of $335,000 during the first
quarter of 1998 and received $336,849 in subordinated debenture proceeds in
1997. The Company also received $115,000 in legal services during the first
quarter of 1998 which were incorporated into the Company's revolving note
agreement with the Company's law firm. The Company also made payments of
$150,000 to its law firm during the first quarter of 1998.
FISCAL YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997. The Company
incurred a loss of $5,943,855 for the year ended June 30, 1998, as compared to a
loss of $3,349,614 for the same period ending June 30, 1997. The Company had no
revenues in either period. The increase in losses was attributable to additional
research costs associated with clinical testing of patients, increased
compensation expenses recognized in connection with options issued to
consultants, escalating interest expenses incurred as a result of outstanding
subordinated debentures of the Company, and increased spending on legal and
accounting fees in connection with the preparation of this Prospectus and
registration with the Commission.
General administrative expenses increased from $1,571,157 in 1997 to
$3,167,690 in 1998. This increase was due to the recognition of a compensation
expense in the amount of $1,050,167 in connection with the issuance of stock
warrants to Manhattan Financial Group, William Harpster, and Ambient Capital in
1998. Legal and accounting fees for 1998 rose to $610,742 from $232,330 in 1997
as a result of work on this Prospectus, related registration matters and other
transactions. The Company's general and administrative activities focused on
fund raising, support of research activities, and development of business
relationships in the United States and China. A significant portion of the
compensation expense has been paid for by the Company with shares of the Common
Stock, amounting to $306,681 in 1998 and $405,498 in 1997.
In 1998, the Company spent $2,430,038 on research and development
expenses compared with $1,753,366 in 1997. The increase resulted from higher
clinical testing costs, $438,530 in 1998 and $54,577 in 1997. However, the
Company's expenses incurred in connection with the TRW contracted decreased from
$1,565,615 in 1997 to $1,237,905 in 1998 as a result of a shifting in contract
objectives from product development and enhancement to support of clinical
testing. The Company also incurred expenses of $54,484 for research equipment in
1998 with no comparable expense in 1997. 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 expense
increased to $415,101 from $86,688 in 1998 versus 1997 due to an increase in the
amount of subordinated debentures issued and outstanding in 1998 versus 1997.
Depreciation expense increased in 1998 to $32,344 from $29,552 in 1997.
The Company funded losses in 1998 by selling shares of the Common Stock
for cash in the amount $829,106. In addition, the Company received cash advances
from TII and PDH, Ltd. in the total amount of $2,077,130 for which the Company
issued shares of the Common Stock in repayment of the advances. In 1997, the
Company received $1,010,209 in proceeds from stock sales ,and $1,385,707 in cash
contributions from TII and PDH, Ltd. The Company also issued shares of Common
Stock to fund compensation and services expenses in the amount of $1,311,860
during
28
<PAGE>
1998 versus $405,498 in 1997. Subordinated debenture holders converted
$1,105,403 of principal and accrued interest to shares of the Common Stock in
1998, versus $64,125 of principal and interest in 1997.
FISCAL YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996. The Company
incurred a loss of $3,349,614 for the fiscal year ended June 30, 1997 and
$2,878,250 for the fiscal year ended June 30, 1996. The reduction in losses was
largely attributable to the fact that fewer shares of the Common Stock were
issued in consideration for services; $405,498 in 1997 and $893,152 in 1996. In
1996, the Company also settled a lawsuit against the Company relating to an
outstanding debt by issuing shares of the Common Stock in the amount of
$508,280. These issuances were made in connection with the Assumption of
Liabilities Agreement executed by the Company and Thermal Imaging, Inc., an
affiliate of Mr. Johnston.
Research expenses also increased substantially in fiscal year 1997 due
to the research and development relationship entered into by the Company with
TRW. As a result, research and development expenses increased from $491,320 in
1996 to $1,753,366 in 1997.
The Company funded its losses in fiscal year 1997 through the issuance
of shares of the Common Stock in exchange for cash contributions in the
aggregate amount of $1,010,209 compared to $2,259,070 raised in 1996. In
addition, outstanding debt obligations in the amount of $64,125 and represented
by certain convertible debentures were retired through conversions into shares
of the Common Stock. The Company received revenues from the sale of laser cards
to a purchaser in the PRC in the amount of $44,815 in 1997 and the sale of a CTI
System to Thailand in 1996 for $125,000. Neither transaction resulted in any
significant profit margins.
The Company relies upon independent contractors to perform much of its
software development, systems integration and installations. Although David A.
Packer, the President of the Company who was hired in 1997 from TRW, and
Bill Black, an employee of TMI who was hired from EDS in 1995, both have
extensive systems integration, systems development and installation experience,
the Company and TMI have no other employees to perform the tasks of developing
and installing the CTI System and the TMI System. Both the Company and TMI have
contracted with TRW since late 1995 for specific technical support. TRW is
presently owed past due amounts for services. TRW by September 1997 completed
its software development required to enable TMI to conduct clinical trials.
The Company and TMI have slowed down additional development work with TRW
until this past due amount is substantially reduced from new Company financing.
TRW is being paid currently for its maintenance and data analysis work being
performed for TMI's clinical trials.
The report from the Company's independent accountants includes an
explanatory paragraph which describes substantial doubt concerning the ability
of the Company to continue as a going concern, without substantial additional
contributions to capital. The Company may incur losses for the foreseeable
future due to the significant costs associated with manufacturing, marketing and
distributing the CTI System and the TMI System, and due to continual research
and development activities which will be necessary to develop applications for
the Company's thermal imaging technology.
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.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has had no significant revenues from operations from
inception. The Company's cash requirements consist of its salaries, office
expenditures, legal and accounting fees to comply with securities registration
needs, legal fees for contracting, TMI's operational budget requirements,
including TRW's technical support of TMI and the Company, and the costs of
maintaining TMI's clinical trials. Available funds are insufficient to pay
Company and TMI operating costs, incurred TRW development costs and incurred
legal fees. The Company intends to raise additional equity funds from the sale
of the Common Stock through private offerings, either pursuant to the Investment
Agreement or from new investors introduced to the Company, to meet its cash
requirements through 1999. The Company has no assured source of liquidity from
the sale of assets or from financing until after the Registration Statement
becomes effective to which this Prospectus relates, and the Company becomes a
fully reporting company pursuant to the Exchange Act, a condition to raising
funds under the Investment Agreement. Even then, any financing which might
become available under the Investment Agreement is potentially limited as to
timing and amount. See below.
The Company will require an estimated $6,000,000 over the next 12
months for its research and development programs, preclinical and clinical
testing, development of its sales and distribution efforts, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs; results of 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; developments and changes in the Company's existing
research, licensing and other relationships; and the terms of any new
collaborative, licensing and other arrangements that the Company may establish.
During the three years prior to the date of this Prospectus, 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 $4,175,000 to the capital of the Company in exchange for shares of
the Common Stock. The Company believes that its current assets and potential
additional contributions from affiliates of the Company and certain accredited
investors, as needed, will be sufficient to meet the Company's short-term
operating expenses and capital expenditures. At the present time, however, there
is no commitment from anyone 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. Moreover, the Company's agreement with Ambient
Capital Group, Inc. does not guarantee that Ambient will be able to raise
additional funding. Consequently, the bulk of the needed capital over the next
12 months must come from one or more substantial new investors.
In order to meet its expected capital needs for the next 12 months, the
Company executed the Investment Agreement with Bristol Asset Management, L.L.C.
("Bristol") on January 20, 1998. Subject to certain conditions, the Company may
require Bristol to purchase up to $7,000,000 worth of the Common Stock during
the remaining portion of the three year term of the Investment Agreement. The
obligations of Bristol to purchase such shares are subject to a number of
conditions precedent which first must be satisfied. Such conditions precedent
include, but are not limited to, the unrestrained trading of the Common Stock on
the principal exchange on which the shares are traded (as of the date of this
Prospectus, such exchange is the OTC Bulletin Board operated by the NASD), and
the registration for resale of the Newly Issued Shares of the Common Stock under
the Securities Act. In addition, the Common Stock must be registered pursuant to
the Exchange Act. If the Company fails to maintain its status under the Exchange
Act, or the Common Stock is delisted from the principal exchange on which the
Common Stock is traded, Bristol shall have no obligation to contribute any
additional funds to the Company, or if no such funds have been contributed, to
contribute any funds to the Company. In addition, if Bristol were to become the
owner of at least 4.9 percent of the issued and outstanding shares of the Common
Stock, Bristol may elect not to purchase any further shares of the Common Stock,
even though the full $7,000,000 worth of the Common Stock has not been
purchased. In computing the 4.9 percent limitation, all shares of the Common
Stock owned or deemed to be owned pursuant to Section 13(d) of the Exchange Act
and the rules promulgated thereunder, shall count towards the ownership
limitation. As a result of these conditions, it is possible that Bristol's total
investment under the Investment Agreement, if any, could be limited to an
aggregate cash contribution well below the $7,000,000 commitment. For example,
using June 1, 1998 as a constant Put Notice date, if Bristol actually purchases
shares of the Common Stock, such shares when coupled with the shares deemed to
be owned under Section 13(d) of the Exchange Act and the rules promulgated
thereunder (E.G., the Warrant Shares discussed below), Bristol would only be
able to purchase approximately $1,377,465 worth of the Common Stock before
30
<PAGE>
the 4.9 percent limitation would be reached. The Company has no access to the
financial statements of Bristol, a privately owned company, and relies upon
Ambient Capital Group, Inc., its financial adviser, to attest for Bristol's
ability to perform. See "Principal Stockholders - Bristol Asset Management,
L.L.C. Investment Agreement."
On each closing date with respect to the purchase of shares of the
Common Stock by Bristol, the Company shall also deliver to Bristol Compensation
Warrants to purchase shares of the Common Stock (the "Warrant Shares"), which
Compensation Warrants shall expire on the fifth anniversary of the date of
issuance thereof. The Compensation Warrants issuable at any such closing shall
entitle the holder thereof to purchase a number of Warrant Shares equal to 12
percent of the number of shares of the Common Stock purchased at the closing in
question at an initial exercise price, subject to the provisions of the
Investment Agreement, equal to 100 percent of the average closing sales price
for the Common Stock on the principal exchange on which the shares are traded
and as noted by Bloomberg (or other appropriate published source) during the
Look Back Period (defined below) in question.
Subject to certain limitations and conditions precedent, the Company
may require Bristol to purchase shares of the Common Stock on a monthly basis.
Within ten days after the end of each calendar month, the Company may require
Bristol to purchase a maximum amount of shares of the Common Stock not to exceed
the lesser of (i) $7,000,000 less all amounts previously paid by Bristol, and
(ii) the product of (x) the number of shares of the Common Stock traded on the
principal exchange on which the shares of the Common Stock traded for the
preceding calendar month, multiplied by (y) the average of the closing bid
prices noted in Bloomberg (or other appropriate published source) for the Common
Stock during the prior calendar month, multiplied by (z) 14 percent. For
example, if a total of 1,000,000 shares of the Common Stock traded during
January of a particular year and the average of the closing bid prices was
$2.00, on or before February 10 the Company could request a draw down not to
exceed 14 percent of the $2,000,000 or $280,000, so long as such amount was
available under the Investment Agreement. Payment of the draw down amount must
be made by Bristol on the fifth business day following the proper delivery of a
Put Notice.
Simultaneously with the receipt of the funds from Bristol in the amount
of the draw down, the Company shall issue and sell to Bristol the number of
shares of the Common Stock equal to the draw down divided by 74 percent of the
lowest sales price for the Common Stock on the principal exchange on which the
shares are traded and as noted in Bloomberg (or other appropriate published
source) (the "Lowest Sale Price" during the 10 trading days prior to the Put
Notice Date (the "Look Back Period"). For example, if the Lowest Sale Price for
the Look Back Period was $2.00 and the draw down was $500,000, the number of
shares of the Common Stock to be issued would be 337,837 shares. Notwithstanding
the foregoing, in the event that the Lowest Sale Price during the 20 trading
days after a particular closing is less than 95 percent of the Lowest Sale Price
applicable to such closing, then the Company shall promptly issue to Bristol an
additional number of shares of the Common Stock with respect to such closing
such that the number of shares of the Common Stock issued to Bristol at such
closing plus such additional number of shares are equal to the funds drawn down
at such Closing divided by 74 percent of the Lowest Sale Price during such 20
trading day period. Bristol shall also be issued additional Compensation
Warrants equal to 12 percent of the number of additional shares so issued and
the exercise price of such additional Compensation Warrants and the Compensation
Warrants issued at such closing shall be adjusted to 100 percent of the Lowest
Sale Price during such 20 trading day period.
The registration of the Newly Issued Shares and the shares underlying
the Compensation Warrants only applies to the resale of such shares by Bristol
Asset Management, L.L.C.
Other than Bristol, there are no other known sources of liquidity.
Moreover, the Company at the present time does not have any party working on any
other source of capital. The Company's cash requirements may vary materially
from those now forecasted due to potential future acquisitions, the progress of
research and development programs, results of clinical testing, relationships
with strategic partners, if any, competitive and technological advances,
decisions of the FDA and foreign regulatory processes and other factors. There
can be no assurance, however, 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 TMI, or to license third parties the rights to
commercialize products or technologies that the Company would otherwise seek to
develop on its own.
31
<PAGE>
As noted above, Bristol will obtain essentially a 26 percent discount
on the purchase price of shares of the Common Stock pursuant to the Investment
Agreement. In addition, Bristol has the right to have additional shares and
additional Compensation Warrants issued to it if there has been a certain
decrease in the market price of the shares. The intention behind these two
provisions is to protect Bristol's relative stock position vis a vis other
stockholders who may acquire shares of the Common Stock at a time when the
market price per share has declined. Management does not believe that these two
provisions should adversely affect the market price for the shares of the Common
Stock, inasmuch as the various purchases of shares of the Common Stock by
affiliates of the Company over the past couple of years have involved discounts
of up to 50 percent in some instances without any seeming negative effect.
Likewise, management does not believe that the provisions of the Investment
Agreement should adversely affect the ability of the Company to raise capital in
the future. No other stockholder of the Company has any preemptive right to
acquire any additional shares of the Common Stock upon purchases by Bristol.
Management does not believe that Bristol's warrants to acquire additional shares
that accompany each purchase will have any long-term adverse effect on the
decision by any other investor to invest in the Company. However, the fact that
there will be a large number of shares of the Common Stock registered for resale
by means of this Prospectus might adversely affect the ability of the Company to
raise capital in the future due to the fact that so many stockholders could sell
their shares at any time and thereby drive down the market value of the shares
of the Common Stock, at a time when price stability would be an important issue
for any new investor.
If the Company does not commence generating adequate revenues, or if it
does not attract new capital sufficient to meet its operating needs, the Company
will not be able maintain the existing clinical trials to obtain FDA approval
for the TMI System or to obtain insurance payment codes for the CTI System. In
such event, the Company would have difficulty selling its products in the United
States. The Company would then be forced to focus on sales to foreign markets
that do not require FDA approval.
TMI DEPENDENCE ON THE COMPANY. TMI is an 80 percent owned subsidiary of
the Company that has developed the TMI System exclusively using contributions of
capital from the Company. The efficacy of the TMI System is currently subject to
confirmation in FDA clinical trials as a tool complementary to mammography. TMI
will have no source of revenue, other than contributions to its capital made by
the Company, until the clinical trials are successfully concluded and TMI or the
Company then is able to market for sale or use the TMI System. TMI 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 TMI
develops its business and then is capable of financing its operations.
Management believes that the Investment Agreement should provide the Company
with a sufficient amount of capital to fund the completion of FDA clinical
trials on the TMI System after the Registration Statement becomes effective to
which this Prospectus relates, a prerequisite to the obligations thereunder to
make contributions to the Company. However, as discussed above, there is no
certainty that any funds will become available as a result of the Investment
Agreement. As of the date of this Prospectus, the Company does not know of any
other source for long-term liquidity, and there are no agreements with any party
to invest any sums in the Company's securities. All risk factors set forth in
this Prospectus for the Company also apply to the risk of the Company's
investment in TMI.
CLINICAL TRIALS. Although the Company expects to raise funds through
the Investment Agreement needed for paying its newly incurred expenses and for
paying its past due obligations to TRW and its law firm, the Company may delay
the clinical trial schedule to defer costs if necessary. The FDA clinical trials
requirements for TMI to receive its PMA approval requires four separate medical
facilities to conduct examinations, and produce clinical statistical data, from
use of the TMI System. Those clinical trials are being conducted at Providence
Hospital in Washington, D.C. (previously at Howard University Hospital in
Washington, D.C. through the end of February 1998 where the pretests were
conducted to qualify to proceed with clinical trials for a PMA), at two Los
Angeles hospitals managed by the University of Southern California Medical
School, and at Mt. Sinai Hospital located in Miami. The rate of conducting
examinations determines the monthly cash flow requirements and the time for
qualifying for the PMA. TMI also incurs costs for FDA legal counsel and for
QBRI, a consulting firm recognized by the FDA for overseeing clinical trial data
collection and adherence to FDA requirements. Management estimates the cost
associated with completion of the scheduled TMI clinical trials by the end of
1998 will be approximately $3,000,000. Fewer funds available would require TMI
to depend more on its employees and less on independent contractors, resulting
in delays in the schedule. The Company intends to fund the cost of completing
TMI's clinical trials through funds generated by affiliate stockholder
contributions or through private sales of the Common Stock either to private
investors or through the Investment
32
<PAGE>
Agreement. If the Company were incapable of raising those funds plus funds
needed to conduct the Company's business, TMI would have to abort its FDA plans.
In 1997, most of the equity funds raised by the Company in exchange for the
Common Stock was contributed by affiliates (primarily TII) through private sales
of the Common Stock. Management believes those affiliates would continue to
contribute the funds necessary to achieve the Company's business plan, because
of the past history of such contributions, although the cash flow from such
funding has been, and probably would continue to be, slower than if a
substantial new investor would invest. However, it should be clearly understood
that as of the date of this Prospectus there is no firm understanding with any
party to contribute any further amounts to the capital of the Company.
To complete TMI's clinical trials, pay all operating expenses of the
Company and TMI, and pay all past due payables, the Company has budgeted
$6,000,000, of which approximately $1,500,000 is owed to TRW and the Attorneys.
The Company expects to achieve the liquidity necessary to satisfy this budget
through private sales of the Common Stock to Bristol Asset Management, L.L.C.
pursuant to the Investment Agreement or to other investors. The Company
understands that there are uncertainties in achieving performance under the
Investment Agreement, including the fact that the Company has no financial
information to verify the ability of Bristol Asset Management, L.L.C., to the
perform under the Investment Agreement. See "Principal Stockholders - Bristol
Asset Management, L.L.C. - Investment Agreement." Pending any time delays in
achieving liquidity pursuant to those agreements, the Company expects affiliate
stockholders to continue to support the Company either through loans or
contributions to capital in exchange for the Common Stock that would be
restricted securities.
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 TMI for the completion of the
ongoing FDA Clinical Trials. The Company anticipates funds from the Investment
Agreement to satisfy that budget requirement. After the Company is successful in
arranging new capital financing to fund completion of TMI clinical trials as
discussed above, the Company intends to use any excess funds, and any additional
funds raised through separate financings, in the further development of the CTI
System. When funding for the Company is available from investors, the Company
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 confidence 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.
MARKETING. The Company cannot assure investors that expenditures for
clinical trials will result in confirming results or an FDA approval, nor can
the Company be sure that any FDA approval or successful clinical trial will
result in a profitable business activity. In order to be successful, the TMI
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. Management has already collaborated with physicians working
on the TMI System clinical trial program to submit an abstract report to the
Radiological Society of North America for presentation at their December 1998
conference in Chicago. If the abstract is selected by the society, a detailed
research paper will be presented as part of the conference and published in the
proceedings. As more research data becomes available, the Company hopes to team
with research physicians on similar projects in the future.
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. Management estimates that an effective
marketing plan for the Systems during the next 12 months would cost at least
$228,000, a line item included in the $6,005,986 budget for 1998. 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 TMI System will provide
sufficient funds to initiate the campaign. Based upon the current pace of
clinical trials, the 600 qualified patient examinations required by the FDA
should be completed by the end of 1998 for consideration for the FDA to grant
the PMA.
33
<PAGE>
EQUIPMENT FINANCING. The Company expects to commence production and
sales for the CTI System when capital or debt financing is available and the Use
Agreements are in place. Equipment financing will be necessary for the Company
or TMI to market the Systems to enable manufacturing, production, and extensive
marketing. Foreign sales of the CTI System may be likely with adequate marketing
expenditures, but substantial U.S. sales are only likely to follow an FDA
program for approval. A the present time, management doe not expect to seek FDA
approval for the CTI System. However, TMI is actively pursuing FDA approval (the
"PMA") for the TMI System. The Company contemplates revenues from the CTI System
in the U.S. to be generated pursuant to Use Agreements, placing the CTI System
in a hospital or medical care facility under an agreement requiring the user to
compensate the Company based upon the time used. The Company contemplates
systems integration and sales agreements for overseas production and sales. The
Company expects to obtain equipment financing for the Company and TMI, secured
by the sales or Use Agreements and the inventory produced. Assuming the PMA is
granted after the TMI clinical trials are completed, TMI anticipates funding to
be available from capital and debt financing to commence production and sales of
the TMI System. The Company has entered into discussions with equipment
financing companies that have indicated that the Systems can be financed in this
manner.
RECENT STOCK SALES. Pending the effective date of this Prospectus, when
the Company believes it will have sources of liquidity either through execution
of Put Notices pursuant to the Investment Agreement or through other sales of
the Common Stock to raise the capital necessary to provide the liquidity for
operations, the Company has relied upon affiliates to contribute to the Company
the cash necessary to maintain operations. This has resulted in the issuance of
additional shares of the Common Stock, which has further diluted the interests
of the stockholders by increasing the number of outstanding shares. From July 1,
1997 through March 31, 1998, the Company has received $1,952,600 in capital
contributions from TII, an affiliate of Mr. Johnston, in exchange for 5,716,049
shares of the Common Stock. In March 1998, the Company issued 2,246,275 shares
of the Common Stock to MFG for an aggregate contribution of $539,106. In
addition, Management accepted two separate loans from MFG in 1998 and granted
rights to MFG to convert the debt into shares of the Common Stock at maturity.
See "Certain Transactions - Promissory Note dated April 15, 1998;" "Certain
Transactions - Promissory Note dated September 11, 1998."
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.
CHANGE OF ACCOUNTANTS
On May 13, 1997, King, Griffin & Adamson P.C. ("King Griffin"),
resigned as the independent accountants of the Company. King Griffin has not
issued an opinion with respect to of any of the Company's financial statements
for any of the preceding two years. The Company then discussed the audit needs
with other auditors and engaged Ham, Langston & Brezina, LLP on May 20, 1997.
Prior to the engagement of King Griffin, Randy Simpson, certified public
accountant, audited the financial statements of the Company for the year ended
June 30, 1996. The change of principal auditor for the Company's financial
statements for the years ended June 30, 1996 and 1997 was subsequently ratified
by the Company's Board of Directors on September 18, 1997.
King Griffin had been engaged on March 13, 1997, and performed certain
limited procedures in connection with the start of their audit of the financial
statements of the Company, but it did not reach any conclusions concerning those
financial statements. No disagreements existed between the Company and King
Griffin from the date of King Griffin's engagement through the termination date
of their engagement.
During Randy Simpson's tenure as principal independent accountant to
the Company, there were no disagreements between the Company and Mr. Simpson
whether resolved or not resolved, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which,
if not resolved, would have
34
<PAGE>
caused him to make reference to the subject matter of the disagreement in
connection with his report. Furthermore, Mr. Simpson's report for the past
fiscal year did not contain any adverse opinion or disclaimer of opinion,
excepting a "going concern" qualification and an emphasis paragraph on the
realizability of certain assets, and was not qualified or modified as to audit
scope or accounting principles.
Management effected the change in accountants in order to provide the
Company with increased service potential in anticipation of a public
registration of the Common Stock. While no longer the principal independent
accountant, Mr. Simpson has been retained by the Company to provide accounting
assistance in connection with the preparation of this Prospectus.
Also, during the Company's two most recent fiscal years, and since
then, Mr. Simpson has not advised the Company that any of the following exist or
are applicable:
1. That the internal controls necessary for the Company to
develop reliable financial statements do not exist, that
information has come to his attention that has lead him to no
longer be able to rely on management's representation, or that
has made him unwilling to be associated with the financial
statements prepared by management;
2. That the Company needs to expand significantly the scope of
its audit, or that information has come to his attention that
if further investigation may materially impact the fairness or
reliability of a previously issued audit report or the
underlying financial statements or any other financial
presentation, or caused him to be unwilling to rely on
management's representations or be associated with the
Company's financial statements for the foregoing reasons or
any other reason; or
3. That he has advised the Company that information has come to
his attention that he has concluded materially impacts the
fairness or reliability of either a previously issued audit
report or the underlying financial statements for the
foregoing reasons or any other reason, except as disclosed in
the Company's financial statements.
Prior to the engagement of Ham, Langston & Brezina, L.L.P. as
independent auditors, the Company did not consult Ham, Langston & Brezina,
L.L.P. regarding the application of accounting principles to a specific
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements or any other financial
presentation whatsoever.
BUSINESS
GENERAL
Computerized Thermal Imaging, Inc. (the "Company") was incorporated on
June 10, 1987 in the State of Nevada as Business Helpers, Inc. 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 Board of Directors. 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. In 1988, the Company, through the issuance of shares of the Common
Stock, acquired all of the assets of Thermal Imaging, Inc., an Oregon
corporation ("TII"), which assets consisted primarily of certain thermal imaging
intellectual property, proprietary ideas, or technology.
The Company is a development stage company that is a medical imaging
systems integrator and proprietary protocol developer producing a computerized
clinical thermal imaging diagnostic system (the "CTI System") that has been
trademarked under the name COMPUTERIZED THERMAL IMAGING. The Company has not
filed any applications for patents covering specific aspects of the CTI System.
Instead, the Company owns computer software which is not
35
<PAGE>
generally subject to the protection afforded by patents. However, the software
is proprietary and subject to protection as a "trade secret." Since 1995, the
Company has spent approximately $3,000,000 on research, software development,
and further development of the Systems.
The Company plans to place the CTI System in various health care
providers such as hospitals, HMOs and free standing 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. Once the CTI System is inserted
into the marketplace, the Company does not expect to rely on any one or a few
major customers. Consequently, it is anticipated that the CTI System will be
attractive to a widely dispersed number of customers.
PRODUCTS
The Company currently has five completed CTI Systems in use, four of
which have been supplied to TMI and have been configured for breast cancer
detection examinations (the "TMI System"). TMI has further developed the
software and hardware for the TMI System, including the engineering design of a
positioning table that protects the privacy of the patient and avoids invasive
compression examinations. TMI is currently seeking patent protection for the
positioning table, as well as, for the algorithm process involved with the TMI
System.
Three units are currently being used by TMI in clinical trials being
conducted at Norris Comprehensive Cancer Center, Los Angeles, Los Angeles County
Hospital, and Providence Hospital, Washington, D.C. Another CTI System was sold
in May 1996 to Orchard Hospital in Bangkok, Thailand, where the 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 fifth CTI System was
placed by the Company 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.
This fifth CTI System has been returned to the Company offices in Layton, Utah
for calibration, and then on to Mt. Sinai Hospital in Miami for clinical trials
in conjunction with TMI's attempt to attain a PMA from the FDA for the TMI
System. The Company intends to return this fifth 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, provided the Company's
anticipated funding from the Investment Agreement occurs.
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.
36
<PAGE>
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. 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 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.
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.
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 be precisely
temperature and humidity controlled 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.
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.
TMI SYSTEM. The Company owns 80 percent of the outstanding capital
stock of Thermal Medical Imaging, Inc., a Nevada corporation (herein sometimes
referred to as "TMI"). TMI 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 "TMI
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 TMI
System also employs a proprietary
37
<PAGE>
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 TMI 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. Once it has
finished its clinical trials, TMI expects to file for PMA in the fall of 1998,
as long as the Company can obtain the necessary financing for the operations of
TMI.
The TMI System performs three independent but interrelated functions;
data acquisition, data analysis and clinical evaluation. The TMI 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.
The TMI System is currently in clinical testing at Providence Hospital
in Washington, D.C., in two hospitals managed by the University of Southern
California, Norris Cancer Center in Los Angeles and Los Angeles County Hospital,
and at Mt. Sinai Hospital located in Miami.
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 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
revenues 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.
TMI SYSTEM. Mammography is an X-ray technology most widely used in the
Untied 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
TMI are designed to establish the TMI System as complementary to mammography.
The first
38
<PAGE>
PMA uses will be to employ the TMI System to examine any patient with
"suspicious tissue" indications resulting from a mammography image.
Potential competition for the TMI 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 mammography is its use of laser technology to
produce the image, which does not use harmful radiation. Management, however,
believes the TMI 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 TMI 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 TMI 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 TMI, 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 TMI System increased
dramatically, some parts may not be immediately available.
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 base at hand, the
Company can begin offering computerized disorder pattern recognition assistance
based upon a multi-dimensional image of patients.
MARKETING. 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
39
<PAGE>
Common Stock of the Company, as elected by TSET. The term of 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.
GOVERNMENT REGULATION
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 and TMI 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 TMI 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 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.
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. However, the average review time in 1997 for
new PMA submittals was 207 days. Furthermore, 21 percent of the PMAs were
reviewed in 180 days or less.
After TMI 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 TMI 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. TMI has successfully completed this step
and has an FDA approved trial protocol, requiring an initial data collection
phase where thermal images collected by the TMI System from approximately 600
qualified patients were collected. The next step was to set-up the trial process
with the appropriate trial oversight. TMI has engaged QBRI, a consulting firm
recognized
40
<PAGE>
by the FDA for overseeing clinical trial data collection and adherence to FDA
requirements. TMI 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. TMI is currently in this
phase of the approval process with clinical trial data collection underway at
USC/Norris Comprehensive Cancer Center, Los Angeles County Hospital, both in Los
Angeles, at Providence Hospital, Washington, D.C., and Mt. Sinai Hospital in
Miami. The clinical trials permit the medical facilities to use the TMI System,
to collect the required patient information and examination results, to compare
the TMI 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 1998. Following the completion of the
trial data collection phase, TMI 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 TMI'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.
THIRD PARTY REIMBURSEMENT
Although use of the CTI System and the TMI 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 TMI System is used seeking reimbursement, if not
covered by other general payment codes.
Neither the Company nor TMI currently have FDA approval for any imaging
procedure. TMI clinical trials are in process for use of the TMI System for
breast cancer detection. The Company has initiated no process to obtain separate
FDA approval to proceed with clinical trials of the CTI System. Therefore, the
Company's efforts to market the CTI System in Asia (the PRC and Thailand) may
result in revenues quicker, if further contracts are entered to sell the CTI
System there, than with the Company's plan to place the CTI System in U.S.
hospitals, clinics, and HMO facilities subject to the Use Agreements.
PATENTS AND INTELLECTUAL PROPERTY
On June 8, 1996, the Company entered into a License Agreement with TMI
which granted an exclusive license to TMI 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 TMI or the
Company. As a result of the Stock Transfer Agreement executed on January 28,
1997 by the Company and TMI, the Company gained control of 80 percent of the
common stock of TMI. 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 TMI, 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 TMI, 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 TMI were to be unable
to timely pay creditors, a judgment or lien or bankruptcy against the Company or
TMI could result in a challenge to the executory
41
<PAGE>
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 TMI System by TMI, that expression of intent
set forth in the Stock Transfer Agreement may not be recognized, if challenged
by TMI or a third party acquiring either TMI or some of the Company's
technology, as a binding license agreement. The result could be that TMI, 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
TMI.
The Company executed a Promissory Note dated May 1, 1998 consolidating
the balance of legal fees and expenses owed to the Attorneys through April 21,
1998 of $397,745.56 (the "Promissory Note"). The terms of the Promissory Note
provided for interest to accrue on the unpaid principal at a rate of one percent
per month. The Company is obligated to make monthly installment payments of
$50,000, including accrued interest, until all principal and interest are paid
in full. The Promissory Note incorporates the terms of two pledge agreements
executed by the Company and TMI which provide security for the amounts due under
the Promissory Note and on future outstanding accounts with the Attorneys (the
"Pledge Agreements"). The security interests granted pursuant to the Promissory
Note and Pledge Agreements cover the Company's common stock holdings in TMI and
the intellectual property of both the Company and TMI. See "Business - Past Due
Accounts." If an event of default were to occur under the Promissory Note or the
Pledge Agreements, the Company's interest in TMI, its 80 percent subsidiary
(including the TMI System), and/or the intellectual property relating to the CTI
System could be sold to satisfy the outstanding debt. As of October 8, 1998, the
total amount due on the Promissory Note and for subsequent fees was
approximately $273,704. As of the date of this Prospectus, the Company has made
all payments due under the Promissory Note, and management expects that the
Company will continue to do so.
Neither the Company nor TMI currently holds registered United States or
foreign patents. TMI 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, TMI 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
TMI System. TMI 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
or TMI System may warrant patent protection in the future. Substantial
engineering costs and legal fees will be incurred in order to research, develop
and file additional patent applications. The Company and TMI intend to explore
this possibility when funds become available to support such expenditures.
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. 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.
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
42
<PAGE>
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.
EMPLOYEES
The Company and TMI currently employ eight persons on a full time
basis. The Company has in the past, and will continue in the future, to employ
independent contractors, and make extensive use of its outside directors and
other consultants. None of the employees of the Company and its subsidiaries and
joint operations are represented by a labor organization. The Company believes
its relationships with all of these employees are satisfactory.
FACILITIES
The Company leases approximately 1,000 square feet of office space in
Lake Oswego, Oregon for an annual rental of approximately $24,000, approximately
2,065 square feet of office space in Bloomfield Hills, Michigan for an annual
rental of approximately $30,000, and approximately 2,000 square feet of office
space in Layton, Utah for an annual rental of approximately $34,800. The Company
believes that its facilities are adequate for its current operations.
LITIGATION
SELECT CAPITAL ADVISORS, INC. DEBENTURES AND WARRANTS. On December 9,
1997, the Company filed suit against Select Capital Advisors, Inc. ("Select"),
Ronald G. Williams ("Williams"), and various other parties in the United States
District Court for the Southern District of Florida for damages and recission
with respect to the fraudulent sale of 12% Series A Senior Subordinated
Convertible Debentures issued by the Company. In March 1997, the Company was
introduced to Select and Williams for the purpose of raising capital and
establishing a line of credit. Select, Williams and several of the other
defendants represented that they had the experience, reputation and resources to
raise the needed money. The Company entered into an agreement with Select to
raise the needed money in stages through capital financing, to immediately loan
or guarantee a loan of $2,000,000 for operating capital, and to perform certain
investment banking services to raise at least $6,000,000. In addition, the
Company paid an initial fee of $10,000 to Select.
In April 1997, Select convinced the Company that Select could raise
$1,500,000 through the offering of the Company's 12% Series A Senior
Subordinated Convertible Debentures to foreign investors pursuant to Regulation
S of the Securities Act. As a result, investors purchased debentures which
provided for a 20 percent discount off an aggregate face value of $662,500, an
interest rate of 12 percent per annum, and rights to convert the principal and
interest into shares of the Common Stock on three different installment dates at
a price determined to be the lower of 90 percent of the market value of Company
free trading shares of the Common Stock at the date of subscription or 90
percent of the five day average price prior to the date of conversion. Upon
making an election to convert the amounts due under the debentures into Common
Stock, the investors demanded that free trading shares rather than "restricted"
shares of the Common Stock be issued, claiming that Select had represented to
the investors that they would be issued registered securities. Upon conducting
an investigation into the matter, the Company discovered that numerous false and
misleading statements were made by Select, Williams, and possibly other
defendants in connection with the sale of the debentures; that various documents
were changed by Select, Williams, and the other defendants without the knowledge
of the Company; that the agreement was breached by Select; that the defendants
engaged in market manipulation; that material omissions were made by Williams
and Select both to the Company and to the investors. Some shares of the Common
Stock were issued in conversion and delivered before the Company knew of the
misrepresentations.
During 1998, the Company reached settlements with all of the debenture
holders. Despite reaching settlements with the investors, the Company plans to
continue to seek damages of approximately $200,000,000 against Select and
Williams.
43
<PAGE>
CLAIMS INVOLVING STOCKHOLDERS. The Company initiated litigation in 1998
against a former director to recover shares of the Common Stock, or resulting
damages, that had been issued to the director in consideration of an agreement
and representation to deliver a commitment from SPRINT, or a similar
telecommunications company, to contribute a substantial amount to the Company
for immediate delivery of planned China production of CTI Systems. The shares
were issued, but the stockholder failed to perform the promised consideration.
During the year ended June 30, 1995, the Company issued 1,000,000 shares of the
Common Stock to Richard Thompson, a former director of the Company, based upon
the director's representation that he would arrange large scale financing by
certain proposed contributors. During the year ended June 30, 1997, actions were
taken to cancel the Common Stock, because the Company contended that the
issuance was conditioned upon Mr. Thompson's performance, which has never
materialized. A lender to Mr. Thompson asserted a pledge of 500,000 shares of
the Common Stock as collateral for a loan and, as such, was a protected
purchaser under the Uniform Commercial Code. See "Description of Securities -
Canceled Shares." An Escrow Agreement was reached between the Company and that
permitted the lender to liquidate the number of shares required to satisfy the
outstanding indebtedness and recoverable costs secured by the shares. The
remaining 48,000 shares have been delivered to the transfer agent of the Company
pursuant to the Escrow Agreement, and it is the transfer agent's intention to
interplead those shares to confirm the Company's right to cancel the shares and
recover damages. The certificate representing the 500,000 shares of the Common
Stock secured by a pledge was re-instated for purposes of the agreement and the
underlying shares are included as issued and outstanding shares in the
accompanying Consolidated Financial Statements at June 30, 1997 and 1998.
PAST DUE ACCOUNTS. Over the last several months, the Company has had
discussions with its primary systems development vendor, TRW, Inc., an Ohio
corporation ("TRW"), regarding past due accounts. TRW has and continues to
perform software development and strategic integration and management services
regarding the testing, development and deployment of the Systems. The Company
became delinquent in the payment of costs and fees under contracts with TRW (see
Note 6 to the Consolidated Financial Statements that are included elsewhere in
this Prospectus) and, accordingly, TRW, although not having filed formal legal
actions, threatened the Company that it would withhold delivery of source codes
of developed software, if the past due amounts are not paid. The Company and TRW
verbally agreed that the Company would make payments at the rate of three times
TRW's weekly on-going costs with respect to work performed for the benefit of
the Company, plus a fee equal to 15 percent of costs, until the past due
accounts were liquidated. As of the date of this Prospectus, the Company has
made all payments agreed to be made to TRW, and management expects that the
Company will continue to do so. The payable to TRW at one time had been as high
as $897,762, but as of July 6, 1998 the outstanding account balance was
approximately $225,000. If the Company defaults in its agreed payment schedule,
and TRW carries through with its threat to withhold the delivery of the source
codes or other key deliverables, the TMI operations would be shut down, or
severely restricted from analyzing clinical data.
As of April 21, 1998, the Company owed approximately $397,745.56 in
legal fees to the law firm of Looper, Reed, Mark & McGraw Incorporated (the
"Attorneys"). The Company executed a Promissory Note dated May 1, 1998
consolidating the balance of fees owed to the Attorneys through April 21, 1998
(the " Promissory Note"). The terms of the Promissory Note provide for interest
to accrue on the unpaid principal, including subsequently accrued legal fees, at
a rate of one percent per month. The Company is obligated to make monthly
installment payments of $50,000, including accrued interest, which may increase
in the event the Company obtains a certain level of financing, until all
principal and interest are paid in full. The Promissory Note incorporates the
terms of two pledge agreements executed by the Company and TMI which provide
security for the amounts due under the Promissory Note and on future outstanding
accounts with the Attorneys (the "Pledge Agreements"). The security interests
granted cover the Company's common stock holdings in TMI and the intellectual
property of both the Company and TMI. If an event of default were to occur under
the Promissory Note or the Pledge Agreements, the Company's interest in TMI, its
80 percent subsidiary (including the TMI System), and/or the intellectual
property relating to the CTI System could be sold to satisfy the outstanding
debt. As of October 8, 1998, the total principal due on the Promissory Note and
for subsequent fees is $273,704. As of the date of this Prospectus, the Company
has made all payments due under the Promissory Note, and management expects that
the Company will continue to do so.
In addition to the above, the Company, in the normal course of its
business, is subject to claims and litigation in the areas of product and
general liability. The Company believes that TMI has adequate insurance coverage
for most claims that are incurred in the normal course of its business,
including liability coverage for commercial liability, premises, general
liability, crime, umbrella, and workers compensation, and directors and officers
coverage. The Company self-insures its current operations and carries no
separate liability insurance policies, but intends to obtain
44
<PAGE>
coverage as its operations permit production and sales. In such cases, the
effect on the Company's financial statements is generally limited to the amount
of its insurance deductibles. Management does not believe at this time that any
such claims have a material impact on the Company's financial position,
operations and liquidity.
45
<PAGE>
MANAGEMENT
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 Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
David B. Johnston (1)................... 55 Chairman of the Board and Chief August 1987
Executive Officer
David A. Packer......................... 47 President and Treasurer N/A
Richard V. Secord....................... 63 Chief Operating Officer, Secretary, February 1996
and Director
Brent M. Pratley, M.D. (1) (2).......... 61 Director June 1994
Milton R. Geilmann (1) (2).............. 61 Director January 1998
Harry C. Aderholt (2)................... 78 Director January 1998
</TABLE>
- ----------------------
(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 not identified or reached an
agreement or understanding with any other individuals to serve in such
management positions, but does not anticipate any difficulty in employing
qualified personnel.
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.
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 TMI 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 TMI, 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 TMI. 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
46
<PAGE>
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.
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.
EXECUTIVE COMPENSATION
During the fiscal year ended June 30, 1998, General Secord, Mr.
Packer and Kenneth M. Dodd, former President and Chief Executive Officer of
TMI, were each paid salaries and bonuses exceeding $100,000. Mr. Johnston,
the Chairman of the Board and Chief Executive Officer, was not paid a cash
salary but was instead deemed compensated in the form of periodic issuances
of restricted shares of the Common Stock to Thermal Imaging, Inc. (herein
referred to as "TII"), an affiliate of Mr. Johnston. In certain instances
during fiscal year 1997, and prior years, funds raised from investors in the
Company were delivered to TII and deposited into TII's bank accounts. In
those cases where reliable evidence was 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 restricted shares of the Common Stock from transfers of funds
collected by TII on behalf of the Company, all unaccounted for funds, or
excess restricted shares of the Common Stock issued to TII, have been
47
<PAGE>
deemed compensation to Mr. Johnston. See "Management - Certain Transactions -
Proceeds From the Sale of Securities." 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.
The total compensation and reimbursement of expenses to officers and
directors for the fiscal year ended June 30, 1998 was $580,173. In addition, Mr.
Johnston and General Secord were granted options to purchase 1,000,000 and
1,250,000 shares of the Common Stock, respectively, subject to certain vesting
requirements.
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.
48
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------- -------------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL FISCAL ALL OTHER RESTRICTED OPTIONS AND
POSITION YEAR SALARY BONUS COMPENSATION (1) COMMON STOCK WARRANTS (3)
-------- ---- ------ ----- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David B. Johnston, 1998 -0- -0- $ 9,772 -0- 1,000,000
Chairman of the Board, and 1997 -0- -0- $152,498 -0- -0-
Chief Executive Officer, and 1996 -0- -0- $474,500 -0- -0-
Treasurer (2)
Richard V. Secord, 1998 $185,705 -0- -0- -0- 1,250,000
President and 1997 $204,486 -0- -0- -0- -0-
Chief Operating Officer (4) 1996 $189,697 -0- -0- -0- -0-
Kenneth M. Dodd, 1998 $200,004 -0- -0- -0- -0-
President of TMI (5) 1997 $156,667 -0- -0- -0- -0-
1996 $ 52,000 -0- -0- -0- 500,000
David A. Packer, 1998 $184,692 -0- -0- -0- -0-
President and Treasurer (6) 1997 $ 31,657 -0- -0- -0- 500,000
</TABLE>
- ------------------------
(1) 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 All
Other Compensation for Mr. Johnston are reimbursements of travel
expenses for himself and other executives of the Company which were
paid by TII. Based on available information, General Secord's All Other
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.
(2) The valued referenced represents the fair market value of the shares of
the Common Stock, ranging from $0.28 to $1.00 per share, when issued in
the name of Thermal Imaging, Inc. ("TII"), an affiliate of Mr.
Johnston. The issuance of the referenced shares was treated as
compensation to Mr. Johnston as a result of discrepancies arising from
the funding relationship between TII and the Company. See "Management -
Certain Transactions - Proceeds From the Sale of Securities." Over the
last three fiscal years, Mr. Johnston indirectly has been issued
9,073,895 shares of the Common Stock as compensation or repayment of
expenses and cash advances to the Company, which based on the fair
market value at the time of issuance equals an aggregate of $4,177,839.
Mr. Johnston is the beneficial owner of 8,248,748 shares of the Common
Stock of the Company as of October 29, 1998 (including shares of the
Common Stock held in the names of Thermal Imaging, Inc.). The aggregate
value of all Common Stock beneficially held by Mr. Johnston, pursuant
to Section 13d-3 of the Exchange Act, as of October 29, 1998, based
upon the closing market price of the Company's unrestricted shares of
the Common Stock as of October 29, 1998, was approximately $8,743,673.
(3) None of the options granted to employees have been exercised. Of Mr.
Johnston's options on 1,000,000 shares, only 500,000 shares are vested
as of the date hereof. Of General Secord's options on 3,250,000 shares,
only 2,625,000 shares are vested as of the date hereof. Of the 500,000
option shares granted to Mr. Packer, only 166,667 shares are vested as
of the date hereof. Of Mr. Dodd's options on 500,000 shares, all
500,000 shares are vested as of the date hereof.
(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.
(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 TMI in December 1998. While employed by the Company,
Mr. Dodd has received stock in TMI totaling approximately 7.5 percent
of the outstanding TMI shares. The value of the TMI 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.
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.
49
<PAGE>
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 of 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 Prospectus, 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.
None of the shares of the Common Stock to be issued to Mr. Johnston in
connection with the exercise of the options is being registered under the
Securities Act pursuant to this Prospectus.
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 TMI. Mr. Packer does not receive any additional
compensation for the services provided to TMI.
The resale of 500,000 shares of the Common Stock to be issued to Mr.
Packer in connection with the exercise of the options is being registered under
the Securities Act pursuant to this Prospectus.
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 Prospectus, 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.
In December 1998, General Secord was appointed to serve as Chief
Executive Officer of TMI. General Secord does not receive any additional
compensation for the services provided to TMI.
The resale of 3,250,000 shares of the Common Stock to be issued to
General Secord in connection with the exercise of the options is being
registered under the Securities Act pursuant to this Prospectus.
Kenneth M. Dodd, former President of TMI, 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
50
<PAGE>
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
Prospectus, 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 TMI and
received 2,830,959 shares of the common stock of TMI (approximately 7.6 percent
of its issued and outstanding common stock).
Mr. Dodd resigned from his positions as Executive Vice President of
the Company and President, Chief Executive Officer, and Director of TMI in
March 1998 and December 1998, respectively.
The resale of 500,000 shares of the Common Stock to be issued to Mr.
Dodd in connection with the exercise of the options is being registered under
the Securities Act pursuant to this Prospectus.
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
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.
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 submittal 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
51
<PAGE>
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 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 Prospectus, no shares of the Restricted Stock
have been granted under the Plan.
52
<PAGE>
As of the date of this Prospectus, the following options were
outstanding under the Plan:
<TABLE>
<CAPTION>
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
President of TMI (3)(5)
David A. Packer, -0- N/A N/A
President and Treasurer (3)(4)
</TABLE>
- ----------------------
(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.
(3) The employee holds 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. See "Management - Stock Options and Restricted
Stock" and "Management - 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.
(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 TMI in
December 1998.
The resale of 1,250,000 shares of the Common Stock to be issued upon
the exercise of the above described options granted pursuant to the Plan and in
favor of General Secord is being registered under the Securities Act pursuant to
this Prospectus.
53
<PAGE>
The following table shows, as to the named executive officers,
information concerning individual grants of options during the fiscal year ended
June 30, 1998.
OPTION/WARRANT GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/WARRANTS
OPTIONS/WARRANTS GRANTED TO EXERCISE PRICE EXPIRATION
NAME GRANTED (2) EMPLOYEES IN FY98 PER SHARE DATE (3)
---- ----------- ----------------- --------- --------
<S> <C> <C> <C> <C>
David B. Johnston, 1,000,000 44% $0.75 9/18/02
Chairman of the Board,
Chief Executive Officer,
and Treasurer
Richard V. Secord, 1,250,000 56% $0.70 9/18/02
Chief Operating Officer (1)
Kenneth M. Dodd, -0- N/A N/A N/A
President of TMI (4)
David A. Packer, -0- N/A N/A N/A
President and Treasurer (1)
</TABLE>
- ----------------------
(1) 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.
(2) Represents options to purchase shares of the Common Stock.
(3) 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.
(4) Mr. Dodd resigned as Executive Vice President of the Company in March
1998, and as President, Chief Executive Officer, and director of TMI in
December 1998.
No warrants to purchase shares of the Common Stock have been granted to
any officer, director, or employee of the Company.
54
<PAGE>
The following table shows, as to the named executive officers,
information concerning aggregate option and warrant exercises during the fiscal
year ended June 30, 1998 and the option and warrant values as of June 30, 1998.
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, 1998 JUNE 30, 1998
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE (1)
---- ----------- -------------- -------------------------- ------------------------------
<S> <C> <C> <C> <C>
David B. Johnston, -0- -0- 500,000/500,000 $120,000/$120,000
Chairman of the Board,
Chief Executive Officer,
and Treasurer
Richard V. Secord, -0- -0- 2,625,000/625,000 $181,250/$181,250
Chief Operating Officer (2)(3)
David A. Packer, -0- -0- 166,667/333,333 $3,333/$6,667
President and Treasurer (2)
Kenneth M. Dodd, -0- -0- 500,000/0 $100,000/0
President of TMI
</TABLE>
- -----------------------
(1) The value of the unexercised in-the-money options/warrants at June 30,
1998 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, 1998 which was $0.99. 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) 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.
(3) 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."
(4) Mr. Dodd resigned as Executive Vice President of the Company in March
1998, and as President, Chief Executive Officer, and director of TMI in
December 1998.
LONG-TERM INCENTIVE PLANS
The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit or actuarial plans.
CERTAIN 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
expert opinions received by management, with respect to share valuations, and,
with respect to the consideration to the Company, 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 the Common Stock. The Company
has issued Form 1099's for all such share issuances for services rendered after
July 1, 1996.
55
<PAGE>
PROCEEDS FROM THE SALE OF SECURITIES. 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 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 included
elsewhere in this Prospectus. For example, this amount for the fiscal year
ending June 30, 1997, 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.
DOREX SETTLEMENT. 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.
PROMISSORY NOTE DATED APRIL 15, 1998. The Company has 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 ($0.25 per share) 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. As of the date of this Prospectus,
the Company has not made any payments on the MFG Note I and Manhattan Financial
Group has not taken any action to convert outstanding amounts due or collect on
such amount.
PROMISSORY NOTE DATED SEPTEMBER11, 1998. The Company has executed a
"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, 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,
56
<PAGE>
1998 ($0.59 per share) 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.
MARKETING AGREEMENT. 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 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.
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. No other officers or
directors of the Company had any direct or indirect pecuniary interest in TSET
as of the date the Marketing Agreement was executed.
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.
57
<PAGE>
The following is an analysis of transactions involving TII, PDH, Ltd. and
MFG during the three months ended September 30, 1998 and the fiscal years
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
TII PDH, LTD. MFG
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30,
1998
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 - - - - - 335,000
Non-interest bearing advances to the
Company to fund current operations.
These advances are uncollateral-
ized. - 552,548 - 44,000 - -
Interest accrued and accretion of
discount on notes payable - - - - - 163,268
---------- ---------- -------- ---------- --------- ----------
Total balances of debt and cash
advances as of September 30,
1998 - $1,745,402 - $ 267,720 - $ 852,435
---------- ---------- -------- ---------- --------- ----------
---------- ---------- -------- ---------- --------- ----------
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 2,746,275 689,106
---------- ---------- -------- ---------- --------- ----------
Total investment 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 oper-
ations. These advances are
uncollateralized. - 1,192,854 - 223,720 - -
---------- ---------- -------- ---------- --------- ----------
Total debt to party -
1998 - $1,192,854 - $ 223,720 - $ 354,167
---------- ---------- -------- ---------- --------- ----------
---------- ---------- -------- ---------- --------- ----------
Interest expense recognized
on note payable - $ - - $ - - $ 109,375
---------- ---------- -------- ---------- --------- ----------
Total interest expense to
party - 1998 - $ - - $ - - $ 109,375
---------- ---------- -------- ---------- --------- ----------
---------- ---------- -------- ---------- --------- ----------
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 $0.70 287,266 $ 152,498 400,000 $ 253,000 - $ -
Cash investment in the Company 1,960,418 980,209 - - - -
---------- ---------- -------- ---------- --------- ----------
Total investment by party -
1997 2,247,684 $1,132,707 400,000 $ 253,000 - $ -
---------- ---------- -------- ---------- --------- ----------
---------- ---------- -------- ---------- --------- ----------
</TABLE>
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of all shares of the Common Stock at October 29, 1998 for (i) each
person who owns beneficially more than five percent of the outstanding shares of
the Common Stock, (ii) each director of the Company, (iii) each named executive
officer, and (iv) all directors and officers as a group. See "Management -
Stock Options and Restricted Stock" and "- Certain Transactions."
<TABLE>
<CAPTION>
Shares Beneficially Owned
--------------------------
Name of Beneficial Owner (1) Number Percent (7)
--------------------------- ---------- ------------
<S> <C> <C>
David B. Johnston (2) . . . . . . . . . 8,248,748 16.7
Richard V. Secord (3) . . . . . . . . . 2,625,000 5.1
Brent M. Pratley, M.D.. . . . . . . . . 600 *
David A. Packer (4) . . . . . . . . . . 257,405 *
Harry C. Aderholt . . . . . . . . . . . 135,000 *
Milton R. Geilmann. . . . . . . . . . . 15,000 *
Daron Dillia (5). . . . . . . . . . . . 5,898,525 11.2
All directors and officers
as a group (seven persons) (6). . . . 11,281,753 21.6
</TABLE>
- ------------------------
* Less than one percent.
(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 500,000 shares of the Common Stock which are covered by options
are exercisable within 60 days from October 29, 1998, and 7,748,784 shares
of the Common Stock owned by Thermal Imaging, Inc., an affiliate of Mr.
Johnston.
(3) Includes 2,625,000 shares of the Common Stock which are covered by options
are exercisable within 60 days from October 29, 1998.
(4) Includes 90,739 shares of the Common Stock issued and outstanding, and
166,666 shares of the Common Stock which are covered by options exercisable
within 60 days from October 29, 1998.
(5) Includes 96,000 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 1,846,275 shares of the Common Stock
issued and outstanding, 2,000,000 shares of the Common Stock which are
covered by options exercisable within 60 days of October 29, 1998, the
right to acquire, within 60 days of October 29, 1998 approximately
1,050,000 shares of the Common Stock through the conversion of outstanding
amounts due by the Company under a corporate note, and 206,250 beneficially
held, in the name of Manhattan Financial Group, an affiliate of Ms. Dillia.
See "Plan of Distributions and Selling Stockholders."
(6) Includes an aggregate of 7,990,087 shares of the Common Stock issued and
outstanding and an aggregate of 3,791,666 shares of the Common Stock which
are covered by options exercisable within 60 days from October 29, 1998.
(7) Unless otherwise provided, the calculation of percentage ownership is based
on the total number of shares of the Common Stock outstanding as of October
29, 1998. 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 October 29, 1998 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.
MANHATTAN FINANCIAL GROUP CONSULTING AGREEMENT
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. 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
59
<PAGE>
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 Prospectus, 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.
In a related transaction, on July 9, 1997, MFG and the Company entered into
a Restricted Stock Purchase Agreement wherein the Company would issue to MFG
500,000 shares of the Common Stock in consideration for, and subject to, total
contributions of up to $150,000 to the Company in conjunction with the PR
Expense Administration Agreement between the Company and Liberty Capital Group,
Inc. As of the date of this Prospectus, MFG has funded approximately $50,000
pursuant to its obligation. The effective purchase price of the Common Stock
was set at $0.30 per share.
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 above described
Consulting Agreement is being registered under the Securities Act pursuant to
this Prospectus.
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 include negotiation of
capital financing for equipment and will include the introduction of new capital
financing sources to the Company. The term of the agreement is for 12 months,
with month-to-month extensions thereafter, until terminated upon 60 days notice
by either party. 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. These warrants are valid for a period of four years from the
date of issue. In addition, Ambient will receive success fees for raising
equity and debt capital, for advising on mergers and acquisitions, and for other
corporate finance transactions pursuant to separate engagement agreements for
each transaction to be negotiated in good faith at such time as the specific
type transaction and/or amount of capital to be raised is determined. If
Ambient terminates the engagement before the end of the initial 12 month term,
then Ambient agreed to a pro-rated cancellation of all unexercised warrants
based on the number of months that the agreement was in effect. The agreement
provides Ambient with anti-dilution protection for stock splits, stock
dividends, and similar corporate events. Moreover, the shares of the Common
Stock issued pursuant to the agreement and all shares of the Common Stock
underlying the warrants shall have standard "piggyback" registration rights at
no cost to Ambient.
The resale of 416,665 shares of the Common Stock to be issued to Ambient in
connection with the above described agreement, including any shares to be issued
upon the exercise of any warrants, is being registered under the Securities Act
pursuant to this Prospectus.
LIBERTY CAPITAL GROUP, INC. SERVICES AGREEMENT
On July 21, 1997, the Company and Liberty Capital Group, Inc. ("Liberty
Capital") executed that certain Services Agreement whereby the Company engaged
Liberty Capital to perform services associated with the development of a
comprehensive business plan, future acquisition strategies, and any other
ancillary services relating to the foregoing. The Services Agreement expanded
upon the terms of an earlier agreement, the Liberty Capital Group, Inc.
Consulting Agreement. In consideration of such services, the Company granted to
Liberty Capital options to purchase all or any portion of 300,000 shares of the
Common Stock at a purchase price equal to $0.60 per share. Options for up to
100,000 shares shall become exercisable on or after the first date, following
the effective date, that the "stock price" (defined as the low bid price for the
Common Stock over three consecutive business days) reaches a level of $2.00 per
share. Options for up to an additional 100,000 shares shall become exercisable
60
<PAGE>
on or after the first date thereafter that the stock price reaches a level of
$3.00 per share, and options for up to an additional 100,000 shares shall become
exercisable on or after the first date thereafter that the stock price reaches a
level of $5.00 per share. In the event the Company terminates the agreement for
"cause" then any options that are exercisable as of the date of such termination
shall be deemed earned by Liberty Capital surviving termination and exercisable
on or before three years after the effective date, and any options that are not
yet exercisable as of the date of such termination will terminate automatically
without notice and be of no further force or effect. The options will terminate
automatically without notice and be of no further force or effect to the extent
the options are not yet exercised within three years after the effective date.
If an event has occurred which would permit Liberty Capital to exercise the
options, Liberty Capital has the right to demand registration of the shares when
issued. In addition, if shares of the Common Stock covered by the options have
been exercised but not yet registered, Liberty Capital shall have "piggyback"
registration rights to require the shares which have been issued to be
registered in the event the Company is filing any other registration statement
to register any other shares of the Common Stock.
In conjunction with the Liberty Capital Group, Inc. Consulting Agreement,
the Company, Liberty Capital and MFG executed the PR Expense Funds
Administration Agreement discussed above. See "Management - Manhattan Financial
Group Consulting Agreement."
The Company terminated the services of Liberty Capital in 1998. As of the
date of this Prospectus, the Company is not aware of the occurrence of any event
which would have triggered vesting of the options granted to Liberty Capital.
None of the shares of the Common Stock to be issued to Liberty Capital in
connection with the exercise of the options are being registered under the
Securities Act pursuant to this Prospectus.
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. The agreement provides for a term of one year
commencing on the effective date, with automatic renewal, if not terminated as
therein provided, for successive one year periods. Notwithstanding the
foregoing, the agreement permits the parties to terminate the agreement at any
time upon 10 days written notice. In the event Harpster terminates the
agreement or the Company terminates the agreement for "cause" then any options
that are exercisable as of the date of such termination shall be deemed earned
by Harpster, surviving termination, but in all cases must be exercised on or
before the expiration of 90 days following the termination date, and any options
that are not yet exercisable as of the date of such termination will terminate
automatically without notice and be of no further force or effect. In the event
the Company terminates the agreement without cause then any portion of the
options which Harpster has the right to exercise as of the date of such
termination of employment must be exercised on or before 90 days after the date
of termination. All options not exercisable as of the date of termination of
employment and all options earned by Harpster, if any, not exercised on or
before the expiration of the 90 day period will terminate automatically without
notice and be of no further force or effect. The options terminate
automatically without notice and will be of no further force or effect to the
extent the options are not yet exercised before January 1, 2002. All shares of
the Common Stock which Harpster obtains from the exercise of options will be
subject to "piggyback" registration rights.
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 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.
61
<PAGE>
PDH, LTD. AGREEMENT
PDH, Ltd. has been issued shares of the 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. The resale of certain shares
of the Common Stock issued to PDH, Ltd. is being registered under the Securities
Act pursuant to this Prospectus. PDH, Ltd. is an assumed business name for Paul
Douglas Holt and any persons engaged by him. This consultant has been engaged
by the Company for several years to assist the Company with advisory and
administrative duties, including stockholder communications. The Company has
engaged PDH, Ltd. in lieu of full time employees. PDH, Ltd. coordinates
stockholder requests for management review and response and processes Company
payables, eliminating the need for administrative staff. PDH, Ltd. has been
familiar with the Company's administrative expenses and operations requirements
and has on occasion paid such costs in exchange for shares of the Common Stock
in the Company.
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. Ambient Capital Group,
Inc. ("Ambient") produced the Investment Agreement for the Company, and the
Company has no financial information available to confirm the financial
capability of Bristol to perform. Subject to the provisions of the Investment
Agreement, the Company shall issue and sell to Bristol, and Bristol shall be
obligated to purchase from the Company, up to $7,000,000 worth of the Common
Stock, which shall continue for the remainder of the three year term of the
Investment Agreement.
The determination of the timing and amount of the Common Stock to be sold
shall be made by the Company, in its sole discretion, to the extent not limited
by the terms of Investment Agreement. Subject to certain limitations, the
Company may require Bristol to purchase shares of the Common Stock on a monthly
basis. Within ten days after the end of each calendar month, the Company is
permitted to deliver written notices to Bristol (the "Put Notice") stating a
dollar amount of the Common Stock which the Company intends to sell to Bristol
five business days following the date (the "Put Notice Date") on which the Put
Notice is given to Bristol; provided, the Company may only require Bristol to
purchase a maximum amount of shares of the Common Stock not to exceed the lesser
of (i) $7,000,000 less all amounts previously paid by Bristol, and (ii) the
product of (x) the number of shares of the Common Stock of the Company traded on
the Principal Exchange on which the Common Stock traded for the preceding
calendar month, multiplied by (y) the average of the closing bid prices for the
Common Stock during the prior calendar month, multiplied by (z) 14 percent.
Furthermore, the Company may not deliver a Put Notice if (i) trading of the
Common Stock on the principal market on which it is then traded (the "Principal
Exchange") is suspended or the Common Stock has been delisted, (ii) the closing
price of the Common Stock on the Principal Exchange is less than $0.15 per
share, (iii) a registration statement filed with the Commission is not effective
or is subject to a stop order or is otherwise suspended, (iv) the Dow Jones
Industrial Average has dropped more than five percent within the preceding five
business days, or (v) the Common Stock to be sold is not then registered for
resale under the Exchange Act.
Unless otherwise provided, Bristol shall be required to contribute the
amount of funds specified in the Put Notice. Payment of the draw down amount
must be made by Bristol on the fifth business day following the proper delivery
of a Put Notice. Simultaneously with the receipt of the funds from Bristol in
the amount specified in the Put Notice, the Company shall issue and sell to
Bristol the number of shares of the Common Stock equal to the draw down divided
by 74 percent of the lowest sales price for the Common Stock on the Principal
Exchange (the "Lowest Sale Price") during the 10 trading days prior to the Put
Notice Date (the "Look Back Period"). In the event that the Lowest Sale Price
during the 20 trading days after a particular closing is less than 95 percent of
the Lowest Sale Price applicable to such closing, then the Company shall
promptly issue to Bristol an additional number of shares of the Common Stock
with respect to such closing such that the number of shares of the Common Stock
issued to Bristol at such closing plus such additional number of shares are
equal to the funds drawn down at such closing divided by 74 percent of the
Lowest Sale Price during such 20 trading day period. Bristol shall also be
issued additional warrants equal to 12 percent of the number of additional
shares so issued and the exercise price of such additional warrants and the
warrants issued at such closing shall be adjusted to 100 percent of the Lowest
Sale Price during such 20 trading day period.
62
<PAGE>
Generally, at each closing, the Company shall also deliver to Bristol
warrants to purchase shares of the Common Stock (the "Warrant Shares"). The
warrants shall expire on the fifth anniversary of the date of issuance.
Generally, the warrants shall entitle the holder thereof to purchase a number of
Warrant Shares equal to 12 percent of the number of shares of the Common Stock
purchased at the closing in question at an initial exercise price equal to 100
percent of the average closing sales price for the Common Stock on the Principal
Exchange during the Look Back Period in question.
The Company agrees that all shares of the Common Stock issued to Bristol
pursuant to the Investment Agreement shall, at the time of such issuance and for
so long thereafter as is required by the Investment Agreement, be subject to an
effective registration statement on Form S-1 or an equivalent thereof, covering
the resale or other disposition thereof by Bristol at any time and from time to
time after each such issuance, and with respect to the Warrant Shares, covering
the resale or other disposition by the holders thereof at any time and from time
to time after each such issuance.
As conditions precedent to the obligation of Bristol to purchase any shares
of the Common Stock, the Company must meet numerous organizational, financial,
and reporting criteria, including the ability to engage in the contemplated
transactions, unrestrained trading of the Common Stock on the Principal
Exchange, effectiveness of the Company's registration statement and
certification of corporate authority to engage in the contemplated transactions.
In addition to conditions precedent which must be satisfied prior to
Bristol's obligation to purchase the Common Stock under the Investment
Agreement, the total amount of the Common Stock which the Company can require
Bristol to purchase may be limited to a percentage of the total shares of the
Common Stock outstanding. Under the Investment Agreement, Bristol may refuse to
purchase the Common Stock, as requested in a properly delivered Put Notice, if
the purchase of the Common Stock would result in Bristol beneficially owning
more than 4.9 percent of the Common Stock outstanding, determined in accordance
with Section 13(d) of the Exchange Act, including shares of the Common Stock
acquired pursuant to the Investment Agreement or through unrelated transactions.
As a result, it is possible that Bristol's total investment under the Investment
Agreement could be limited to an aggregate dollar amount well below $7,000,000.
As an illustration, assuming that all of the necessary conditions have been
met and using June 1, 1998 as a constant Put Notice Date, Bristol could be
required to contribute approximately $1,377,465 to the Company in exchange for
an estimated 2,127,360 shares of the Common Stock and 255,284 shares of the
Common Stock underlying the Compensation Warrants before reaching a beneficial
ownership position in excess of 4.9 percent of the Common Stock of the Company
outstanding as of June 30, 1998. Pursuant to Section 1.3 of the Investment
Agreement, the draw down amount would be determined by taking the product of the
number of shares of the Common Stock of the Company traded on the principal
exchange during the applicable month (4,342,200), multiplied by the average of
the closing bid prices for the Common Stock during the applicable month
($0.9865) multiplied by 14 percent. The number of shares to be issued in
exchange for the maximum draw down amount of $599,701 would be determined by
dividing the amount by 74 percent of the lowest sales price for the Common Stock
during the 10 trading days prior to the Put Notice Date ($0.6475). Based on
this calculation, Bristol would be entitled to receive approximately 926,180
shares of the Common Stock of the Company upon payment of the monthly draw down
amount. In addition to the issuance of shares of the Common Stock, Bristol
would receive, upon each closing, warrants entitling Bristol to purchase
111,142 shares of the Common Stock at $0.964 per share.
Assuming the above figures are constant, all necessary conditions have been
met, and the Company properly delivers Put Notices for the maximum possible
amount in successive months, Bristol could acquire 4.9 percent of the Common
Stock of the Company, calculated as of June 30, 1998, within a period of three
months in exchange for an approximate aggregate contribution of $1,377,465. The
amount contributed by Bristol and the number of shares of Common Stock issued
by the Company under the Investment Agreement could vary significantly based on
fluctuations in the trading price of the Common Stock. In addition, if Bristol
acquires beneficial ownership of shares of the Common Stock through any other
means, the amount Bristol could be required to purchase under the Investment
Agreement would be reduced. In the event the trading price of the Company's
Common Stock were to decline in value, the aggregate contributions the Company
could require Bristol to fund under the Investment Agreement would be reduced.
63
<PAGE>
The Investment Agreement may be terminated at any time only with the mutual
consent of the Company and Bristol. The Investment Agreement shall
automatically terminate without any further action of either party when Bristol
has invested an aggregate of $7,000,000 in Common Stock pursuant to the
Investment Agreement.
Pursuant to the Investment Agreement, 20,781,250 shares of the Common Stock
to be issued to Bristol, including any shares to be issued upon the exercise of
the Compensation Warrants, are being registered under the Securities Act
pursuant to this Prospectus. The number of shares described in this section
includes (i) 18,229,167 Newly Issued Shares; and (ii) 2,552,083 shares to be
issued upon the exercise of the Compensation Warrants. The number of Newly
Issued Shares and shares underlying Compensation Warrants being registered
hereby are generally calculated based on the formula set forth in the Investment
Agreement. The formula used to calculate the number of Newly Issued Shares
being registered hereunder is as follows: $7,000,000 DIVIDED BY 74 percent X
$0.52 (the lowest sales price for the Common Stock on the Principal Exchange of
the Company during the 10 trading days prior to January 30, 1998) = 18,229,167
shares of the Common Stock. The number of shares of the Common Stock underlying
the Compensation Warrants were calculated as follows: 18,229,167 X 14 percent =
2,552,083 shares. If the sales price for the Common Stock used in the formula
is different than the example of $0.52 contained herein, then the number of
Newly Issued Shares and the number of shares underlying the Compensation
Warrants will change. However, for the purposes of this Prospectus, the formula
price of $0.52 per share is being used. If the sales price is greater than
$0.52 per share, a lesser number of shares of the Common Stock will be issued.
DESCRIPTION OF SECURITIES
Under the Company's Articles of Incorporation, the authorized capital stock
of the Company consists of 103,000,000 shares, of which 100,000,000 are shares
of common stock, par value $0.001 per share (the "Common Stock") and 3,000,000
are shares of preferred stock (the "Preferred Stock"). As of October 29, 1998,
there were 48,834,512 shares of the Common Stock issued and outstanding, while
no shares of the Preferred Stock were issued or outstanding. The Company has
reserved 18,229,167 shares of the Common Stock for issuance upon the purchase of
the Newly Issued Shares, 2,552,083 shares of the Common Stock for issuance upon
the exercise of the Compensation Warrants, 3,840,615 shares of the Common Stock
for issuance upon the exercise of the Resale Warrants, and 6,250,000 shares of
the Common Stock for issuance upon exercise of the Resale Options.
The registration of the Newly Issued Shares and the shares underlying the
Compensation Warrants only applies to the resale of such shares by Bristol Asset
Management , L.L.C.
The following description of certain matters relating to the Common Stock,
the Preferred Stock, and the Warrants is a summary and is qualified in its
entirety by the provisions of the Company's Articles of Incorporation and
Bylaws.
COMMON STOCK
The holders of the Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders of the Company. The holders of
the Common Stock have the sole right to vote, except as otherwise provided by
law or by the Company's Articles of Incorporation, including provisions
governing any shares of the Preferred Stock. In addition, such holders are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor,
subject to the payment of preferential dividends with respect to any shares of
the Preferred Stock that from time to time may be outstanding. In the event of
the dissolution, liquidation or winding up of the Company, the holders of the
Common Stock are entitled to share ratably in all assets remaining after payment
of all liabilities of the Company and subject to the prior distribution rights
of the holders of any shares of the Preferred Stock that may be outstanding at
that time. All outstanding shares of the Common Stock being registered for
resale hereby, will be fully paid and nonassessable. The resale of (i)
5,337,741 shares of the Common Stock issued and outstanding, (ii) 6,250,000
shares of the Common Stock pursuant to the exercise of the Resale Options, and
(iii) 18,229,167 shares of the Common Stock with respect to the Newly Issued
Shares are being registered hereby.
64
<PAGE>
CUMULATIVE VOTING RIGHTS
The holders of the Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than 50 percent of the issued and outstanding
shares of the Common Stock voting for the election of directors can elect all of
the directors if they choose to do so, and in such event, the holders of the
remaining shares of the Common Stock voting for the election of the directors
will be unable to elect any person or persons to the Board of Directors.
PREEMPTIVE RIGHTS
Pursuant to Title 7, Chapter 79 of the Nevada Revised Statutes,
stockholders of corporations organized before October 1, 1991, with certain
limited exceptions set out in the statute, have preemptive rights to acquire pro
rata unissued shares, treasury shares or securities convertible into such
shares, being offered for sale, except to the extent limited or denied by the
corporation's articles of incorporation. Prior to October 1, 1991, among other
circumstances, preemptive rights did not exist with respect to (i) shares issued
to directors, officers or employees of the Company pursuant to a vote of the
stockholders, or pursuant to a plan authorized by the stockholders, (ii) shares
sold for a consideration other than cash, and (iii) shares issued at the same
time that the stockholder who claims a preemptive right acquired his shares.
The Company was incorporated on June 10, 1987, and prior to March 16, 1998, its
Articles of Incorporation did not provide for any limitation with respect to
preemptive rights. In the various offerings of its securities, the Company did
not offer to its existing stockholders preemptive rights to acquire any of the
securities so offered other than to persons in exchange for services rendered.
The applicable remedy, if any, for the failure by the Company to offer to its
stockholders the preemptive rights is not certain after the passage of time and
Common Stock price fluctuations. Under Nevada law, the preemptive right is only
an opportunity to acquire shares upon such terms as the Board of Directors fixes
for the purpose of providing a fair and reasonable opportunity for the exercise
of such right. If a stockholder were to timely demand preemptive rights for a
particular non-excepted prior sale, the Company might be required in equity to
sell additional shares of the Common Stock to the complaining stockholder at
previously offered prices to enable a stockholder exercising such rights to
maintain his ownership percentage for prior sales that would effect preemptive
rights. To the extent that any stockholders were entitled to the right to
purchase shares of the Common Stock upon the exercise of any such preemptive
rights, the Company plans to allow any such requesting stockholder the right to
purchase his pro rata amount of such shares at the same price per share to which
he would have been entitled if such preemptive rights had been offered in
conformity with Nevada law. Any such offering of preemptive rights will be in
conformity with the Securities Act and the various states where any such
stockholders may be located. If any stockholders were to exercise their
preemptive rights within the applicable statute of limitations for any sale of
securities which carried a preemptive right prior to March 16, 1998, the
percentage interests of investors may be diluted by any such sales of additional
securities and the contributions to the Company from such sales, if required to
be offered at the price of previous issuances and if such price is below the
current market value, could result in contributions to the Company at a per
share contribution less than the current market value. The Company cannot
speculate whether any stockholders would elect such preemptive rights, if the
statute of limitations has not barred such rights, or how much additional
capital would be raised or how many shares would be issued or whether other
remedies would be available. Thus, the Company assigns no liability to this
contingency. As of the date of this Prospectus, management is not aware of any
stockholder who intends to make any claim with respect to the failure by the
Company to offer any such preemptive rights. On February 4, 1998, a majority of
the stockholders, by written consent, voted to amend the Articles of
Incorporation of the Company to deny preemptive rights with respect to each new
issuance of shares of the Common Stock. However, the amendment to the Articles
of Incorporation will have no effect with respect to preemptive rights which may
have existed for certain sales of the Common Stock prior to such amendment.
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of the
Common Stock, to provide for the issuance of the Preferred Stock in one or more
series, to establish the number of shares to be included in each series and to
fix the designations, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof. This
includes, among other things, voting rights, conversion privileges, dividend
rates, redemption rights, sinking fund provisions and liquidation rights which
shall be superior to the Common Stock. The issuance of one or more series of
the Preferred Stock could adversely affect the voting power of the holders of
the Common Stock and could have the effect of discouraging or making more
difficult any attempt by a person or group
65
<PAGE>
to attain control of the Company. As of the date of this Prospectus, there are
no shares of the Preferred Stock issued and outstanding.
DEBENTURES
6% CONVERTIBLE DEBENTURE. On August 15, 1996, the Company issued its 6%
Convertible Debenture due August 15, 1999 in the principal amount of $550,000
(the "6% Convertible Debenture"). This debenture included a provision under
which a penalty equal to 1.5 percent of the then outstanding principal shall be
payable monthly, in addition to the six percent interest otherwise due to be
paid, if the shares of the Common Stock issuable upon conversion of the 6%
Convertible Debenture were not the subject of a registration statement filed
with the Commission pursuant to the Securities Act on or before August 30, 1996
and declared effective on or before October 31, 1996. It was subsequently
agreed between the Company and the holder of the 6% Convertible Debenture that
any such penalties would not commence to accrue until April 1, 1997. The 6%
Convertible Debenture was convertible into shares of the Common Stock at a price
per share equal to the lesser of the average closing bid price of the Common
Stock for the five consecutive trading days immediately preceding the date of
the 6% Convertible Debenture, or 77 percent of the average closing bid price of
the Common Stock for the five consecutive trading days prior to conversion. In
connection with the issuance of the 6% Convertible Debenture, the Company also
issued to the holder a warrant to purchase 100,000 shares of the Common Stock at
$2.00 per share. See "Description of Securities - Warrants." The 6%
Convertible Debentures have been fully converted and are no longer outstanding.
8% CONVERTIBLE DEBENTURE. On March 13, 1997, the Company issued its 8%
Convertible Debenture due March 13, 2000 in the principal amount of $125,000
(the "8% Convertible Debenture"). This debenture included a provision under
which a penalty equal to two percent of the then outstanding principal shall be
payable monthly, in addition to the six percent interest otherwise due to be
paid, if the shares of the Common Stock issuable upon conversion of the 8%
Convertible Debenture were not the subject of a registration statement filed
with the Commission pursuant to the Securities Act on or before May 15, 1997 and
declared effective on or before July 15, 1997. The 8% Convertible Debenture was
convertible into shares of the Common Stock at a price per share equal to the
lesser of the average closing bid price of the Common Stock for the five
consecutive trading days immediately preceding the date of the 8% Convertible
Debenture, or 77 percent of the average closing bid price of the Common Stock
for the five consecutive trading days prior to conversion. In connection with
the issuance of the 8% Convertible Debenture, the Company also issued to the
holder a warrant to purchase 50,000 shares of the Common Stock at $1.50 per
share. See "Description of Securities - Warrants." The 8% Convertible
Debentures have been fully converted and are no longer outstanding.
12% SERIES A SENIOR SUBORDINATED CONVERTIBLE REDEEMABLE DEBENTURE. In
April 1997, the Company issued its 12% Series A Senior Subordinated Redeemable
Debentures in the aggregate amount of $662,500 (the "12% Convertible
Debenture"). These debentures generally matured in April 1998 and were
convertible into shares of the Common Stock at a conversion price equal to the
lower of 90 percent of the average closing bid price of the Common Stock for the
five business days immediately preceding the notice of conversion or 90 percent
of the closing bid price of the Common Stock of the business day immediately
preceding the date of subscription by the holder. All of the 12% Convertible
Debentures have been converted or canceled through a recission effected pursuant
to settlement agreements reached with the respective holders. See "Business -
Litigation."
WARRANTS
PRIVATE PLACEMENT WARRANTS. During the period from November 1995 though
February 1996, in connection with a private placement of 2,000,000 shares of the
Common Stock at $1.00 per share, the Company also granted to the investors
warrants to acquire an equal number of shares at $5.00 per share for a two-year
period. Warrants for an additional 203,150 shares of the Common Stock were
issued to the investors in the private placement in September 1996 due to the
failure by the Company to file a registration statement covering the shares of
the Common Stock offered in the private placement. These additional warrants
were likewise exercisable at $5.00 per share. In the spring of 1997, the
Company effected a further settlement with investors in the private placement
regarding the Company's obligation to register the shares of the Common Stock
offered in the private placement. The terms of the settlement provided that
certain investors would turn in the warrants held at that time in exchange for
warrants equal to one and one-half times
66
<PAGE>
the warrants held at a new exercise price of $2.50 per share. Due to the
various settlements effected by the Company, as of February 6, 1998 such
investors held warrants which upon exercise would represent 3,273,950 shares of
the Common Stock (the "PPM Warrants").
DEBENTURE WARRANTS. In connection with the purchase of the Company's 6%
Convertible Debenture, (which was fully converted and canceled by the Company on
February 6, 1998) on August 15, 1996 the Company issued a warrant for 100,000
shares of the Common Stock at $2.00 per share which expires on August 15, 2001
(the "6% Convertible Debenture Warrant"). In connection with the purchase of
the Company's 8% Convertible Debenture, on March 13, 1997 the Company issued a
warrant for 50,000 shares of the Common Stock at $1.50 per share which expires
on March 13, 2002 (the "8% Convertible Debenture Warrant").
AMBIENT WARRANTS. As additional compensation to Ambient Capital Group,
Inc. ("Ambient") for providing services relating to capital structure strategies
and the revision of the Company's business plan, the Company issued Ambient
83,333 warrants on October 29, 1997 (the "Ambient Warrants"). The Ambient
Warrants entitle the holder to purchase five shares of the Common Stock at $0.72
per share for each warrant issued. The Ambient Warrants are valid for a period
of four years from the date of issuance.
The resale of 3,273,950 shares of the Common Stock underlying the PPM
Warrants, 100,000 shares of the Common Stock underlying the 6% Convertible
Debenture Warrant, 50,000 shares of the Common Stock underlying the 8%
Convertible Debenture Warrant and 416,665 shares of the Common Stock underlying
the Ambient Warrants (collectively, the "Resale Warrants") is being registered
hereby pursuant to registration rights granted to the holders thereof. The
Company has agreed to pay all expenses in connection with such registration,
except for underwriting discounts and commissions and legal fees for counsel to
the holders.
COMPENSATION WARRANTS. In conjunction with purchase of the Newly Issued
Shares under the Investment Agreement, Bristol shall generally be issued
warrants to purchase a number of shares of the Common Stock equal to 12 percent
of the number of Newly Issued Shares purchased at each closing at an initial
exercise price equal to 100 percent of the average closing sales price for the
Common Stock on the Principal Exchange during the Look Back Period (the
"Compensation Warrants"). See "Principal Stockholders - Bristol Asset
Management, L.L.C. Investment Agreement." The Compensation Warrants will expire
five years from the date of issuance. The resale of 2,552,083 shares of the
Common Stock underlying the Compensation Warrants is being registered pursuant
to this Prospectus.
67
<PAGE>
CANCELED SHARES
As a result of an internal audit conducted by the Company's management,
including a review of all stock transactions within the past four years, the
Board of Directors approved the cancellation of 5,897,960 shares of the Common
Stock during 1997. The shares of the Common Stock were canceled for various
reasons, including failure of consideration, duplicative issuances, and the
disparity in value between the number of shares issued and the services rendered
to the Company by the respective stockholders. In addition, the Company
recalled and canceled an aggregate of 400,322 shares of the Common Stock issued
to TII (252,597) and MFG (147,725) in 1998 due to mathematical errors in
calculating the purchase price. The following is a summary of the cancellations
which have been effected by the Transfer Agent:
<TABLE>
<CAPTION>
Name Number of Shares Canceled
---- -------------------------
<S> <C>
Thermal Imaging, Inc (1). . . . . . . . . . . 4,582,597
PDH, Ltd (2). . . . . . . . . . . . . . . . . 467,260
Bin Zhou (3). . . . . . . . . . . . . . . . . 250,000
Richard Thompson (4). . . . . . . . . . . . . 500,000
Maxwell Rabb (4). . . . . . . . . . . . . . . 250,000
Robert Gray (4) . . . . . . . . . . . . . . . 100,000
Bruce Huddleston (5). . . . . . . . . . . . . 700
Manhattan Financial Group (6) . . . . . . . . 147,725
</TABLE>
- -----------------
(1) Several stock issuances to Thermal Imaging, Inc., an affiliate of Mr.
Johnston, were canceled due to failure of consideration. The cancellations
included the following: (i) cancellation of 300,000 shares of the Common
Stock originally issued on February 22, 1995 as a finder's fee relating to
funding which never materialized; (ii) cancellation of 1,400,000 shares of
the Common Stock originally issued on September 22, 1995 in anticipation of
cash contributions to the Company which never materialized due to the
breach by its intended funding source; (iii) cancellation of 630,000 shares
of the Common Stock originally issued on April 18, 1996 due to the fact
that the shares had been directly issued to Dorex stockholders in
settlement of claims for which Thermal Imaging, Inc. had assumed liability
pursuant to the Assumption of Liability Agreement (the Company canceled
certificates totaling 700,000 shares of the Common Stock and re-issued a
certificate to Thermal Imaging, Inc. representing 70,000 shares of the
Common Stock); (iv) cancellation of 2,000,000 shares of the Common Stock
originally issued on February 27, 1997 in anticipation of cash
contributions to the Company which never materialized; and (v) cancellation
of 252,597 shares of the Common Stock originally issued on February 3, 1998
due to a mathematical error in calculating the purchase price.
(2) The Company formally canceled 167,260 shares of the Common Stock originally
issued to PDH, Ltd. on November 18, 1996 due to the fact that the value of
the shares issued was in excess of the value of the services rendered to
the Company. In addition, the Company canceled and set-off 300,000 shares
of the Common Stock originally issued on April 4, 1996 against
approximately 300,000 shares of the Common Stock due to PDH, Ltd. for
services rendered and expenses incurred through June 30, 1997. The
cancellation was to due to the fact that the value of the shares issued
exceeded the value of the services rendered to the Company. Due to the
fact that the set-off was made against unissued shares of the Common Stock,
the transaction did not involve the formal cancellation of additional
certificates.
(3) Pursuant to an understanding reached between the Company and Dr. Ben Zhou,
a former director of the Company, Zhou was to receive 250,000 shares of the
Common Stock in the event that the widespread marketing and distribution of
CTI Systems in China had taken place by November 1997. The planned
distribution of CTI Systems was not implemented by November 1997. The
parties never executed a written document to memorialize the agreement.
While the minutes of the Company evidence that the 250,000 shares of the
Common Stock have been recorded as issued, delivery of the certificates
never took place, consistent with the Company's representation and
understanding that the shares would not be earned until first revenues were
generated from the delivery and installation of CTI Systems in China. The
Company's position was clarified in letters to Zhou dated June 1996 and
January 1997.
(4) The Company has taken action to cancel certain stock certificates that were
conditionally issued and delivered to Richard Thompson, a former director
of the Company, and Maxwell Rabb and Robert Gray, both consultants to the
Company. The Company conditionally issued shares of the Common Stock to
Thompson (1,000,000), Rabb (275,000) and Gray (100,000) based on Thompson's
representation that he had arranged large scale financing by SPRINT and
another proposed contributor. Relying on Thompson's representations that
such agreements had been reached, the shares were issued and delivered
directly to Thompson. When the Company discovered that no financing
agreements had been reached with SPRINT, the Company demanded return of the
certificates from Thompson. After numerous attempts to persuade Thompson
to return the certificates, the Board of Directors canceled the
certificates, along with other certificates issued to Rabb and Gray by
resolutions adopted on February 18, 1997 and April 21, 1997. As of the
date of this Prospectus, the certificates have not been returned.
Unfortunately, Mr. Thompson pledged one of the certificates, Certificate
No. 8313, to a lender in January 1997, who claimed to be a protected
purchaser under the Uniform Commercial Code. An agreement has been reached
to permit the lender to liquidate the number of shares required to satisfy
the outstanding indebtedness and recoverable costs secured by the shares,
which shares have been liquidated and the balance of the shares 48,000 have
been returned to the Company's Transfer Agent who intends to interplead
them to resolve the Company's right to cancel such shares.
(5) The Company canceled these shares of the Common Stock due to the failure of
consideration.
(6) The Company canceled these shares of the Common Stock originally issued on
March 24, 1998 due to a mathematical error in calculating the purchase
price.
In September 1997, the Board of Directors adopted a resolution
instructing its officers to work with the Company's auditor to develop internal
control procedures for the Company, including directives relating to the
separation of duties for account management, centralized record-keeping,
document control, and contract expense
68
<PAGE>
authorization limitations on executive officers. The Company expects the
preparation of such procedures to be completed by December 1998.
STOCK NOT PAID UP
On February 28, 1996 the Company accepted a "Personal Note - Secured" (the
"Note") in the principal amount of $525,000 from Daron Dillia doing business as
Manhattan Financial Group ("MFG") in exchange for the issuance of 525,000 units
(one unit = one share of the Common Stock and one warrant) offered by the
Company in conjunction with its Private Placement Memorandum dated November 13,
1995. The Note matured on February 28, 1997 and interest has been accruing on
the outstanding amount due since such date at a rate of nine percent per annum.
The terms of the Note also provide that the amount due will be secured by the
525,000 units issued to MFG which shall be held by the Company until the Note is
paid in full. Pursuant to an agreement between MFG and Benjamin W. and Nancy L.
Anderson which was incorporated into the terms of the Note (the "Collateral
Guarantee"), the Andersons' pledged 500,000 shares of the Common Stock and
200,000 units as additional security under the Note. As consideration under the
Collateral Guarantee, MFG agreed to transfer 200,000 shares of the Common Stock
from the 525,000 units acquired pursuant to the Note to the Andersons.
In accordance with N.R.S. 78.211, the Company may authorize the issuance
of shares in consideration of any tangible or intangible property or benefit
delivered to the Company, including promissory notes. Upon receipt of the
consideration for which the Board of Directors authorized the issuance of the
shares, the shares issued therefor are fully paid. An issuance of 325,000
shares to Daron C. Dillia and 200,000 shares to Benjamin or Nancy Anderson was
approved by the Board of Directors on February 29, 1996 in consideration for
"money received as a result of the Private Placement Memorandum dated November
13, 1995." According to Management, the certificates representing all shares
and warrants issued in connection with the Note are held by the Company.
As of the date of this Prospectus no payments have been made by MFG towards
the outstanding indebtedness due under the Note, nor has the Company made any
effort to collect such amounts.
CERTAIN PROVISION OF THE ARTICLES OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Articles of Incorporation
("Articles") and Bylaws ("Bylaws") of the Company concern matters of corporate
governance and the rights of stockholders. Certain of these provisions, as well
as the ability of the Board of Directors to issue shares of the Preferred Stock
and to set the voting rights, preferences and other terms thereof, may be deemed
to have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which certain
stockholders may deem to be in their best interests). To the extent takeover
attempts are discouraged, temporary fluctuations in the market price of the
Common Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with the ability of the Board of
Directors to issue the Preferred Stock without further stockholder action, also
could delay or frustrate the removal of incumbent directors or the assumption of
control by the stockholders, even if such removal or assumption would be
beneficial to the stockholders of the Company. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if they could be favorable to the interests of the stockholders, and could
potentially depress the market price of the Common Stock. The Board of
Directors believes that these provisions are appropriate to protect the
interests of the Company and all of its stockholders.
MEETINGS OF STOCKHOLDERS. The Bylaws provide that a special meeting of the
stockholders may be called by the Chairman of the Board, the President, the
Board of Directors, or the holders of not less than 10 percent of the
outstanding shares of the capital stock of the Company entitled to vote at such
a meeting unless otherwise required by law. The Company's Bylaws provide that
only those matters set forth in the notice of the special meeting may be
considered or acted upon at the special meeting.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Articles
provide that a director of the Company will not be personally liable to the
Company or its stockholders for monetary damages for any act or omission in good
faith. By its terms, and in accordance with applicable state law, however, this
provision does not eliminate or limit the liability of a director of the Company
for any breach of duty based upon an act or omission (i) involving appropriation
in violation of duty of any business opportunity of the Company, (ii) involving
acts or omissions that are not in good
69
<PAGE>
faith or which involve intentional misconduct or a knowing violation of the law,
or (iii) involving unlawful distributions or transactions from which the
director derived an improper personal benefit. The Articles provide further
that the Company shall indemnify its directors, except in such matters as to
which the director shall be adjudged liable for his own negligence or
intentional misconduct in the performance of his duty. A similar
indemnification and limitation of liability provision in the Company's Bylaws
also extends such protection to officers of the Company. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers, or persons controlling the Company pursuant to
the foregoing provisions, or otherwise, the Company is aware that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
AMENDMENT OF BYLAWS. The Bylaws provide that the Bylaws may be altered,
amended or repealed by the Board of Directors or the stockholders of the
Company. Such action by the Board of Directors requires the affirmative vote of
a majority of the directors present at such meeting.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Until the issuance of all of the shares of the Common Stock covered by the
Warrants, the Resale Options, and the Debenture, the Company's authorized but
unissued capital stock will consist of approximately 55,431,025 shares of the
Common Stock. One of the effects of the authorized but unissued capital stock
may be to enable the Board of Directors to render more difficult or to
discourage an attempt to obtain control of the Company by means of a tender
offer, proxy contest or otherwise, and thereby to protect the continuity of the
Company's management. If in the due exercise of its fiduciary obligations, for
example, the Board of Directors were to determine that a takeover proposal was
not in the Company's best interests, such shares could be issued by the Board of
Directors without stockholder approval in one or more private or public
offerings or other transactions that might prevent or render more difficult or
costly the completion of the proposed takeover transaction by diluting the
voting or other rights of the proposed acquirer or insurgent stockholder or
stockholder group, by creating a substantial voting block of institutional or
other investors that might undertake to support the position of the incumbent
Board of Directors, by effecting an acquisition that might complicate or
preclude the takeover, or otherwise. In this regard, the Company's Articles
grant the Board of Directors broad power to establish the rights and preferences
of the authorized, but unissued Preferred Stock, one or more series of which
would be issued entitling holders to vote separately as a class on any proposed
merger or consolidation, to convert Preferred Stock into a larger number of
shares of the Common Stock or other securities, to demand redemption at a
specified price under prescribed circumstances related to a change in control,
or to exercise other rights designed to impede a takeover.
The issuance of shares of the Preferred Stock pursuant to the Board's
authority described above could decrease the amount of earnings and assets
available for distribution to holders of the Common Stock, and adversely affect
the rights and powers, including voting rights, of such holders and may have the
effect of delaying, deferring or preventing a change in control of the Company.
The Board of Directors does not currently intend to seek stockholder approval
prior to any issuance of authorized, but unissued stock, unless otherwise
required by law.
TRANSFER AGENT
The Company's transfer agent for the Common Stock is Merit Transfer
Company, 68 South Main Street, Suite 708, Salt Lake City, Utah 84101.
70
<PAGE>
PLAN OF DISTRIBUTION AND SELLING STOCKHOLDERS
This Prospectus relates to the aggregate resale of 36,209,606 shares of the
Common Stock which may be sold by the Selling Stockholders. The shares of the
Common Stock to be resold include (i) 18,229,167 shares to be purchased by an
unrelated third party investor (the "Newly Issued Shares"); (ii) 2,552,083
shares to be issued upon the exercise of warrants to be issued to such investor
(the "Compensation Warrants"); (iii) 5,337,741 shares issued and outstanding;
(iv) 3,840,615 shares underlying outstanding warrants (the "Resale Warrants");
and (v) 6,250,000 shares underlying outstanding options (the "Resale Options").
The registration of the Newly Issued Shares and the shares underlying the
Compensation Warrants only applies to the resale of such shares by Bristol Asset
Management, L.L.C.
The following tables set forth certain information with respect to the
resale of the Common Stock by the Selling Stockholders as described in this
Prospectus. The Company will not receive any proceeds from the resale of the
Common Stock by the Selling Stockholders. However, the Company will receive the
proceeds from the sale of the Newly Issued Shares, the exercise price per share
upon the exercise of the Resale Warrants, the Compensation Warrants and the
Resale Options.
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S");
SHARES TO BE ISSUED AS NEWLY ISSUED SHARES ("NS") AND SHARES UNDERLYING
RESALE WARRANTS ("W"), COMPENSATION WARRANTS ("CW"), AND RESALE OPTIONS ("O")
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED AMOUNT OWNED
STOCKHOLDER BEFORE RESALE (1) OFFERED (2) AFTER RESALE PERCENTAGE(3)
----------- ----------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Fritz Abendroth (W) 61,875 61,875 -0- *
Harry C. Aderholt (S) 135,000 135,000 -0- *
Ainslie Investment Ltd. (S) 250,000 250,000 -0- *
Ambient Capital Group, Inc.(W) 416,665 416,665 -0- *
Benjamin or Nancy Anderson (S) 774,549 600,000 174,549 *
Benjamin Anderson (W) 568,750 568,750 -0- *
Jeremy Brent Andrus (W) 60,500 60,500 -0- *
Mary Ellen Ashby (W) 45,375 45,375 -0- *
Lynn Beckman (W) 41,250 41,250 -0- *
Randall S. Benson (W) 20,625 20,625 -0- *
Joanne L. Bingo (W) 94,875 94,875 -0- *
Orion Bishop (S) 50,000 50,000 -0- *
Dave Braman (S) 31,000 21,000 10,000 *
Timothy Brant (S) 70,000 70,000 -0- *
Charles Brinkman (S) 240,100 25,000 215,100 *
Charles W. Brinkman (W) 41,250 41,250 -0- *
Maxene Brinkman (S) 25,000 25,000 -0- *
Bristol Asset Management, L.L.C.(NS) 18,229,167 18,229,167 -0- *
Bristol Asset Management, L.L.C. (CW) 2,552,083 2,552,083 -0- *
Cameron Capital, Ltd. (W) 150,000 150,000 -0- *
Pak Choi (S) 6,552 6,552 -0- *
John Cornfield (S) 3,275 3,275 -0- *
Brent L. Cox (W) 41,250 41,250 -0- *
Crown Development, Inc. (W) 82,500 82,500 -0- *
Cheryl Demler (W) 7,150 7,150 -0- *
Cheryl Demler (S) 175,000 130,000 45,000 *
Daron C. Dillia (W) 700,000 700,000 -0- *
Kenneth M. Dodd (O) 500,000 500,000 -0- *
Misty Dorman (W) 25,410 25,410 -0- *
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED AMOUNT OWNED
STOCKHOLDER BEFORE RESALE (1) OFFERED (2) AFTER RESALE PERCENTAGE(3)
----------- ----------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Donna L. Doxey (W) 82,500 82,500 -0- *
Robert A. Dresser (S) 138,000 138,000 -0- *
John Egbert (S) 310,000 180,000 130,000 *
Douglas Emery (S) 35,000 35,000 -0- *
Sylvia Epstein (S) 50,000 50,000 -0- *
Dennis W. Ferchland (W) 20,625 20,625 -0- *
David Finney (S) 96,000 96,000 -0- *
Blake Fowler (S) 37,000 37,000 -0- *
Carol Fowler (S) 25,000 25,000 -0- *
Merrill Fowler (S) 204,500 59,000 145,500 *
Jack Gately (S) 50,000 50,000 -0- *
Grisborne Capital (S) 250,000 250,000 -0- *
Joseph K. Grote (W) 41,250 41,250 -0- *
Earl Grundei (S) 45,000 30,000 15,000 *
Bruce B. Hall (W) 41,250 41,250 -0- *
Willard Harpster (S) 7,200 6,000 1,200 *
William Hartman (S) 65,000 65,000 -0- *
Gerald Lynn Hayward(W) 41,250 41,250 -0- *
Michael P. Hill (S) 4,200 4,200 -0- *
Bryan Holbrook (S) 100,000 100,000 -0- *
Darrell J. Horne (W) 82,500 82,500 -0- *
Matthew Jeaufreau (S) 4,000 4,000 -0- *
Winthrop Jeaufreau (S) 55,000 21,000 34,000 *
Soon-Yon Jin (W) 41,250 41,250 -0- *
Lori Koebler (S) 5,000 5,000 -0- *
Arthur Laffer (S) 816 816 -0- *
Lance J. Larson (W) 41,250 41,250 -0- *
Herman Lee (S) 205,000 200,000 5,000 *
Allan-Chad Loo (S) 2,000 2,000 -0- *
Manhattan Financial Group (S) 1,846,275 1,846,275 -0- *
Manhattan Financial Group (O) 2,000,000 2,000,000 -0- *
Masahisa Masuda (W) 330,000 330,000 -0- *
Nolan Maxfield (S) 12,200 10,000 2,000 *
Brad Mefford (W) 41,250 41,250 -0- *
Leonard Meyers (S) 5,000 5,000 -0- *
Meto Miteff (S) 6,752 6,752 -0- *
Orlando Nickerson (W) 41,250 41,250 -0- *
Reed Oldroyd (S) 78,200 5,000 67,200 *
Stephen A. Oliver Trust (W) 20,625 20,625 -0- *
Alex Olson (S) 2,000 2,000 -0- *
John Olson (S) 787 787 -0- *
Aaron Oyler (S) 787 787 -0- *
Dick Oyler (S) 3,150 3,150 -0- *
David Packer (O) 500,000 500,000 -0- *
PDH, Ltd. (S) 801,682 346,092 445,590 *
Gary Post (S) 39,992 39,992 -0- *
Carol T. Racine (W) 33,750 33,750 -0- *
Max B. Reece (W) 41,415 41,415 -0- *
Steven M. Rhodes (W) 20,625 20,625 -0- *
Earl Richards (S) 135,000 135,000 -0- *
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED AMOUNT OWNED
STOCKHOLDER BEFORE RESALE (1) OFFERED (2) AFTER RESALE PERCENTAGE(3)
----------- ----------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
James P. Roake (W) 123,750 123,750 -0- *
David Russell (S) 334,000 44,000 290,000 *
Susan D. Scott (W) 20,625 20,625 -0- *
Larry R. Sears (W) 41,250 41,250 -0- *
Richard V. Secord (O) 3,250,000 3,250,000 -0- *
Peter P. Smith (W) 41,250 41,250 -0- *
Gerald N. Stanley (W) 41,250 41,250 -0- *
Jack M. & Geraldean Stevens (JTWROS)(W) 82,500 82,500 -0- *
Richard M. & Carolyn Stevens (JTWROS)(W) 41,250 41,250 -0- *
David D. Stewart(W) 41,250 41,250 -0- *
David Stewart (S) 163,500 36,000 127,500 *
Ross D. Stokes (W) 25,000 25,000 -0- *
Bee Bee Tan (W) 41,250 41,250 -0- *
Technology Vision Group, LLC (S) 5,313 5,313 -0- *
Charles Howard Thomas (W) 28,600 28,600 -0- *
Daniel G. Thomas (W) 27,500 27,500 -0- *
Alice G. Watts (S) 1,000 1,000 -0- *
Paul Weller (S) 34,000 34,000 -0- *
Harold Werth, Jr. (S) 180,000 127,000 53,000 *
Harold Werth, Jr. (W) 6,875 6,875 -0- *
Royce Yorgason (S) 62,245 15,750 46,495 *
</TABLE>
- -------------------
* Less than one percent.
(1) Shares Beneficially Owned Before Resale include shares of the Common Stock
underlying outstanding Resale Warrants ("W"), Resale Options ("O"),
Compensation Warrants ("CW") and Newly Issued Shares ("NS"). For purposes
of this table, ownership of Shares Currently Outstanding ("S") is
calculated based on the record number of outstanding shares held by such
person as of October 29, 1998. For purposes of this table, ownership of
Resale Warrants ("W"), Resale Options ("O"), Compensation Warrants ("CW")
and Newly Issued Shares ("NS") is based on the actual or estimated number
of shares of the Common Stock underlying the referenced class of securities
owned by such person as of October 29, 1998.
(2) Shares offered include Shares Currently Outstanding ("S") subject to the
restrictions of the Securities Act and held by the Selling Stockholder less
than two years as of the date of this Prospectus, and shares of the Common
Stock underlying outstanding Resale Warrants ("W"), Resale Options ("O"),
Compensation Warrants ("CW") and Newly Issued Shares ("NS").
(3) Percentage based on the number of shares of the Common Stock outstanding as
of October 29, 1998, without regard to beneficial ownership as may be
calculated under Rule 13d-3 of the Exchange Act.
The 36,209,606 shares of the Common Stock offered by the Selling
Stockholders for resale may be sold by the Selling Stockholders from time to
time as market conditions permit in the market, or otherwise at prices and terms
then prevailing or at prices related to the current market price, or in
negotiated transactions. The Selling Shareholders may sell their shares in
unsolicited ordinary brokerage transactions or privately negotiated transactions
between the Selling Stockholders and purchasers without a broker.
A current prospectus must be in effect at the time of the sale of the
Common Stock to which this Prospectus relates. Any Selling Stockholder or
dealer effecting a transaction in the registered securities, whether or not
participating in a distribution, is required to deliver a Prospectus. Unless
otherwise exempted, the Selling Stockholders and their agents engaged in the
resale of the Common Stock may be deemed underwriters under the Securities Act.
Bristol Asset Management, L.L.C. is deemed to be an underwriter under the
Securities Act with regard to the resale of the Newly Issued Shares and shares
issued upon exercise of the Compensation Warrants.
LEGAL MATTERS
Certain legal matters relating to the issuance and resale of shares hereby
will be passed upon for the Company by Looper, Reed, Mark & McGraw,
Incorporated, Houston, Texas.
73
<PAGE>
EXPERTS
The Consolidated Financial Statements and schedules for the years ended
June 30, 1998 and 1997, and for the period from inception, June 30, 1987 to June
30, 1998 included in this Prospectus and in the Registration Statement to which
this Prospectus relates have been audited by Ham, Langston & Brezina, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their reports appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of said firm as experts in auditing and accounting.
74
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
----------
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1998 AND 1997,
AND FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987,
TO JUNE 30, 1998
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
TABLE OF CONTENTS
----------
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1998 F-4
Consolidated Statement of Operations for the years
ended June 30, 1998 and 1997, and for the period
from inception, June 10, 1987, to June 30, 1998 F-5
Consolidated Statement of Stockholders' Deficit for
the years ended June 30, 1998 and 1997, and for
the period from inception, June 10, 1987, to
June 30, 1998 F-6
Consolidated Statement of Cash Flows for the years
ended June 30, 1998 and 1997, and for the period
from inception, June 10, 1987, to June 30, 1998 F-10
Notes to Consolidated Financial Statements F-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Computerized Thermal Imaging, Inc.
We have audited the accompanying consolidated balance sheet of Computerized
Thermal Imaging, Inc. (a development stage enterprise) as of June 30, 1998, and
the related statements of operations, stockholders' deficit and cash flows for
the years ended June 30, 1998 and 1997, and for the period from inception, June
10, 1987, to June 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based upon our audits.
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 financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computerized Thermal Imaging,
Inc. as of June 30, 1998, and the results of its operations and its cash flows
for the years ended June 30, 1998 and 1997, and for the period from inception,
June 10, 1987, to June 30, 1998, in conformity with generally accepted
accounting principles.
As described in Note 12, since its inception the Company has undertaken various
private placements and other offerings of its common stock without offering
existing stockholders preemptive rights to acquire common stock so offered.
Neither the likelihood of claims nor the range of loss that could arise from
this matter is presently determinable. Accordingly, the financial statements do
not include any adjustment that might result from the outcome of this
uncertainty.
Continued
F-2
<PAGE>
Computerized Thermal Imaging, Inc.
Page 2
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 13, the Company has incurred
significant recurring losses from operations since inception, is in a negative
working capital and stockholders' deficit position at June 30, 1998, 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 13. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas
October 26, 1998, except for
Note 7, as to which the date
is December 4, 1998
F-3
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
----------
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 230,064
Deposits 2,204
-----------
Total current assets 232,268
Property and equipment, net 149,257
-----------
Total assets $ 381,525
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Notes payable $ 655,390
Accounts payable 511,920
Accrued liabilities 278,111
Advances from stockholders 1,416,574
-----------
Total current liabilities 2,861,995
-----------
Commitment and contingencies (Notes 4, 7, 8, 9, 10, 12 and 13)
Common stock subject to rescission offers 306,873
-----------
Stockholders' deficit:
Convertible preferred stock, $5.00 par value,
100,000 shares authorized -
Common stock, $.001 par value, 100,000,000 shares
authorized, 47,565,757 shares issued and out-
standing at June 30, 1998, excluding 771,200
shares subject to rescission offers 47,566
Additional paid-in capital 18,373,060
Subscription receivable (525,000)
Losses accumulated during the development
stage (20,682,969)
-----------
Total stockholders' deficit (2,787,343)
-----------
Total liabilities and stockholders'
deficit $ 381,525
-----------
-----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987, TO JUNE 30, 1998
----------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED INCEPTION
JUNE 30, JUNE 30, TO JUNE 30,
1998 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Income:
Interest income $ 3,307 $ 5,762 $ 19,883
Income from sale of prototype - 55,815 180,815
----------- ----------- ------------
Total income 3,307 61,577 200,698
----------- ----------- ------------
Costs and expenses:
Operating, general and adminis-
trative expenses 3,167,690 1,571,157 13,667,748
Research and development costs 2,430,038 1,753,366 5,195,064
Interest expense 415,101 86,668 1,572,112
Litigation settlement - - 514,380
----------- ----------- ------------
Total costs and expenses 6,012,829 3,411,191 20,949,304
----------- ----------- ------------
Loss before extraordinary item (6,009,522) (3,349,614) (20,748,606)
Extraordinary gain on extinguishment
of debt 65,637 - 65,637
----------- ----------- ------------
Net loss $(5,943,885) $(3,349,614) $(20,682,969)
----------- ----------- ------------
----------- ----------- ------------
Weighted average shares outstanding 41,943,867 33,803,045
----------- -----------
----------- -----------
Basic and diluted net loss per
common share $ (0.14) $ (0.10)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987 TO JUNE 30, 1998
----------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at inception, June 10,
1987 - $ - - $ -
Stock issued for cash to founding
stockholders in 1987 - - 5,000,000 5,000
Stock issued for cash in connec-
tion with a public offering of
common stock in 1988 - - 5,000,000 5,000
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1989 - - 80,000 80
Stock issued for services in 1990 - - 500,000 500
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1991 - - 180,000 180
Stock issued for services in 1991 - - 3,240,000 3,240
Stock issued for services in 1992 - - 4,860,000 4,860
Stock issued for services in 1993 - - 1,134,500 1,134
Stock issued for extension of
debt agreement in 1993 - - 9,000 9
Stock issued in connection with
claims by certain stockholders
in 1993 - - 1,000 1
Stock issued for cash in 1994 - - 387,000 387
<CAPTION>
LOSSES
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN SUBSCRIPTION DEVELOPMENT
CAPITAL RECEIVABLE STAGE TOTAL
--------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at inception, June 10,
1987 $ - $ - $ - $ -
Stock issued for cash to founding
stockholders in 1987 - - - 5,000
Stock issued for cash in connec-
tion with a public offering of
common stock in 1988 14,562 - - 19,562
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1989 249,930 - - 250,010
Stock issued for services in 1990 254,500 - - 255,000
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1991 89,820 - - 90,000
Stock issued for services in 1991 1,616,760 - - 1,620,000
Stock issued for services in 1992 578,340 - - 583,200
Stock issued for services in 1993 82,726 - - 83,860
Stock issued for extension of
debt agreement in 1993 691 - - 700
Stock issued in connection with
claims by certain stockholders
in 1993 59 - - 60
Stock issued for cash in 1994 25,613 - - 26,000
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Continued
F-6
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT, CONTINUED
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987 TO JUNE 30, 1998
----------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ---------- --------
<S> <C> <C> <C> <C>
Stock issued for services in
1994 - - 1,485,660 1,486
Stock issued for extension of
debt agreement in 1994 - - 9,000 9
Stock issued in connection with
claims by certain stockholders
in 1994 - - 51,000 51
Preferred stock issued in connec-
tion with certain loans made
to the Company in 1994 47,000 235,000 - -
Stock issued for cash in 1995 - - 679,202 680
Stock issued for services in
1995 - - 3,506,461 3,506
Stock issued to convert certain
notes payable in 1995 - - 702,400 702
Conversion of preferred stock to
common stock in 1995 (42,000) (210,000) 124,600 125
Stock issued for cash in con-
nection with a Regulation D
offering of common stock in
1996 - - 1,462,600 1,463
Stock issued for a note receiv-
able in connection with a
Regulation D offering of
common stock in 1996 - - 525,000 525
<CAPTION>
LOSSES
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN SUBSCRIPTION DEVELOPMENT
CAPITAL RECEIVABLE STAGE TOTAL
---------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Stock issued for services in
1994 149,148 - - 150,634
Stock issued for extension of
debt agreement in 1994 591 - - 600
Stock issued in connection with
claims by certain stockholders
in 1994 5,989 - - 6,040
Preferred stock issued in connec-
tion with certain loans made
to the Company in 1994 - - - 235,000
Stock issued for cash in 1995 407,995 - - 408,675
Stock issued for services in
1995 3,049,200 - - 3,052,706
Stock issued to convert certain
notes payable in 1995 117,941 - - 118,643
Conversion of preferred stock to
common stock in 1995 209,875 - - -
Stock issued for cash in con-
nection with a Regulation D
offering of common stock in
1996 1,461,137 - - 1,462,600
Stock issued for a note receiv-
able in connection with a
Regulation D offering of
common stock in 1996 524,475 (525,000) - -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Continued
F-7
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT, CONTINUED
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987 TO JUNE 30, 1998
----------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ---------- --------
<S> <C> <C> <C> <C>
Stock issued for offering costs
in connection with a Regulation
D offering of common stock in
1996 - - 53,650 53
Stock issued in connection with
the settlement of a note pay-
able to an individual in 1996 - - 734,942 735
Stock issued in connection with
the settlement of claims by
certain stockholders in 1996 - - 578,000 578
Conversion of preferred stock
in 1996 (5,000) (25,000) 14,700 14
Stock issued in repayment of
certain notes payable and
interest expense in 1996 - - 146,590 147
Stock issued for cash in 1996 - - 1,163,625 1,164
Stock issued for services in
1996 - - 1,277,633 1,278
Losses accumulated during the
period from inception, June 10,
1987, to June 30, 1996 - - - -
------- -------- ---------- --------
Balance at June 30, 1996 - - 32,906,563 32,907
<CAPTION>
LOSSES
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN SUBSCRIPTION DEVELOPMENT
CAPITAL RECEIVABLE STAGE TOTAL
----------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Stock issued for offering costs
in connection with a Regulation
D offering of common stock in
1996 (53) - - -
Stock issued in connection with
the settlement of a note pay-
able to an individual in 1996 721,345 - - 722,080
Stock issued in connection with
the settlement of claims by
certain stockholders in 1996 507,702 - - 508,280
Conversion of preferred stock
in 1996 24,986 - - -
Stock issued in repayment of
certain notes payable and
interest expense in 1996 153,060 - - 153,207
Stock issued for cash in 1996 795,306 - - 796,470
Stock issued for services in
1996 891,874 - - 893,152
Losses accumulated during the
period from inception, June 10,
1987, to June 30, 1996 - - (11,389,470) (11,389,470)
----------- ---------- ----------- -----------
Balance at June 30, 1996 11,933,572 (525,000) (11,389,470) 52,009
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Continued
F-8
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT, CONTINUED
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987 TO JUNE 30, 1998
----------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ---------- --------
<S> <C> <C> <C> <C>
Stock issued as a bonus to inves-
tors in connection with the
Company's 1996 Regulation D
offering of common stock - - 211,900 212
Conversion of debentures to
common stock - - 98,768 99
Stock issued for cash - - 1,833,152 1,833
Stock issued for services - - 687,266 687
Net loss accumulated in 1997 - - - -
------- -------- ---------- --------
Balance at June 30, 1997 - - 35,737,649 35,738
Conversion of debentures to
common stock - - 2,403,838 2,404
Stock issued to convertible
debenture holders for failure
to complete registration of
the underlying common stock in
a timely manner - - 197,574 198
Stock issued for cash - - 9,476,418 9,476
Stock issued for services - - 521,478 521
Warrants issued for services - - - -
Stock subject to rescission offer - - (771,200) (771)
Net loss accumulated in 1998 - - - -
------- -------- ---------- --------
Balance at June 30 ,1998 - $ - 47,565,757 $ 47,566
------- -------- ---------- --------
------- -------- ---------- --------
<CAPTION>
LOSSES
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN SUBSCRIPTION DEVELOPMENT
CAPITAL RECEIVABLE STAGE TOTAL
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Stock issued as a bonus to inves-
tors in connection with the
Company's 1996 Regulation D
offering of common stock (212) - - -
Conversion of debentures to
common stock 64,026 - - 64,125
Stock issued for cash 1,008,376 - - 1,010,209
Stock issued for services 404,811 - - 405,498
Net loss accumulated in 1997 - - (3,349,614) (3,349,614)
----------- ---------- ------------ -----------
Balance at June 30, 1997 13,410,573 (525,000) (14,739,084) (1,817,773)
Conversion of debentures to
common stock 977,951 - - 980,355
Stock issued to convertible
debenture holders for failure
to complete registration of
the underlying common stock in
a timely manner 82,018 - - 82,216
Stock issued for cash 2,896,760 - - 2,906,236
Stock issued for services 305,860 - - 306,381
Warrants issued for services 1,006,000 - - 1,006,000
Stock subject to rescission offer (306,102) - - (306,873)
Net loss accumulated in 1998 - - (5,943,885) (5,943,885)
----------- ---------- ------------ -----------
Balance at June 30 ,1998 $18,373,060 $ (525,000) $(20,682,969) $(2,787,343)
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1987, TO JUNE 30, 1998
----------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED INCEPTION
JUNE 30, JUNE 30, TO JUNE 30,
1998 1997 1998
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,943,885) $(3,349,614) $(20,682,969)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Common stock, options and warrants
issued as compensation for services 1,311,860 405,498 8,355,910
Common stock issued for interest
expense 155,831 2,105 423,596
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 32,344 29,552 81,921
Amortization of debt issuance costs
and discounts on notes payable 287,051 43,418 340,469
Changes in operating assets and
liabilities:
Increase in deposits - (2,204) (2,204)
Increase (decrease) in accounts
payable and accrued liabilities (401,535) 964,892 790,031
----------- ----------- ------------
Net cash used in operating
activities (4,541,755) (1,906,353) (10,162,287)
----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (66,066) (30,332) (231,178)
----------- ----------- ------------
Net cash used in investing
activities (66,066) (30,332) (231,178)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from sale of common stock 2,906,236 1,010,209 6,974,762
Payment of stock offering costs - (125,000) (125,000)
Proceeds from notes payable and
convertible debentures 647,745 1,205,000 3,158,614
Payment of debt issuance costs - (123,600) (133,600)
Repayment of notes payable (326,522) - (667,821)
Proceeds from advances from
stockholders 1,416,574 - 1,416,574
----------- ----------- ------------
Net cash provided by financing
activities 4,644,033 1,966,609 10,623,529
----------- ----------- ------------
Net increase in cash and cash equivalents 36,212 29,924 230,064
Cash and cash equivalents at beginning
of period 193,852 163,928 -
----------- ----------- ------------
Cash and cash equivalents at end of
period $ 230,064 $ 193,852 $ 230,064
----------- ----------- ------------
----------- ----------- ------------
Supplemental disclosure of cash flow
information:
Cash paid for interest expense $ 3,477 $ - $ 8,770
----------- ----------- ------------
----------- ----------- ------------
Cash paid for income taxes $ - $ - $ -
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-10
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
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 revenue 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:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary, Thermal Medical Imaging, Inc. ("TMI").
All significant intercompany transactions and accounts have been
eliminated in consolidation.
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 term.
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.
Continued
F-11
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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 three 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.
INVESTMENT IN JOINT VENTURE
The Company's investment in a joint venture is accounted for using the
equity method.
ISSUANCE COSTS
Debt issuance costs are deferred and recognized over the term of the
related debt.
Stock offering costs are deferred and offset against proceeds from sale
of common stock upon closing. If the Company's current offering should
prove to be unsuccessful, these costs will be expensed in operations.
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 provides a valuation allowance to reduce deferred tax assets
to their net realizable value.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred. These costs
consist of direct and indirect costs associated with specific projects.
Continued
F-12
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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".
LOSS PER SHARE
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. It
requires (a) classification of the components of other comprehensive
income by their nature in a financial statement and (b) the display of
the accumulated balance of the other comprehensive income separate from
retained earnings and additional paid-in capital in the equity section of
a balance sheet. SFAS 130 is effective for years beginning after December
15, 1997 and is not expected to have a material impact on the Company's
financial position or results of operations.
IMPACT OF YEAR 2000
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 miscalculation causing a
disruption of business activities.
Continued
F-13
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
IMPACT OF YEAR 2000, CONTINUED
The Company has performed a complete assessment of the Year 2000 issue
and believes that no significant modifications to its existing computer
software will be required and that its existing computer systems will
function properly with respect to dates in the year 2000 and thereafter.
The Company also believes that costs related to the Year 2000 issue will
not be significant because the Company's systems have been designed to be
Year 2000 compliant.
Based on the Company's assessment of its relationships with significant
suppliers and major customers to understand the extent to which the
Company is vulnerable to any failure by third parties to remedy their own
Year 2000 issues, management believes that the Company does not have
significant exposure with respect to third parties.
2: PROPERTY AND EQUIPMENT:
Property and equipment at June 30, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997 LIFE
---------- ---------- ---------
<S> <C> <C> <C>
Office furniture, fixtures and
equipment $ 231,178 $ 165,112 5-7 years
Less accumulated depreciation (81,921) (49,577)
---------- ----------
$ 149,257 $ 115,535
---------- ----------
---------- ----------
</TABLE>
Depreciation expense during the years ended June 30, 1998 and 1997 was
$32,344 and $29,552, respectively.
Continued
F-14
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
3. INVESTMENT IN TRISUN/CTI ASIA, LTD.:
Effective May 24, 1995, the Company formed Trisun/CTI Asia, Ltd. (the
"Joint Venture"), a 50%-50% joint venture with Tri Sun Medical China,
Inc., a corporation established under the direction of the Chinese
Ministry of Health. The Joint Venture's primary purpose is to install a
telemedicine network and thermal imaging diagnostic equipment in medical
centers in China. The Joint Venture has obtained deployment contracts
with the Peoples Republic of China, however, the Ministry of Health has
to date been unable to obtain funding for the project. Management
believes that China represents a promising source of future business;
however, the Company does not intend to make capital contributions to the
Joint Venture until funding is obtained by the Chinese Ministry of Health
and development and testing of its thermal imaging diagnostic units are
completed. During the years ended June 30, 1998 and 1997, only minimal
expenses related to the Joint Venture were incurred by the Company and
such expenses have been reflected as operating, general and
administrative expenses because operations through the Joint Venture have
been insignificant.
4. COMMITMENT FOR THERMAL IMAGING SYSTEM DEVELOPMENT:
In June 1996 and October 1996, the Company, through TMI, entered into two
significant contracts (the "Contracts") with TRW, Inc. ("TRW"). Under the
terms of the Contracts, TRW will provide the Company with software
enhancements and ultimately a fully integrated thermal imaging system.
TRW will also develop a plan for deployment of the Company's thermal
imaging systems in major health care markets including systems
installation, training, testing and logistic support. Following is an
analysis of amounts incurred and committed in connection with the
Contracts through June 30, 1998:
<TABLE>
<S> <C>
Total commitment $4,700,000
Amount incurred under the contracts
through June 30, 1998 (2,707,296)
----------
Remaining commitment $1,992,704
----------
----------
</TABLE>
The remaining commitment does not include amounts totaling $280,433 that
are included in accounts payable at June 30, 1998. At various times
during 1998 the Company became delinquent on payments under the
Contracts; however, the Company has established a payment plan under
which regular payments are now being made. (See Note 13) All amounts
incurred under the Contracts have been charged directly to research and
development expense.
Continued
F-15
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
5. NOTES PAYABLE AND CONVERTIBLE DEBT:
Notes payable and convertible debt at June 30, 1998 consist of the
following:
<TABLE>
<S> <C>
Note payable to the Company's primary legal counsel, bearing interest of
12% per year and due in monthly installments of $50,000, including
interest, through December 1998, with a final payment of approximately
$12,000 due in January 1999. This note is collateralized by the common
stock and intellectual property of both the Company and its wholly
owned subsidiary, TMI. (See Note 11) $ 301,223
Note payable to a stockholder, bearing interest of 10% per year and due
in October 1998. This note is uncollateralized and may be converted to
common stock at a conversion price of $0.25 per share based upon 50% of
the closing price of the Company's common stock at the date of the
note. The resulting discount is being amortized to expense over the six
month term of the note and, accordingly, the note bears an effective
interest rate of approximately 210% per year. 354,167
----------
Total notes payable and convertible debt $ 655,390
----------
----------
</TABLE>
At June 30, 1997, the Company owed amounts under convertible debentures
totaling $1,154,882. These convertible debentures were converted, repaid
or otherwise settled by June 30, 1998; however, certain of the debentures
totaling $479,882 at June 30, 1997 were subject to legal disputes during
1998 arising from actions by a financial services firm that assisted the
Company in raising the debt. During the year ended June 30, 1998, the
Company negotiated settlements regarding all such debentures and such
settlements resulted in conversions or settlement payments that were
$65,637 less than the balance of the debentures plus accrued interest to
the date of settlement. The resulting $65,637 gain is presented as an
extraordinary gain on extinguishment of debt in the consolidated
statement of operations.
Continued
F-16
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
6. INCOME TAX:
The composition of deferred tax assets and the related tax effects at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Benefit from carryforward of net
operating losses $3,449,974
Less valuation allowance (3,449,974)
Net deferred tax asset $ -
----------
----------
</TABLE>
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>
1998 1997
-------------------------- --------------------------
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 $2,020,921 34.0% $1,138,868 34.0%
Non-deductible expenses (446,032) (7.5) (187,869) (5.6)
Increase in valuation
allowance (1,574,889) (26.5) (950,999) (28.4)
---------- ---------- ---------- ----------
Total $ - - % $ - - %
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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, 1998, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $10,200,000 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 2012 and could be subject to severe
limitations if significant ownership changes occur in the Company.
Continued
F-17
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
7. COMMON STOCK SUBJECT TO RESCISSION OFFERS:
During 1998, the Company issued a total of 8,876,418 shares of common
stock to the Affiliates ( See Note 11) for cash or other consideration
and such common shares are considered to be "restricted" securities with
limited transferability under state and federal securities laws. The
Affiliates, in secondary transactions, subsequently sold or otherwise
transferred 1,187,000 shares of the common stock between themselves and
to fourteen non-affiliates and it has come to the Company's attention
that the transactions between Affiliates and non-affiliates may have been
in violation of various state and/or federal securities laws.
In the event that the subsequent transfers of "restricted" shares of the
Company's common stock by the Affiliates are deemed to be in violation of
state and/or federal securities laws, the exemptions from registration,
relied upon by the Company for the initial issuance of those shares,
could be lost. Additionally, if an exemption from registration for the
issuances is not available, and the Company is found to have engaged in a
public offering of securities, the Company may face claims by the
subsequent purchasers for rescission and/or administrative sanctions,
fines and penalties even though the Company took the step of applying
appropriate restrictive legends to the stock certificates in question.
Based on the limited number of parties involved in the above-described
transactions and the precautions taken by the Company, management does
not believe that there was any public offering of the Company's shares of
the Common Stock, and consequently, the exemption available to the
Company at the time of the issuance of the securities was not forfeited.
However, in order to lessen any problems which may emanate from the
transfer of the above-described shares of the Common Stock, the Company
and the Affiliates offered to rescind the sales of all such shares,
pursuant to the securities laws of the various states where the transfers
took place. The Company made its rescission offer in the form of an
exempt offering in conformity with the applicable state securities laws.
Subsequent to June 30, 1998, all of the stockholders in question elected
to reject the rescission offers. Consequently, the Company does not
believe that significant exposure exists in connection with the issuance
of such shares. However, the rescission offers with respect to state
securities laws do not cure any potential federal securities laws
problems.
The 771,200 shares of restricted Common stock transferred to
non-affiliates and subject to rescission orders at June 30, 1998, are
reported outside the classification of stockholders' equity as common
stock subject to rescission orders
Continued
F-18
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
8. STOCKHOLDERS' EQUITY:
Following is an analysis of activity in the Company's stockholder equity
accounts during the year ended June, 30, 1998:
<TABLE>
<CAPTION>
PRICE RANGE SHARES TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Common stock issued upon conversion of
debentures $0.37-$0.96 2,403,838 $ 980,355
Common stock issued to convertible debenture
holders for failure to complete registration
of the underlying common stock in a timely manner $0.37-$0.49 197,574 82,216
Common stock issued for cash $0.23-$0.56 9,476,418 2,906,236
Common stock issued for services based upon
the estimated fair value of the shares at
the date of issue $0.35-$1.00 521,478 306,381
Warrants issued for services - - 1,006,000
Common stock subject to rescission offers - (771,200) (306,873)
---------- ----------
Totals for 1998 11,828,108 $4,974,315
---------- ----------
---------- ----------
</TABLE>
Following is an analysis of activity in the Company's stockholder equity
accounts during the year ended June, 30, 1997:
<TABLE>
<CAPTION>
PRICE RANGE SHARES TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Common stock issued for services based upon
the estimated fair value of the shares at
the date of issue $0.50 to $0.73 687,266 $ 405,498
Common stock issued as compensation to investors
for failure to promptly issue shares in connection
with the a Regulation D offering of common stock
and common stock warrants completed during 1996.
These shares were not valued but were considered
an offering cost of the Regulation D Offering. - 211,900
Common stock issued upon conversion of
debentures $0.64 98,768 64,125
Common stock issued for cash $0.50 to $0.60 1,833,152 1,010,209
--------- ----------
Totals for 1997 2,831,086 $1,479,832
--------- ----------
--------- ----------
</TABLE>
Continued
F-19
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
8. STOCKHOLDERS' EQUITY, CONTINUED:
Following is an analysis of activity in the Company's stockholder equity
accounts during the period from inception, June 10, 1987, to June, 30,
1996:
<TABLE>
<CAPTION>
PRICE RANGE SHARES TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Common stock issued for cash in connection
with a Regulation D offering of common stock
and common stock warrants $1.00 1,462,600 $ 1,462,600
Common stock issued for a note receivable in
connection with a Regulation D offering of
common stock and common stock warrants $1.00 525,000 525,000
Common stock issued for offering costs - 53,650 -
Common stock issued in connection with the
settlement of a note payable to an individual $0.98 734,942 722,080
Common stock issued to settle claims of
stockholders $0.81 to $0.91 578,000 508,280
Preferred stock converted to common stock based
upon a ratio equal to $5.00 over the quoted
market price of the common stock at the date of
issue $1.67 to $1.70 14,700 25,000
Common stock issued upon conversion of notes
and in payment of related interest expenses $0.95 to $1.77 146,590 153,207
Common stock issued for cash $0.35 to $1.00 1,163,625 796,470
Common stock issued for services based upon
the estimated fair value of the shares at the
date of issue $0.53 to $1.50 1,277,633 893,152
Common stock issued for cash to founding
stockholders in 1987 $0.001 5,000,000 5,000
Common stock issued for cash in connection
with a public offering of common stock
in 1988 0.005 5,000,000 19,562
Common stock issued for cash in connection
with a Regulation D offering of common
stock in 1989 3.13 80,000 250,010
Common stock issued for services in 1990 0.51 500,000 255,000
Common stock issued for cash in connection
with a Regulation D offering of common
stock in 1991 0.50 180,000 90,000
Common stock issued for services in 1991 0.50 3,240,000 1,620,000
Common stock issued for services in 1992 0.12 4,860,000 583,200
</TABLE>
Continued
F-20
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
8. STOCKHOLDERS' EQUITY, CONTINUED:
<TABLE>
<CAPTION>
PRICE RANGE SHARES TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Common stock issued for services in 1993 0.06 to 0.14 1,134,500 83,860
Common stock issued for extension of debt
agreement in 1993 0.06 to 0.10 9,000 700
Common stock issued in connection with
claims by certain stockholders in 1993 0.06 1,000 60
Common stock issued for cash in 1994 0.04 to 0.12 387,000 26,000
Common stock issued for services in 1994 0.04 to 0.16 1,485,660 150,634
Common stock issued for extension of debt
agreement in 1994 0.04 to 0.10 9,000 600
Common stock issued in connection with
claims by certain stockholders in 1994 0.04 to 0.12 51,000 6,040
Stock issued for cash in 1995 0.35 to 1.00 679,202 408,675
Stock issued for services in 1995 0.18 to 1.03 3,506,461 3,052,706
Common stock issued to convert certain
notes payable in 1995 0.10 to 1.76 702,400 118,643
Common stock issued in conversion of
preferred stock in 1995 1.67 to 1.69 124,600 210,000
---------- -----------
Totals from inception to June 30, 1996 32,906,563 $11,966,479
---------- -----------
---------- -----------
</TABLE>
On January 28, 1998, the Company entered into a three year investment
agreement (the "Investment Agreement") with Bristol Asset Management,
L.L.C. ("Bristol") under which Bristol may become obligated to purchase
up to $7,000,000 of the Company's common stock. Bristol's obligation
under the Investment agreement will not become effective until the
Company meets numerous legal, financial and reporting criteria as
specified in the Investment Agreement. The criteria require, among other
things, that the Company complete an effective registration on Form SB-2
of the common stock that will be issued under the Investment Agreement or
upon the exercise of related common stock warrants that will be issued
thereunder.
Continued
F-21
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
8. STOCKHOLDERS' EQUITY, CONTINUED:
Should the Company meet all criteria specified in the Investment
Agreement, the Company will determine, subject to certain limitations,
the timing and amount of its common stock to be sold to Bristol and will
deliver written notices ("Put Notices") to Bristol stating the dollar
amount of common stock that the Company intends to sell. The maximum
amount to be covered by any single Put Notice may not exceed the lesser
of (i) $7,000,000 less all amounts previously paid by Bristol and (ii)
the product of 14 per cent of the preceding calendar months volume of
shares of the Company's common stock that traded on the principal
exchange (the "Principal Exchange") on which the Company's common stock
trades, times the average closing bid price for the preceding calendar
month. Bristol's total investment under the Investment Agreement may
further be limited to an aggregate amount well below $7,000,000 based
upon stipulations included in the Investment Agreement that Bristol may
refuse to purchase the Company's common stock if the related Put Notice
would result in Bristol beneficially owning more than 4.9% of the
Company's outstanding common stock.
The sales price of common stock issued under the Investment Agreement
will be 74 percent of the lowest sales price for the Company's common
stock on the Principal Exchange during the ten days prior to a Put
Notice. The Company may be required to issue additional shares to Bristol
should the price of the Company's common stock fall significantly during
the twenty day period after a Put Notice. At the closing of each Put
Notice, the Investment Agreement provides that the Company will deliver
to Bristol warrants with a term of five years, to purchase 12 percent of
the number of shares covered by the Put Notice at an exercise price equal
to the average closing sales price for the Company's common stock on the
Principal Exchange during the ten days prior to the Put Notice. The 26%
discount on the sale of the Company's common stock and the value assigned
to warrants will be accreted at the date of issue and result in a
reduction of income for purposes of the calculation of earnings per
share.
Subscriptions receivable at June 30, 1998 represents a note receivable
received in exchange for 525,000 shares of the Company's common stock
sold during the year ended June 30, 1996. The note receivable bears
interest at 9% per year and was originally due February 28, 1997. The
Company has made no demands for payment of the note receivable and has
recognized no interest income on the balance. This note is collateralized
by 725,000 shares of the Company's common stock. (See Note 11)
Continued
F-22
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
9. STOCK WARRANTS AND OPTIONS:
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 March 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.
During the year ended June 30, 1997, the Company issued a warrant for
50,000 shares of the Company's common stock at $1.50 per share in
connection with the funding of a $125,000 convertible debenture. (See
Note 5) The Company also issued a warrant for 100,000 shares at $2.00 per
share in connection with the funding of a $550,000 convertible debenture.
Each of the warrants issued with the convertible debentures expires five
years from the date of issuance. (See Note 5)
A summary of warrant activity is as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at June 30, 1996 2,199,500 $5.00
Warrants issued in connection with the
funding of convertible debentures 150,000 $1.50-$2.00
----------
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 3,865,915 $0.72-$2.50
----------
----------
</TABLE>
Continued
F-23
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
9. STOCK WARRANTS AND OPTIONS, CONTINUED:
During the year ended June 30, 1998, the Company adopted the 1997 Stock
Option and Restricted Stock Plan (the "Plan") that provides for the grant
by the Company to employees of up to 5,125,000 options for shares of the
Company's common stock or actual shares of restricted common stock. The
Plan will continue in effect for a term of ten years unless sooner
terminated pursuant to its terms. To date, no restricted stock or stock
options have been issued under the Plan.
During the year ended June 30, 1998, the Company also executed a
consulting agreement with a financial services firm (the "Consultant")
under which the Company compensated the Consultant for past services
through issuance of 100,000 shares of common stock and by grant of
options to acquire 2,000,000 shares of the Company's common stock at
$0.60 per share (based upon the market value of the Company's common
stock at the date of issuance) for a term of five years. In connection
with this transaction, the Company recognized compensation expense of
approximately $800,000.
During the year ended June 30, 1998, the Company also granted stock
options for 275,000 shares of common stock to a consultant that provided
business planning services to the Company. The stock options bear a four
year term and an exercise price of $0.75 per share. The Company
recognized compensation expense of approximately $120,000 in connection
with the issuance of these stock options.
The Company periodically issues incentive stock options to key employees,
officers, directors and outside consultants to provide additional
incentives to promote the success of the Company's business and to
enhance the ability to attract and retain the services of qualified
persons. The issuance of such options are approved by the Board of
Directors. The exercise price of an option granted is determined by the
fair market value of the stock on the date of grant.
The Company has issued stock options to employees and non-employee
consultants as follows:
Continued
F-24
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
9. STOCK WARRANTS AND OPTIONS, CONTINUED:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------------------
EMPLOYEE NON-EMPLOYEE TOTAL EXERCISE PRICE
-------- ------------ ----- --------------
<S> <C> <C> <C> <C>
Options outstand-
ing at July 1,
1996 2,500,000 - 2,500,000 $1.25
Options granted 1,750,000 - 1,750,000 $0.70-$0.97
--------- --------- ---------
Options outstand-
ing at June 30,
1997 4,250,000 - 4,250,000 $0.70-$1.25
Options granted 1,000,000 2,275,000 3,275,000 $0.60-$0.75
--------- --------- ---------
Options outstand-
ing at June 30,
1998 5,250,000 2,275,000 7,525,000 $0.60-$1.25
--------- --------- ---------
--------- --------- ---------
</TABLE>
Following is a summary of outstanding options at June 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTED EXPIRATION DATE EXERCISE PRICE
---------------- ----------- --------------- --------------
<C> <C> <C> <C>
500,000 375,000 October, 2000 $1.25
1,250,000 312,500 August, 2001 0.70
275,000 275,000 November, 2001 0.75
500,000 166,667 April, 2002 0.97
1,000,000 250,000 September, 2002 0.75
2,000,000 2,000,000 November, 2002 0.60
2,000,000 2,000,000 June, 2005 1.25
--------- ---------
7,525,000 5,379,167
--------- ---------
--------- ---------
</TABLE>
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.
Continued
F-25
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
9. STOCK WARRANTS AND OPTIONS, CONTINUED:
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 a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998 and 1997: risk-free
interest rate of 5.8% to 6%; 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.
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:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net loss available to common
stockholders $(5,943,885) $(3,349,614)
Proforma net loss available to
common stockholders $(6,967,195) $(4,014,614)
Proforma basic and dilutive
loss per share $ (0.17) $ (0.12)
</TABLE>
Continued
F-26
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
10. LEASE COMMITMENTS:
The Company has entered into a lease agreement for office space which is
accounted for as an operating lease. Rent expense for each of the years
ended June 30, 1998 and 1997 was $30,300.
At June 30, 1998, the future minimum payments required under this
noncancelable operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
----------
<S> <C>
1999 $ 30,300
2000 5,050
-----------
Total $ 35,350
-----------
-----------
</TABLE>
11. 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,
1998 and 1997:
Continued
F-27
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
11. RELATED PARTY TRANSACTIONS, CONTINUED:
<TABLE>
<CAPTION>
AFFILIATE 1 AFFILIATE 1 AFFILIATE 3
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998
Warrants issued as compen-
sation - $ - - $ - - $ 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 2,746,275 $ 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 in-
cluded in notes payable - $ - - $ - - $ 354,167
Non-interest bearing advances
to the Company to fund current
operations. These advances
are uncollateralized. See
Note 5 - 1,192,854 - 223,720 - -
--------- ---------- ------- ---------- --------- ----------
Total debt to Affiliates -
1998 - $1,192,854 - $ 223,720 - $ 354,167
--------- ---------- ------- ---------- --------- ----------
--------- ---------- ------- ---------- --------- ----------
Interest expense recognized
on note payable - $ - - $ - - $ 109,375
--------- ---------- ------- ---------- --------- ----------
Total interest expense to
Affiliates - 1998 - $ - - $ - - $ 109,375
--------- ---------- ------- ---------- --------- ----------
--------- ---------- ------- ---------- --------- ----------
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
Affiliates at prices ranging
from $0.53 to $0.70 287,266 $ 152,498 400,000 $ 253,000 - $ -
Cash investment in the
Company 1,960,418 980,209 - - - -
--------- ---------- ------- ---------- --------- ----------
Total investment by
Affiliates - 1997 2,247,684 $1,132,707 400,000 $ 253,000 - $ -
--------- ---------- ------- ---------- --------- ----------
--------- ---------- ------- ---------- --------- ----------
</TABLE>
In addition to amounts shown above, the accompanying balance sheet
includes a $525,000 subscription receivable from Affiliate 3. (See
Note 8)
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.
Continued
F-28
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
12. LITIGATION AND CONTINGENCIES:
At June 30, 1998, the Company is involved in various matters of
litigation or dispute and other contingencies, as follows:
During the year ended June 30, 1996, a stockholder in the Company has
raised claims against the Company and certain of its officers alleging
misrepresentation, potential securities violations and breach of
fiduciary duties. The stockholder has made a settlement offer to obtain
additional shares of the Company's common stock; however certain
directors of the Company refute the allegations and the settlement offer
has been rejected by the Company.
In another matter, during the year ended June 30, 1994, the Company
issued 1,000,000 shares of its common stock to a former director of the
Company based upon the directors representation that he would arrange
large-scale financing by certain proposed contributors. During the year
ended June 30, 1997, actions were taken to cancel the common stock
because the Company contends that the issuance was conditional upon the
former directors' ability to arrange large-scale financing. However, the
Company was subsequently contacted by a lender that asserts that he had
relied upon a pledge of 500,000 shares of the Company's common stock by
the former director as collateral for a loan. The 500,000 shares of
common stock issued to the director are included as issued and
outstanding shares in the accompanying financial statements at June 30,
1998 and 1997.
At various times during 1998 and 1997 the Company has been involved in
discussions with two of its primary vendors regarding past due accounts.
The most critical vendor is TRW, an Ohio corporation performing contract
software development, and strategic planning and management services
regarding the testing, development and deployment of the Company's
thermal imaging systems. The Company has periodically been delinquent in
the payment of costs and fees under contracts with TRW (See Note 4) and
TRW, although not having filed formal legal actions, has threatened the
Company that it would withhold delivery of source codes of developed
software until past due amounts were paid. The Company and TRW have
informally agreed that the Company will make payments of three times
TRW's weekly ongoing costs with respect to work performed for the
Company, plus a fee of 15% of such costs until past due amounts are paid.
To date, the Company has adhered to the payment schedule and the payable
to TRW, which has been as high as $897,762, was $280,433 at June 30,
1998. If the Company defaults on its agreed payment schedule, and TRW
follows through with its threats to withhold delivery of the source
codes, or other key deliverables, the Company's operations will be shut
down or severely restricted from analyzing clinical data.
Continued
F-29
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
12. LITIGATION AND CONTINGENCIES, CONTINUED:
The Company has also been periodically delinquent in payments to its
primary legal counsel (the "Attorneys") for legal services and at June
30, 1998 owed the Attorneys $369,848. Effective May 1, 1998, the Company
executed a Promissory Note consolidating the balance of fees owed to the
Attorneys through April 21, 1998 (the "Promissory Note"). The terms of
the Promissory Note provide for interest to accrue on the unpaid
principal at a rate of one percent per month and require the Company to
make monthly installment payments of $50,000, including accrued interest,
which may increase in the event the Company obtains a certain level of
financing, until all principal and interest are paid in full. The
Promissory Note incorporates the terms of two pledge agreements executed
by the Company and TMI which provide security for the amounts due under
the Promissory Note and on future outstanding accounts with the Attorneys
(the "Pledge Agreements"). The security interests granted cover the
Company's common stock holdings in TMI and the intellectual property of
both the Company and TMI. If an event of default were to occur under the
Promissory Note and or the Pledge Agreements, the Company's interest in
TMI and in the Company's intellectual property could be sold to satisfy
the outstanding debt. At June 30, 1998 the amount due on the Promissory
Note was $301,223. Additional amounts for fees totaling $68,625 are
included in accounts payable at June 30, 1998.
The Company has funded its operations in part by means of various
offerings thought to be exempt from the registration requirements of the
Securities Act of 1933 or various applicable state securities laws. In
the event that any of the exemptions upon which the Company relied were
not, in fact, available, the Company could face claims from federal and
state regulators and from purchasers of their securities. Management and
legal counsel, although not aware of any alleged specific violations,
cannot predict the likelihood of claims or the range of potential
liability that could arise from this issue.
Continued
F-30
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
12. LITIGATION AND CONTINGENCIES, CONTINUED:
As a Nevada Corporation organized prior to October 1, 1991, the Company's
stockholders have, with limited exceptions, had preemptive rights to
acquire the Company's common stock when such securities were offered for
sale. However, in various offerings of the Company's securities, the
Company failed to properly offer their existing stockholders the
preemptive rights to which they were entitled. Should any stockholder
assert preemptive rights for past offerings, the Company plans to make
available the shares of stock and at the price to which the stockholder
was originally entitled. Management is not aware of any stockholder who
intends to make any claim with respect to the failure by the Company to
offer preemptive rights. However, there can be no assurance that
litigation asserting such claims will not be initiated, or that the
Company would prevail in any such litigation. On February 4, 1998 a
majority of the stockholders, by written consent, amended the Articles of
Incorporation of the Company to deny preemptive rights from and after
that date with respect to the issuance of shares of the common stock. The
amendment to the Articles of Incorporation will have no effect with
respect to preemptive rights which may have existed for certain offerings
prior to such amendment.
The Company is also involved various other legal disputes arising in the
normal course of business that, in the opinion of management, should not
result in significant liability, if any.
13. GOING CONCERN CONSIDERATIONS:
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, 1998
and 1997, the Company incurred net losses of $(5,943,885) and
$(3,349,614), respectively, and negative cash flows from operations of
$(4,541,755) and $(1,906,353), respectively. These factors along with a
$(2,629,727) negative working capital position at June 30, 1998 and
delinquencies in payments to major vendors (See Notes 5 and 12) raise
substantial doubt about the Company's ability to continue as a going
concern.
Management plans to take specific steps to address its difficult
financial situation as follows:
Continued
F-31
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
13. GOING CONCERN CONSIDERATIONS, CONTINUED:
- In the near term the Company plans additional private sales of debt
and common stock to qualified investors to fund its current
operations.
- In the intermediate term, the Company plans a public registration of
its common stock under the Securities and Exchange Act of 1933 to
provide a means of expanding the market for its common stock and to
provide a means of obtaining the funds necessary to bring its thermal
imaging system to the commercial market.
- 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.
14. ACQUISITION OF THERMAL MEDICAL IMAGING, INC.:
In January 1997, the Company acquired a 60% ownership percentage in TMI
to bring its total ownership percentage to 80%. The purchase price for
the additional interest was $732,577 and the balance was paid through the
contribution of cash advances, previously made, to the capital of the
Company. This acquisition was accounted for using the purchase method of
accounting and the results of operations of TMI have been consolidated
for 1997, the year of acquisition, and 1998. All pre-acquisition losses
of TMI had previously been reported in the Company's financial
statements.
Continued
F-32
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------
15. NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the years ended June 30, 1998 and 1997, the Company engaged in
certain non-cash investing and financing activities as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Common stock issued in settlement of
notes payable $980,355 $ -
-------- --------
-------- --------
Common stock issued upon conversion
of debentures $ - $ 62,020
-------- --------
-------- --------
</TABLE>
F-33
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
---------
CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
F-34
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED INTERIM BALANCE SHEET
SEPTEMBER 30, 1998
----------
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1998
-------------
<S> <C>
Current assets:
Cash $ 175,503
Deposits 2,204
-----------
Total current assets 177,707
Property and equipment, net 138,354
-----------
Total assets $ 316,061
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 1,176,140
Accounts payable 551,572
Accrued liabilities 260,632
Advances from stockholder 2,013,122
-----------
Total current liabilities 4,001,466
-----------
Commitments and contingencies
Common stock subject to rescission offer 306,873
-----------
Stockholders' deficit:
Convertible preferred stock, $5.00 par
value, 100,000 shares authorized -
Common stock, $.001 par value; 100,000,000
shares authorized, 47,565,757 shares
issued and outstanding on September 30,
1998, excluding 771,200 shares subject
to rescission offer 47,566
Additional paid-in capital 18,373,060
Subscription receivable (525,000)
Losses accumulated during the development
stage (21,887,904)
-----------
Total stockholders' deficit (3,992,278)
-----------
Total liabilities and stockholders'
deficit $ 316,061
-----------
-----------
</TABLE>
The accompanying selected notes are an integral
part of these interim financial statements.
F-35
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND THE
PERIOD FROM INCEPTION, JUNE 10, 1987, THROUGH SEPTEMBER 30, 1998
-----------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Interest income $ 733 $ 333 $ 20,616
Income from sale of prototype - - 180,815
----------- ----------- ------------
Total income 733 333 201,431
----------- ----------- ------------
Operating, general and admin-
istrative expenses 394,957 262,210 14,062,705
Research and development costs 642,222 351,884 5,837,286
Interest expense 168,489 114,555 1,740,601
Litigation settlement - - 514,380
----------- ----------- ------------
Total expenses 1,205,668 728,649 22,154,972
----------- ----------- ------------
Net loss before extraordinary
item 1,204,935 728,316 21,953,541
Extraordinary gain on extin-
guishment of debt - - 65,637
----------- ----------- ------------
Net loss $(1,204,935) $ (728,316) $(21,887,904)
----------- ----------- ------------
----------- ----------- ------------
Weighted average shares
outstanding 48,336,957 36,945,206
----------- -----------
----------- -----------
Loss per common share $ (0.02) $ (0.02)
----------- -----------
----------- -----------
</TABLE>
The accompanying selected notes are an integral
part of these interim financial statements
F-36
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED CONDENSED INTERIM STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND THE
PERIOD FROM INCEPTION, JUNE 10, 1987, THROUGH SEPTEMBER 30, 1998
-----------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,204,935) $ (728,316) $(21,887,904)
Adjustments to reconcile net loss
to net cash used in operating
activities: 139,349 (260,367) 10,660,031
----------- ----------- ------------
Net cash used in operating
activities (1,065,586) (988,683) (11,227,873)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of equipment and computers (617) (10,301) (231,795)
----------- ----------- ------------
Net cash used in investing
activities (617) (10,301) (231,795)
----------- ----------- ------------
Cash flows from financing activities:
Net proceeds from sale of common
stock issued for cash - - 6,974,762
Payment of stock offering costs - - (125,000)
Advances from affiliates 596,548 753,019 2,013,122
Proceeds from notes payable and
convertible debentures 565,094 336,849 3,723,708
Payment of debt issuance costs - - (133,600)
Repayment of notes payable (150,000) (60,000) (817,821)
----------- ----------- ------------
Net cash provided by financing
activities 1,011,642 1,029,868 11,635,171
----------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents (54,561) 30,884 175,503
Cash and cash equivalents, beginning
of period 230,064 193,852 -
----------- ----------- ------------
Cash and cash equivalents, end of
period $ 175,503 $ 224,736 $ 175,503
----------- ----------- ------------
----------- ----------- ------------
Supplemental additional cash flow
information:
Cash paid for interest $ - $ - $ 8,770
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying selected notes are an integral
part of these interim financial statements.
F-37
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
-----------
1. INTERIM FINANCIAL STATEMENTS:
The unaudited consolidated condensed interim financial statements have
been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and note disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant
to those rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments necessary for
a fair presentation of results of operations have been made to the
interim financial statements. Results of operations for the three-month
periods ended September 30, 1998 and 1997 are not necessarily indicative
of results of operations for the respective full years.
A summary of the Company's significant accounting policies and other
information necessary to understand these consolidated condensed interim
financial statements is presented in the Company's audited financial
statements for the years ended June 30, 1998 and 1997. Accordingly, the
Company's audited financial statements should be read in connection with
these financial statements.
2. NOTES PAYABLE AND CONVERTIBLE DEBT:
On September 11, 1998, the Company entered into a $347,750 note
payable to a stockholder/affiliate bearing interest at a stated rate of
10% per year and due April 11, 1999. (At September 30, 1998, $335,000
had been drawn under this note.) This note is uncollateralized and may
be converted to common stock of the Company at any time subsequent to
its maturity based upon the lesser of 50% of the closing price of the
Company's common stock at the date of the note or 50% of the price of
the Company's common stock at the date the lender notifies the Company
of his intent to convert. The resulting discount from the fair value of
the Company's common stock is being amortized to expense over the
six-month term of the note and, accordingly, the note bears an effective
interest rate of approximately 131% per year. This note increases the
amount due this stockholder/affiliate to $852,435 at September 30, 1998.
3. INCOME TAXES:
The difference between the 34% federal statutory income tax rate shown
in the accompanying interim financial statements is primarily
attributable to an increase in the valuation allowance applied against
the tax benefit from utilization of net operating loss carryforwards.
4. COMPREHENSIVE INCOME:
Effective July 1, 1998 the Company adopted Statement of Financial
Accounting standards ("SFAS") No. 130, Reporting Comprehensive Income,
which requires a company to display an amount representing comprehensive
income as part of the Company's basic financial statements.
Comprehensive income includes such items as unrealized gains or losses
on certain investment securities and certain foreign currency
translation adjustments. The Company's financial statements include
none of the additional elements that affect comprehensive income.
Accordingly, comprehensive income and net income are identical.
F-38
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
------------
5. COMMON STOCK SUBJECT TO RESCISSION OFFERS:
During 1998, the Company issued a total of 8,876,418 shares of common
stock to the Affiliates (See Note 11) for cash or other consideration
and such common shares are considered to be "restricted" securities with
limited transferability under state and federal securities laws. The
Affiliates, in secondary transactions, subsequently sold or otherwise
transferred 1,187,000 shares of the common stock between themselves and
to fourteen non-affiliates and it has come to the Company's attention
that the transactions between Affiliates and non-affiliates may have
been in violation of various state and/or federal securities laws.
In the event that the subsequent transfers of "restricted" shares of the
Company's common stock by the Affiliates are deemed to be in violation
of state and/or federal securities laws, the exemptions from
registration, relied upon by the company for the initial issuance of
those shares, could be lost. Additionally, if an exemption from
registration for the issuances is not available, and the Company is
found to have engaged in a public offering of securities, the Company
may face claims by the subsequent purchasers for rescission and/or
administrative sanctions, fines and penalties even though the Company
took the step of applying appropriate restrictive legends to the stock
certificates in question.
Based on the limited number of parties involved in the above-described
transactions and the precautions taken by the Company, management does
not believe that there was any public offering of the Company's shares
of the Common Stock, and consequently, the exemption available to the
Company at the time of the issuance of the securities was not forfeited.
However, in order to lessen any problems which may emanate from the
transfer of the above-described shares of the Common Stock, the Company
and the Affiliates offered to rescind the sales of all such shares,
pursuant to the securities laws of the various states where the
transfers took place. The Company made its rescission offer in the form
of an exempt offering in conformity with the applicable state securities
laws. Subsequent to June 30, 1998, all of the stockholders in question
elected to reject the rescission offers. Consequently, the Company does
not believe that significant exposure exists in connection with the
issuance of such shares. However, the rescission offers with respect to
state securities laws do not sure any potential federal securities laws
problems.
F-39
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
------------
5. COMMON STOCK SUBJECT TO RESCISSION OFFERS, CONTINUED:
The 771,200 shares of restricted Common Stock transferred to
non-affiliates and subject to rescission orders are reported outside the
classification of stockholders' equity as common stock subject to
rescission orders. However, subsequent to September 30, 1998, all
rescission offers were rejected by the non-affiliates and the balance of
common stock subject to rescission orders was reclassified and included
in stockholders' equity.
F-40
