<PAGE>
As Filed with Securities and Exchange Commission on April 1, 1999
Registration No. 333-47237
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
POST-EFFECTIVE AMENDMENT NO. 8
TO
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
COMPUTERIZED THERMAL IMAGING, INC.
(Exact name of the Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Nevada 3815 87-0458721
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
476 Heritage Park Boulevard, Suite 210
Layton, Utah 84041
(801) 776-4700
(Address, including zip code and telephone number, including
area code, of the Registrant's principal executive offices)
<TABLE>
<S> <C>
David A. Packer With a copy to:
President Owen H. Naccarato, Esq.
476 Heritage Park Boulevard, Suite 210 31 Grenache
Layton, Utah 84041 Irvine, California 92614
(801) 776-4700 (949) 551-4982
(Name, address, including zip code, and
telephone number, including area code,
of agent for service for the Registrant)
</TABLE>
--------------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement has been declared
effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. :
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount To Offering Price Aggregate Registration
Securities To Be Registered Be Registered Per Share (1) (2) Offering Price (1) (2) Fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock to be Resold (3):
Newly Issued Shares................... 20,781,250 $0.675 $14,027,344 $4,138.07
Shares Outstanding.................... 5,337,741 $0.675 $ 3,602,975 $1,062.88
Shares Underlying Resale Warrants..... 3,840,615 $0.675 $ 2,592,415 $ 764.76
Shares Underlying Resale Options...... 6,250,000 $0.675 $ 4,218,750 $1,244.53
- ------------------------------------------------------------------------------------------------------------------------------
Total................................... 36,209,606 $24,441,484 $7,210.24
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Based upon the average of the bid and ask prices of the Common Stock
reported on the OTC Bulletin Board on February 25, 1998.
(3) Common Stock to be Resold includes shares of the Common Stock underlying
certain outstanding securities which are exercisable for or convertible into
shares of the Common Stock which have not yet been exercised or converted.
--------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Location In Prospectus
--------------------------------- ----------------------
<S> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus....................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information and Risk Factors...................... Prospectus Summary; Risk Factors; The Company
4. Use of Proceeds........................................... Use of Proceeds
5. Determination of Offering Price........................... Outside Front Cover Page; Risk Factors
6. Dilution.................................................. *
7. Selling Security Holders.................................. Plan of Distribution and Selling Stockholders
8. Plan of Distribution...................................... Plan of Distribution and Selling Stockholders
9. Legal Proceedings......................................... Business - Litigation
10. Directors, Executive Officers, Promoters
and Control Persons....................................... The Company; Management - Executive Officers and
Directors
11. Security Ownership of Certain Beneficial
Owners and Management..................................... Principal Stockholders
12. Description of Securities................................. Description of Securities
13. Interest of Named Experts and Counsel..................... *
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities............ *
15. Organization Within Last Five Years....................... The Company
16. Description of Business................................... Business
17. Management's Discussion and Analysis
or Plan of Operation...................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property................................... Business - Patents and Intellectual Property, - Facilities
19. Certain Relationships and Related Transactions............ Management - Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters....................................... Risk Factors; Price Range of Common Stock and Dividend
Policy; Description of Securities
21. Executive Compensation.................................... Management - Executive Compensation
22. Financial Statements...................................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................................ Management's Discussion and Analysis of Financial
Condition and Results of Operations - Change of
Accountants
</TABLE>
(*) None or Not Applicable.
<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) 20,781,250 shares to be purchased by an unrelated investor
(the "Newly Issued Shares"); (ii) 5,337,741 shares currently issued and
outstanding; (iii) 3,840,615 shares underlying outstanding warrants exercisable
at prices ranging from $0.72 to $5.00 per share which expire on various dates
ranging from March 31, 1999 to March 13, 2002 (the "Resale Warrants"); and (i)
6,250,000 shares underlying outstanding options exercisable at prices ranging
from $0.60 per share to $1.25 per share which expire automatically on various
dates ranging from July 21, 2000 to June 12, 2005 (the "Resale Options").
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 applies to the resale of such shares by Beach Boulevard 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"). Beach Boulevard 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 March 26, 1999, the closing bid and ask prices of the Common Stock were $0.66
and $0.70 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 March 31, 1999
1
<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........................................................... 23
Management............................................................... 44
Principal Stockholders................................................... 57
Description of Securities................................................ 63
Plan of Distribution And Selling Stockholders............................ 70
Legal Matters............................................................ 72
Experts.................................................................. 73
Index to Financial Statements............................................ F- 1
</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.
4
<PAGE>
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 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 an Investment Agreement with Beach Boulevard L.L.C.
("Beach") on March 4, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources". Subject to certain conditions, the
5
<PAGE>
Company may require Beach to purchase up to $7,000,000 worth of the Common Stock
in tranches. Such conditions include that the Current Price (the lowest sale
price of the Common Stock as reported by Bloomberg, or if not so reported, as
reported by the over-the-counter market during the ten trading days prior to the
agree upon tranche date) of the Common Stock after the Initial Closing Date be
seventy-five cents ($0.75) or more, and the average daily trading volume for the
twenty consecutive trading days ending the day before any subsequent Closing
Date be two hundred thousand (200,000) or more shares. In addition, the
Company's filed and effective Registration Statement shall continue to be
effective for all subsequent tranches. The Company warrants and representations
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, Beach 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. See
"Principal Stockholders - Beach Boulevard L.L.C. Securities Purchase Agreement".
The first Traunch (the "Initial Tranche") shall aggregate $1,500,000.
Subject to certain limitations and conditions precedent, the Company may require
Beach Boulevard L.L.C. to purchase additional shares of the Common Stock at
$500,000 a month commencing two months after the Closing Date (the date of the
closing of the purchase and sale of the Initial Tranche), at any time, but not
more than once in any calendar month and not prior to five business days after
the immediate preceding closing date and total purchases are not to exceed
$7,000,000. Shares purchased in each subsequent tranche shall equal the price
of the tranche, divided by the Current, multiplied by the Applicable Percentage.
The "Applicable Percentage" is eighty-two and one-half percent (82.5%) for the
Initial Closing Date and eighty-five percent (85%) for each Additional Closing
Date.
If the Market Price of the Company's Common Stock is less then the
Base Price (95% of the Current Price of the Common Stock applicable to that
Closing Date) at any trading day during the period (the "Effective Period")
beginning on the first trading day of the relevant Closing Date and continuing
through the twentieth trading day after such closing date, the Company will be
obligated to issue Beach Supplemental Shares. These Supplemental Shares such be
issued no later than the thirtieth trading day after each Closing Date. The
number of Supplemental Shares shall be equal in number to the product of the
Purchased Shares of that relevant Closing Date multiplied by the excess of
ninety-five percent of the Current Price of the Common Stock applicable to the
Closing Date over the Market Price of the Common Stock, divided by the Market
Price of the Common Stock. For purposes of this calculation, the "Market Price
of Common Stock" shall be the average of the lowest sale price of a share of
Common Stock, as reported by Bloomberg, LP, for any five trading days during the
Effective Period as such dates are selected by the Purchaser. Based on certain
assumptions in determining a Current Price for the Company's Common Stock, the
Company shall have at all times authorized and reserved for issuance, free from
preemptive rights, share of Common Stock issuable (i) for the remaining maximum
Additional Purchased Shares and (ii) the maximum Supplemental Shares which would
be issued in conjunction with the purchase and sale of the maximum Additional
Purchased Shares. The Company shall notify the Purchaser if at any time the
proper number of shares are not reserved for issuance
Other than Beach Boulevard, 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. In addition, 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.
6
<PAGE>
On January 28, 1998, the Company had entered into an investment
agreement with Bristol Asset Management L.L.C. ("Bristol"). Subject to certain
conditions, Bristol had agreed to purchase up to $7,000,000 worth of the
Company's Common Stock. Subsequent to the effective date of the Company's
Registration Statement on Form SB-2 (January 8, 1999), Bristol declined to
participate under its investment agreement with the Company. Beach Boulevard
has stepped in to replace Bristol.
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) 70,781, (ii) 3,840,615 shares underlying the
Resale Warrants; and (iii) 6,250,000 shares underlying the Resale Options.
See "Management - Stock Options and Restricted Stock" and "Description of
Securities".
(2) Includes: 20,781,250 Newly Issued Shares. The number of newly issued shares
is based on the formulas contained within the Beach Boulevard Securities
Purchase Agreement. The formula to calculate the number of newly purchased
shares contains two calculations (1) the Number of Purchased Shares equals
$7,000,000 divided by .65 (estimated Current Price on Closing Date) times
the Applicable Percentage Rate of 85% (conservative approach) equals
9,153,845 shares; (2) the number of Supplemental Shares equals the Purchased
Shares of 9,153,845 shares times the excess of 95% of the Current Price
($0.65) or $0.62 over the Market Price (50% of the Current Price or $0.33)
which is $0.29, divided by the Market Price which results in 8,044,288 for a
grand total of 17,198,133. To this total the Company added 3,583,227 shares
to account for decreases in the price of the Common Stock during the
Agreement period. (ii) 5,337,741 shares issued and outstanding. (iii)
3,840,615 shares underlying the Resale Warrants. (iv) 6,250,000 shares
underlying the Resale Options. See "Plan of Distribution and Selling
Stockholders". The registration of the Newly Issued Shares applies to the
resale of such shares by Beach Boulevard 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 December 31, 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 December
31, 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>
Six Months Ended Years Ended
December 31, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues, net................ -0- -0- -0- $55,815
Other income................. $1,667 $1,247 $3,307 $5,762
------------ ------------ ------------ ------------
Total revenues............... $1,667 $1,247 $3,307 $61,577
Loss from operations......... ($2,345,823) ($3,125.075) ($6,009,522) ($3,349,614)
Extraordinary item........... -0- -0- $65,637 -0-
Net loss..................... ($2,345,823) ($3,125,075) ($5,943,885) ($3,349,614)
Net loss per weighted-average
shares of common stock
outstanding................. ($0.049) ($0.081) ($0.14) ($0.10)
Weighted average Shares of
Common Stock outstanding.... 48,248,841 38,769,017 41,943,867 33,803,045
Balance Sheet Data:
Current assets............... $259,908 $259,123 $232,268 $196,056
Total assets................. $387,577 $595,938 $381,525 $528,675
Current liabilities.......... $4,293,870 $2,376,424 $2,861,995 $1,671,448
Total liabilities............ $4,293,870 $2,376,424 $3,168,868 $2,346,448
Stockholders' equity
(deficit)................... ($3,906,293) ($1,780,486) ($2,787,343) ($1,817,773)
Working capital (deficit).... ($4,033,962) ($2,117,301) ($2,629,727) ($1,475,392)
</TABLE>
9
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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 that 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
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<PAGE>
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 an Investment Agreement with Beach Boulevard L.L.C.
("Beach") on March 4, 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 Beach to
purchase up to $7,000,000 worth of the Common Stock in tranches. Such
conditions include that the Current Price (the lowest sale price of the Common
Stock as reported by Bloomberg, or if not so reported, as reported by the over-
the-counter market during the ten trading days prior to the agree upon tranche
date) of the Common Stock after the Initial Closing Date be seventy-five cents
($0.75) or more, and the average daily trading volume for the twenty consecutive
trading days ending the day before any subsequent Closing Date be two hundred
thousand (200,000) or more shares. In addition, the Company's filed and
effective Registration Statement shall continue to be effective for all
subsequent tranches. The Company warrants and representations 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, Beach 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. See "Principal Stockholders - Beach
Boulevard L.L.C. Securities Purchase Agreement".
The first Traunch (the "Initial Tranche") shall aggregate $1,500,000.
Subject to certain limitations and conditions precedent, the Company may require
Beach Boulevard L.L.C. to purchase additional shares of the Common Stock at
$500,000 a month commencing two months after the Closing Date (the date of the
closing of the purchase and sale of the Initial Tranche), at any time, but not
more than once in any calendar month and not prior to five business days after
the immediate preceding closing date and total purchases are not to exceed
$7,000,000. Shares purchased in each subsequent tranche shall equal the price
of the tranche, divided by the Current, multiplied by the Applicable Percentage.
The "Applicable Percentage" is eighty-two and one-half percent (82.5%) for the
Initial Closing Date and eighty-five percent (85%) for each Additional Closing
Date.
If the Market Price of the Company's Common Stock is less then the
Base Price (95% of the Current Price of the Common Stock applicable to that
Closing Date) at any trading day during the period (the "Effective Period")
beginning on the first trading day of the relevant Closing Date and continuing
through the twentieth trading day after such closing date, the Company will be
obligated to issue Beach Supplemental Shares. These Supplemental Shares such be
issued no later than the thirtieth trading day after each Closing Date. The
number of Supplemental Shares shall be equal in number to the product of the
Purchased Shares of that relevant Closing Date multiplied by the excess of
ninety-five percent of the Current Price of the Common Stock applicable to the
Closing Date over the Market Price of the Common Stock, divided by the Market
Price of the Common Stock. For purposes of this calculation, the "Market Price
of Common Stock" shall be the average of the lowest sale price of a share of
Common Stock, as reported by Bloomberg, LP, for any five trading days during the
Effective Period as such dates are selected by the Purchaser. Based on certain
assumptions in determining a Current Price for the Company's Common Stock, the
Company shall have at all times authorized and reserved for issuance, free from
preemptive rights, share of Common Stock issuable (i) for the remaining maximum
Additional Purchased Shares and (ii) the maximum Supplemental Shares which would
be issued in conjunction with the purchase and sale of the maximum Additional
Purchased Shares. The Company shall notify the Purchaser if at any time the
proper number of shares are not reserved for issuance
Other than Beach Boulevard L.L.C., 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
11
<PAGE>
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. In addition, 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 only applies to the resale
of such shares by Beach Boulevard 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.
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
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<PAGE>
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? 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 that 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;
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<PAGE>
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 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
14
<PAGE>
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 a Securities Purchase Agreement with Beach Boulevard,
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 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
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<PAGE>
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 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 pre-market approval
application (herein referred to as "PMA") by the FDA. Satisfaction of
applicable regulatory requirements may take several years and varies
substantially based upon the type, complexity and novelty of such devices, as
well as the clinical procedure. Although filings and governmental approvals may
be required in some foreign countries before the devices can be marketed, other
countries may require no approval. There can be no assurance that further
clinical trials of the Systems or of any future products will be successfully
completed or, if they are completed that any requisite FDA or foreign
governmental clearances or approvals will be obtained.
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
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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
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
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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 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 'he
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
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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 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 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 Securities Purchase
Agreement, the Company may require Beach Boulevard L.L.C. ("Beach") 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, Beach is not required to purchase any of the
Newly Issued Shares until the Company has fulfilled certain conditions precedent
set forth in the Securities Purchase 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
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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 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
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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 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.
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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".
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.
22
<PAGE>
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
Low High
Calendar Year 1997 ------------ ------------
- ------------------
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
Fourth Quarter $0.51 $ 0.76
</TABLE>
As of December 31, 1998, there were approximately 50,086,998 shares of
the Common Stock issued and outstanding. The Company believes that the Common
Stock was held by approximately 5400 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 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 December 31, 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) December 31, 1998(1)
---------------- --------------------
<S> <C> <C>
Stockholders deficit:
Common Stock, $0.001 par value,
100,000,000 shares authorized;
47,565,757 and 50,086,988 issued and
outstanding
on June 30, 1998 and December 31,
1998, respectively $ 47,566 $ 50,087
Additional paid-in capital............ 18,373,060 1,597,412
Subscription receivable (2)........... (525,000) (525,000)
Losses accumulated during the
development stage.................... (20,682,969) (23,028,792)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998(1) December 31, 1998(1)
---------------- -------------------
<S> <C> <C>
Total stockholders deficit.............. ($2,480,470) ($3,906,293)
</TABLE> ========== ==========
(1) Does not give the effect to the issuance of (i) 20,781,250 shares of the
Common Stock upon the purchase of the Newly Issued Shares; (ii) 3,840,615
shares of the Common Stock upon exercise of the Resale Warrants; (iii)
6,250,000 shares of the Common Stock upon exercise of the Resale Options;
and (iv) 771,200 shares of the Common Stock issued and outstanding but
subject to rescission offers. For December 31, 1998 the 771,200 rescission
offer has expired.
(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 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
24
<PAGE>
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.
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.
25
<PAGE>
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 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.
26
<PAGE>
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
RESULTS OF OPERATIONS
SECOND QUARTER ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997. The Company
incurred a loss of $1,140,560 for the quarter ended December 31, 1998, as
compared to a loss of $2,396,760 for the three months ending December 31, 1997.
The Company had no revenues in either period. The decrease in losses was
attributable to a significant decrease in general and administrative expenses.
General and administrative expenses decreased from $1,679,941 during the
second quarter of 1997 to $334,614 during the same period in 1998. The 1997
period includes a charge of $850,167 for options issued to a consultant with no
comparable expense in 1998. This decrease was also due to decreased legal and
accounting fees for 1998 over 1997 and decreases in consulting fees 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.
During the second quarter of 1998, the Company spent $593,411 on research an
development expenses compared with $652,349 during the same period in 1997.
Clinical testing costs during the second quarter of 1998 rose to $148,092 from
$65,212 in the prior year's quarter. The Company's expenses incurred in
connection with the TRW contracts decreased to $317,641 in the second quarter of
1998 as compared to $493,374 in 1997. The costs incurred for research equipment
during the second quarter of 1998 were $37,285 and FDA consulting costs were
$38,099 with no comparable expense in 1997 for equipment and $20,672 for FDA
testing/consulting costs. Interest expense increased to $202,783 from $59,423
during the second quarter of 1998 versus 1997 due to the realization of a
$329,833 discount on two notes payable to MFG during this period. 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 second quarter of 1998 to
$10,686 from $5,960 in 1997.
27
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997. The Company incurred
a loss of $2,345,823 for the six months ended December 31, 1998 as compared to a
loss of $3,125,075 for that same six-month period in 1997. The Company had no
revenues in either period. The decrease was due to a substantial decrease in
general and administrative expenses. General and administrative expenses
decreased to $805,848 for the six months ended December 31, 1998 from $2,030,345
during that same period in 1997. The decrease was largely due to a decrease in
consulting fee expenses from $1,374,591 for the six months ended December 1997,
to $231,301 for the first half of the next fiscal year. The decrease was due to
the lack of stock transactions to fund general and administrative expenses in
1998. The Company funded $1,198,334 in general and administrative expenses
through the issuance of stock in 1997. The Company also experienced a decrease
in legal and accounting of approximately $36,000 when comparing the 1998 and
1997 periods.
During the six months ended December 31, 1998, the Company spent $57,238 on
FDA testing and consulting compared with $25,379 in that same period in 1997.
TRW contracts and patent work cost the Company $552,679 in the first half of the
fiscal year 1998, a decrease from the $709,961 spent in the first half of the
fiscal year 1997. Equipment for research was $123,055 for the six months ended
December 31, 1998 with no such expenditures in that same time period for the
prior year. Clinical trial expenses significantly increased for the six months
ended December 31, 1998 when compared to December 31, 1997, and were $304,521
and $65,802, respectively. Depreciation expenses at first half of the year
ended December 31, 1998 increased to $22,206 over $12,348 in 1997. Interest in
the two comparable six month periods, was $371,272 as of December 31, 1998, a
substantial increase over that same period in 1997, when interest cost the
Company $173,978.
The Company funded its losses during the six months ended December 31, 1998
and 1997, through issuances of common stock in exchange for cash contributions,
notes, and through advances from one or more of the parties which have
consistently provided funding to the Company: Thermal Imaging, Inc. ("TII"), an
affiliate of Mr. Johnston, Doug Holt doing business as PDH, Ltd.("PDH"), an
independent contractor which provides various services to the Company and Daron
Dilia doing business as Manhattan Financial Group ("MFG"). The Company received
funding of $631,833 in non-interest bearing advances in the period ending
December 31, 1998, and $1,680,610 in non-interest bearing advances in the that
same period of 1997. The Company received loans from MFG in the amount of
$347,750 during the September and October of 1998 and no notes were entered into
in the comparative period of 1997. The Company also received $219,902 in legal
services during the six months ended December 31, 1998 which were incorporated
into the Company's revolving note agreement with the Company's law firm. The
Company also made payments of $300,000 to its law firm, $150,000 in each of the
first two quarters of 1998. During the first six months of 1997 fiscal period,
the Company satisfied a large part of its cash flow requirement through issuance
of shares. Shares were issued to affiliates to satisfy advances consisting of
4,727,177 common shares in repayment of advances totaling $1,608,260. Common
shares aggregating 871,333 were also issued as compensation and for services
valued at $348,167. In addition, the Company paid off $355,500 in debentures
and accrued interest through the issuance of 801,439 common shares. During the
comparable six month period of 1998, the Company issued 1,750,041 common shares
for cash contributions of $862,400.
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
28
<PAGE>
in 1998 and $405,498 in 1997.
During the Company's fiscal year ended June 30, 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 during its fiscal year ended June 30, 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 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 ended June 30, 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
29
<PAGE>
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.
LIQUIDITY/CAPITAL RESOURCES/PLAN OF OPERATION
NO REVENUES FROM OPERATIONS -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 and reporting requirements, 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 have been 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 an investment agreement or from new investors
introduced to the Company, to meet its cash requirements through 1999.
PROSPECTIVE STOCK SALES OF REGISTERED SECURITIES - On January 28, 1998, the
Company entered into an investment agreement with Bristol Asset Management
L.L.C. ("Bristol"). Subject to certain conditions, Bristol had agreed to
purchase up to $7,000,000 worth of the Company's Common Stock. Subsequent to
the effective date of the Company's Registration Statement on Form SB-2 (January
8, 1999), Bristol declined to participate under its investment agreement with
the Company. The Company has replaced Bristol with Beach Boulevard L.L.C.
("Beach"). Beach has entered into an investment agreement (the "Investment
Agreement") with the Company on March 4, 1999, whereby it agreed to purchase up
to $7,000,000 worth of the Company's Common Stock subject to certain conditions
precedent which include the filing of this amended Prospectus and the Post-
Effective Amendment to the Company's Registration Statement on Form SB-2 to
which it is made a part of. The Company expects to receive $1.5 Million from
Beach upon acceptance of the Post-Effective Amendment by the Securities and
Exchange Commission, and $500,000 per month thereafter up to $7,000,000. In
addition, since the effective date of the Registration Statement, January 8,
1999, the Company has received $188,200 as a result of the exercise of Resale
Warrants; however, the Company does not anticipate the exercise of Resale
Warrants will be a significant source of funding because the exercise price is
considerably higher than the price per share of the Company's Common Stock in
the over-the-counter market.
THE MANHATTAN FINANCIAL GROUP INVESTMENT AGREEMENT. Subsequent to the
Company's second fiscal period, on February 8, 1999, Daron Dilia, doing business
as Manhattan Financial Group, agreed to purchase a minimum of $250,000 of the
Company's Common Stock and a maximum of $1,250,000 of the Company's Common Stock
on or before March 15, 1999. As consideration therefor, the Company would allow
MFG to purchase the common shares at 50% of the low bid price during that time
period (February 8 through March 15, 1999). The Company also granted piggy back
registration rights to MFG although MFG has declined to exercise its
registration rights in connection with the filing of the Post-Effective
Amendment to which this Prospectus is made a part of. The shares issued in the
transaction are restricted. MFG is one of the parties which has consistently
provided funding to the Company. Since the agreement was executed, the Company
has received $875,000 from MFG pursuant to that agreement which represents
2,364,865 unregistered shares of Common Stock, which shares are subscribed for
and paid but not yet issued. The low bid price during that time period was $.74
per share.
CAPITAL REQUIREMENTS OVER THE NEXT YEAR The Company will require an estimated
$5,000,000 of which $378,551 is owed to TRW and $109,396 is owed its former
attorneys (as of March 8, 1999). Such cash requirements for the next 12 months
will be needed for its research and development programs, preclinical and
clinical testing, development of its sales and distribution efforts, operating
expenses, and regulatory processes. The Company's capital requirements will
depend on numerous factors, including the progress of its research and
development programs;
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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 its
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 other than MFG 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. Although the Company hopes to complete a securities
purchase agreement with a substantial new investor, as of this date, it has no
firm commitment from such investor, or any other substantial new investors.
Until such time as it can locate a source of material funding, the Company
expects affiliate stockholders to continue to support the Company either through
loans or contributions to capital in exchange for the restricted common stock of
the Company.
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.
DEPENDENCE OF TMI ON THE COMPANY. TMI, an 80% subsidiary of the Company which
utilizes the CTI System especially 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"), has no source of revenue, other
than contributions to its capital made by the Company. It is not expected that
TMI's dependence on the Company will change 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. TMI 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. The FDA clinical trials requirement for
TMI to receive its PMA approval requires four separate medical facilities to
conduct examinations and conduct and produce clinical statistical data from use
of the TMI System. Those clinical trials are currently being conducted at
Providence Hospital in Washinton DC, at two Los Angeles hospitals managed by
the University of Southern California Medical School, and at Mt. Sinai Hospital
in Miami, Florida. The rate of conducting examinations determines the monthly
cash flow requirements and the time for qualifying for PMA. TMI also incurs
costs for FDA legal counsel and for consulting services from a firm recognized
by the FDA for overseeing clinical trial data collection and adherence to FDA
requirements. The Company has advanced TMI approximately 5.5 Million through
December 31, 1998. The estimated requirements to fund TMI's research and
clinical testing are approximately $500,000 per quarter.
If the Company is incapable of raising sufficient funds to finance TMI's
clinical trials, as well as funds sufficient to conduct its own business, TMI
may be forced to abandon its FDA plans.
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. Although the Company is prioritizing its funding of TMI, it also plans
to conduct multiple clinical trials involving the CTI System in the
identification of soft tissue maladies. Although such clinical trials may not be
necessary for physicians to use the CTI System, the benefit of specific purpose
clinical trials will be to enable the Company to reference medical efficacy
claims in connection with marketing efforts, to enhance physician confidence
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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. 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 1999
for consideration for the FDA to grant the PMA.
EQUIPMENT FINANCING. The Company expects to commence production and
sales for the CTI System when capital or debt financing is available and Use
Agreements are in place. Equipment financing will be necessary for the Company
or TMI to market the TMI and/or CTI 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.
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.
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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 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.
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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 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.
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CTI System. The basis of the CTI System is predicated on the
principle that every externally or internally triggered physiological event
causes an associated caloric reaction. In the opinion of management, any such
abnormal caloric activity will stimulate the body's three temperature and
thermal regulatory systems. These responses are believed to be detectable and
interpretable through tell-tale thermal symptoms and temperature regulatory
response patterns over time. Management believes that the body's thermatome
(temperature) "map" has been well established by medical science, and can
provide a reliable set of clues for diagnostic and patient management purposes,
so long as the thermal symptoms are present. At other times, symptoms such as
pain or numbness and information from other medical tests, will triangulate to
indicate a disorder. Thus, the CTI System may be used by physicians to
eliminate or identify certain possible soft tissue ailments in the process of
making a diagnosis.
"Thermal imaging" as the observation technique is called generically,
is a methodology that long has held great promise, but has not realized its
potential because of deficiencies in the enabling technology. Thus, thermal
imaging has found fairly limited acceptance by the mainstream medical community
because, until the invention and development of the Company's technology, the
testing and evaluation techniques simply have not been scientifically completed,
nor medically reliable for most disorders. The CTI System represents an
integration of state-of-the-art thermal imaging technology hardware and software
components, most of which are configured to the Company's specific needs. The
CTI System is driven by sophisticated software developed over many years by the
Company and its research contractors. The software allows for quantification of
data, and significant flexibility in data manipulation, among other advantages.
However, equally important as the CTI System's components are, the CTI System's
scientifically structured patient examination administration protocols and
standards are expected to assure the accuracy, consistency and reliability of
the CTI System's generated data.
The CTI System is suitable for use as a screening or directional tool
for imaging or diagnosis modalities, some of which are surgical, chemical and
otherwise extremely invasive. By knowing where in the body to begin looking
because of thermal irregularities, other imaging and testing can proceed more
efficiently and economically; obviously an important advantage in containing
health care costs. Additionally, management believes that as a result of the
CTI System's comparatively low user cost (less than the cost of an MRI or CAT
scan), accuracy and non-invasive procedure, the CTI System will be advantageous
for diagnostic and patient therapy purposes, in both pre- and post-therapy
assessment and with any frequency deemed necessary by the physician. The CTI
System can examine patients dynamically to enable the physician to observe
thermal reactions while the patient moves and while the patient undergoes
thermal applications.
The CTI System is currently composed of four elements. 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
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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 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.
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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 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.
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<PAGE>
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 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.
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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 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
39
<PAGE>
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.
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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 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.
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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 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.
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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.
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.
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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 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
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 August 1987
Chief Executive Officer
David A. Packer.............. 47 President and Treasurer N/A
Richard V. Secord............ 63 Chief Operating Officer, February 1996
Secretary, 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.
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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 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
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<PAGE>
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 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.
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>
46
<PAGE>
(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 also 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. 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
47
<PAGE>
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 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.
48
<PAGE>
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 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
49
<PAGE>
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.
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)
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
50
<PAGE>
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.
51
<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
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.
52
<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)
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 (4)
</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
53
<PAGE>
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.
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
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<PAGE>
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, 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.
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<PAGE>
The following is an analysis of transactions involving TII, PDH, Ltd.
and MFG during the six months ended December 31, 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>
Six Months ended December 31, 1998
Balances of debt and cash advances as of
June 30, 1998................................... - $1,192,85 - $223,720 - $359,37
Funding for the Company included in notes
payable......................................... - - - - - 347,75
Non-interest bearing advances to the Com-
pany to fund current operations. These
advances are uncollateralized................... - 628,270 - 155,409 -
Payments......................................... (201,446)
Interest accrued and accretion of discount
on notes payable................................ - - - - - 354,09
--------- ---------- ------- -------- --------- ----------
Total balances of debt and cash advances as
of December 31, 1998............................ - $1,821,12 - $177,683 - $1,062,21
========= ========== ======= ======== ========= ==========
Year ended June 30, 1998
Warrants issued as compensation.................. - $ - - $ - - $ 740,00
Shares of the Company's Common Stock
issued as compensation at a price of $0.76
per share....................................... - - - - 100,00 $ 76,00
Cash investment in the Company................... 5,463,47 $1,827,130 666,66 $250,00 2,746,27 $ 689,106
--------- ---------- ------- -------- --------- ----------
Total investment - 1998.......................... 5,463,47 $1,827,130 666,66 $250,00 2,846,27 $1,505,106
========= ========== ======= ======== ========= ==========
Funding for the Company included in note
payable......................................... - $ - - $ - - $ 354,16
Non-interest bearing advances to the Com-
pany to fund current operations. These
advances are uncollateralized................... - $1,192,85 - $223,72 - -
--------- ---------- ------- -------- --------- ----------
Total debt to party - 1998....................... - $1,192,85 - $223,72 - $ 354,16
========= ========== ======= ======== ========= ==========
Interest expense recognized on note payable...... - $ - - $ - - $ 109,37
--------- ---------- ------- -------- --------- ----------
Total interest expense to party - 1998........... - $ - - $ - - $ 109,37
========= ========== ======= ======== ========= ==========
Year Ended June 30, 1997
Shares of the Company's Common Stock
issued as compensation and repayment of
expenses incurred on behalf of the
Company by the parties at prices ranging........
from $0.53 to $0.70 per share................. 287,26 $ 152,49
400,00 $253,00 - -
Cash investment in the Company.................. 1,960,41 $ 980,20 - - - -
--------- ---------- ------- -------- --------- ----------
Total investment by party - 1997................ 2,247,68 $1,132,707 400,00 $253,00 - $ -
========= ========== ======= ======== ========= ==========
</TABLE>
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<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 (8)
- ----------------------------------- ---------- -----------
<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 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
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<PAGE>
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
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
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<PAGE>
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.
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<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
Subsequent to the effective date of this Registration, Bristol Asset
Management. L.L.C. ("Bristol") declined to participate under its investment
agreement with the Company. The Company has replaced Bristol with Beach
Boulevard L.L.C. ("Beach"). For information purposes, the below summarizes the
transaction that was negotiated with
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
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<PAGE>
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.
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
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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.
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 ) 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 H 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.
Bristol Management has decided not to go forward with this agreement
and therefore the Company has executed a new agreement with Beach Boulevard
L.L.C. (see below).
Beach Boulevard L.L.C. Security Purchase Agreement
In order to meet its expected capital needs for the next 12 months,
the Company executed an Investment Agreement with Beach Boulevard L.L.C.
("Beach") on March 4, 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 Beach to
purchase up to $7,000,000 worth of the Common Stock in tranches. Such
conditions include that the Current Price (the lowest sale price of the Common
Stock as reported by Bloomberg, or if not so reported, as reported by the over-
the-counter market during the ten trading days prior to the agree upon tranche
date) of the Common Stock after the Initial Closing Date be seventy-five cents
($0.75) or more, and the average daily trading volume for the twenty consecutive
trading days ending the day before any subsequent Closing Date be two hundred
thousand (200,000) or more shares. In addition, the Company's filed and
effective Registration Statement shall continue to be effective for all
subsequent tranches. The Company warrants and representations 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, Beach 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. See "Principal Stockholders - Beach
Boulevard L.L.C. Securities Purchase Agreement".
The first Traunch (the "Initial Tranche") shall aggregate $1,500,000.
Subject to certain limitations and conditions precedent, the Company may require
Beach Boulevard L.L.C. to purchase additional shares of the Common Stock at
$500,000 a month commencing two months after the Closing Date (the date of the
closing of the purchase and sale of the Initial Tranche), at any time, but not
more than once in any calendar month and not prior to five business days after
the immediate preceding closing date and total purchases are not to exceed
$7,000,000. Shares purchased in each subsequent tranche shall equal the price
of the tranche, divided by the Current, multiplied by the Applicable Percentage.
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The "Applicable Percentage" is eighty-two and one-half percent (82.5%) for the
Initial Closing Date and eighty-five percent (85%) for each Additional Closing
Date.
If the Market Price of the Company's Common Stock is less then the
Base Price (95% of the Current Price of the Common Stock applicable to that
Closing Date) at any trading day during the period (the "Effective Period")
beginning on the first trading day of the relevant Closing Date and continuing
through the twentieth trading day after such closing date, the Company will be
obligated to issue Beach Supplemental Shares. These Supplemental Shares such be
issued no later than the thirtieth trading day after each Closing Date. The
number of Supplemental Shares shall be equal in number to the product of the
Purchased Shares of that relevant Closing Date multiplied by the excess of
ninety-five percent of the Current Price of the Common Stock applicable to the
Closing Date over the Market Price of the Common Stock, divided by the Market
Price of the Common Stock. For purposes of this calculation, the "Market Price
of Common Stock" shall be the average of the lowest sale price of a share of
Common Stock, as reported by Bloomberg, LP, for any five trading days during the
Effective Period as such dates are selected by the Purchaser. Based on certain
assumptions in determining a Current Price for the Company's Common Stock, the
Company shall have at all times authorized and reserved for issuance, free from
preemptive rights, share of Common Stock issuable (i) for the remaining maximum
Additional Purchased Shares and (ii) the maximum Supplemental Shares which would
be issued in conjunction with the purchase and sale of the maximum Additional
Purchased Shares. The Company shall notify the Purchaser if at any time the
proper number of shares are not reserved for issuance
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 December
31, 1998, there were 50,086,998 shares of the Common Stock issued and
outstanding, while no shares of the Preferred Stock were issued or outstanding.
The Company has reserved 20.781,250 shares of the Common Stock for issuance upon
the purchase of the Newly Issued Shares, 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 only apply to the resale
of such shares by Beach Boulevard , 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) 20,781,250 shares of the Common Stock with respect to the Newly Issued
Shares are being registered hereby.
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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,
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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 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".
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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 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.
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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>
<S> <C>
Name Number of Shares Canceled
---- -------------------------
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.
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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 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.
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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 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.
69
<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) 20,781,250 shares to be purchased
by an unrelated third party investor (the "Newly Issued Shares"); (ii) 5,337,741
shares issued and outstanding; (ii) 3,840,615 shares underlying outstanding
warrants (the "Resale Warrants") and (iii) 6,250,000 shares underlying
outstanding options (the "Resale Options").
The registration of the Newly Issued Shares only apply to the resale
of such shares by Beach Boulevard, 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 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") 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. 416,665 416,665 -0- *
(W)
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- *
Beach Boulevard, L.L.C. (NS) 20,781,250 20,781,250 -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>
70
<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 5,500 *
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>
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>
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 82,500 82,500 -0- *
(JTWROS)(W)
Richard M. & Carolyn Stevens 41,250 41,250 -0- *
(JTWROS)(W)
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"), 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 December 31, 1998. For
purposes of this table, ownership of Resale Warrants ("W"), Resale Options
("O") 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 December 31, 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") and
Newly Issued Shares ("NS").
(3) Percentage based on the number of shares of the Common Stock outstanding
as of December 31, 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.
Beach Boulevard, 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 Owen M, Naccarato Esq., Irvine,
California.
72
<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.
73
<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 Additional
----------------- ------------------- Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
------ ------ --------- ------ ---------- ------------
<S> <C> <C> <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 14,562 -
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1989 - - 80,000 80 249,930 -
Stock issued for services in 1990 - - 500,000 500 254,500 -
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1991 - - 180,000 180 89,820 -
Stock issued for services in 1991 - - 3,240,000 3,240 1,616,760 -
Stock issued for services in 1992 - - 4,860,000 4,860 578,340 -
Stock issued for services in 1993 - - 1,134,500 1,134 82,726 -
Stock issued for extension of
debt agreement in 1993 - - 9,000 9 691 -
Stock issued in connection with
claims by certain stockholders
in 1993 - - 1,000 1 59 -
Stock issued for cash in 1994 - - 387,000 387 25,613 -
<CAPTION>
Losses
Accumulated
During the
Development
Stage Total
------------- ----------
<S> <C> <C>
Balance at inception, June 10, $ - $ -
1987
Stock issued for cash to founding - 5,000
stockholders in 1987
Stock issued for cash in connec-
tion with a public offering of - 19,562
common stock in 1988
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1989 - 250,010
Stock issued for services in 1990 - 255,000
Stock issued for cash in connec-
tion with a Regulation D offer-
ing of common stock in 1991 - 90,000
Stock issued for services in 1991 - 1,620,000
Stock issued for services in 1992 - 583,200
Stock issued for services in 1993 - 83,860
Stock issued for extension of
debt agreement in 1993 - 700
Stock issued in connection with
claims by certain stockholders
in 1993 - 60
Stock issued for cash in 1994 - 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 Additional
----------------- ------------------- Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
------ ------ --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock issued for services in
1994 - - 1,485,660 1,486 149,148 -
Stock issued for extension of
debt agreement in 1994 - - 9,000 9 591 -
Stock issued in connection with
claims by certain stockholders
in 1994 - - 51,000 51 5,989 -
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 - - 679,202 680 407,995 -
Stock issued for services in
1995 - - 3,506,461 3,506 3,049,200 -
Stock issued to convert certain
notes payable in 1995 - - 702,400 702 117,941 -
Conversion of preferred stock to
common stock in 1995 (42,000) (210,000) 124,600 125 209,875 -
Stock issued for cash in con-
nection with a Regulation D
offering of common stock in
1996 - - 1,462,600 1,463 1,461,137 -
Stock issued for a note receiv-
able in connection with a
Regulation D offering of
common stock in 1996 - - 525,000 525 524,475 (525,000)
<CAPTION>
Losses
Accumulated
During the
Developmental
Stage Total
------------ ----------
<S> <C> <C>
Stock issued for services in
1994 - 150,634
Stock issued for extension of
debt agreement in 1994 - 600
Stock issued in connection with
claims by certain stockholders
in 1994 - 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 - 408,675
Stock issued for services in
1995 - 3,052,706
Stock issued to convert certain
notes payable in 1995 - 118,643
Conversion of preferred stock to
common stock in 1995 - -
Stock issued for cash in con-
nection with a Regulation D
offering of common stock in
1996 - 1,462,600
Stock issued for a note receiv-
able in connection with a
Regulation D offering of
common stock in 1996 - -
</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
-----------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------- ------------------- Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
------ ------ --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock issued for offering
costs in connection with a
Regulation D offering of common
stock in 1996 - - 53,650 53 (53) -
Stock issued in connection
with the settlement of a note
pay-able to an individual in
1996 - - 734,942 735 721,345 -
Stock issued in connection
with the settlement of claims by
certain stockholders in 1996 - - 578,000 578 507,702 -
Conversion of preferred stock
in 1996 (5,000) (25,000) 14,700 14 24,986 -
Stock issued in repayment of
certain notes payable and
interest expense in 1996 - - 146,590 147 153,060 -
Stock issued for cash in 1996 - - 1,163,625 1,164 795,306 -
Stock issued for services in
1996 - - 1,277,633 1,278 891,874 -
Losses accumulated during the
period from inception, June
10, 1987, to June 30, 1996 - - - - - -
------ ------- ---------- ------- ----------- --------
Balance at June 30, 1996 - - 32,906,563 32,907 11,933,572 (525,000)
<CAPTION>
Losses
Accumulated
During the
Developmental
Stage Total
------------ ----------
<S> <C> <C>
Stock issued for offering
costs in connection with a
Regulation D offering of common
stock in 1996 - -
Stock issued in connection
with the settlement of a note
pay-able to an individual in
1996 - 722,080
Stock issued in connection
with the settlement of claims by
certain stockholders in 1996 - 508,280
Conversion of preferred stock
in 1996 - -
Stock issued in repayment of
certain notes payable and
interest expense in 1996 - 153,207
Stock issued for cash in 1996 - 796,470
Stock issued for services in
1996 - 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 (11,389,470) 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>
Accumulated
Preferred Stock Common Stock Additional
----------------- ------------------- Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
------ ------ --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock issued as a bonus to
investors in connection
with the Company's 1996
Regulation D offering of
common stock - - 211,900 212 (212) -
Conversion of debentures to
common stock - - 98,768 99 64,026 -
Stock issued for cash - - 1,833,152 1,833 1,008,376 -
Stock issued for services - - 687,266 687 404,811 -
Net loss accumulated in 1997 - - - - - -
------ ------ ---------- ------------ ------------ ----------
Balance at June 30, 1997 - - 35,737,649 35,738 13,410,573 (525,000)
Conversion of debentures to
common stock - - 2,403,838 2,404 977,951 -
Stock issued to convertible
debenture holders for
failure to complete
registration of the
underlying common stock in
a timely manner - - 197,574 198 82,018 -
Stock issued for cash - - 9,476,418 9,476 2,896,760 -
Stock issued for services - - 521,478 521 305,860 -
Warrants issued for services - - - - 1,006,000 -
Stock subject to rescission
offer - - (771,200) (771) (306,102) -
Net loss accumulated in 1998 - - - - - -
------ ------ ---------- ------------ ------------ ----------
Balance at June 30 ,1998 - $ - 47,565,757 $ 47,566 $ 18,373,060 $(525,000)
====== ====== ========== ============ ============ ==========
<CAPTION>
Losses
During the
Development
Stage Total
----------- -----------
<S> <C> <C>
Stock issued as a bonus to
investors in connection
with the Company's 1996
Regulation D offering of
common stock - -
Conversion of debentures to
common stock - 64,125
Stock issued for cash - 1,010,209
Stock issued for services - 405,498
Net loss accumulated in 1997 (3,349,614) (3,349,614)
------------ -----------
Balance at June 30, 1997 (14,739,084) (1,817,773)
Conversion of debentures to
common stock - 980,355
Stock issued to convertible
debenture holders for
failure to complete
registration of the
underlying common stock in
a timely manner - 82,216
Stock issued for cash - 2,906,236
Stock issued for services - 306,381
Warrants issued for services - 1,006,000
Stock subject to rescission
offer - (306,873)
Net loss accumulated in 1998 (5,943,885) (5,943,885)
------------ -----------
Balance at June 30 ,1998 $(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:
Total commitment $4,700,000
Amount incurred under the contracts
through June 30, 1998 (2,707,296)
----------
Remaining commitment $1,992,704
==========
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:
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 in-
tellectual property of both the Company
and its wholly owned subsidiary, TMI. (See
Note 11) $ 301,223
Note payable to a stockholder, bearing int-
erest 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
note bears an effective interest rate of
approximately 210% per year. 354,167
----------
Total notes payable and convertible debt $ 655,390
==========
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:
1998
----------
Benefit from carryforward of net
operating losses $3,449,974
Less valuation allowance (3,449,974)
----------
Net deferred tax asset $ -
==========
The difference between the income tax benefit in the accompanying statement
of operations and the amount that would result if the U.S. Federal statutory
rate of 34% were applied to pre-tax loss is as follows:
<TABLE>
<CAPTION>
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 in-
vestors 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 STATEMENT, 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 73'4,942 722,080
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
-------------------- ---------- --------------- ---------------
<S> <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. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 257,704 $ 230,064
Deposits 2,204 2,204
------------ ------------
Total current assets 259,908 232,268
Property and equipment, net 127,669 149,257
------------ ------------
Total assets $ 387,577 $ 381,525
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (Note 2) $ 1,282,343 $ 655,390
Accounts payable 819,865 511,920
Accrued liabilities 143,255 278,111
Advances from stockholder 2,048,407 1,416,574
------------ ------------
Total current liabilities 4,293,870 2,861,995
------------ ------------
Commitments and contingencies
Common stock subject to rescission offer - 306,873
(Note 5) ------------- ------------
Stockholders' deficit:
Convertible preferredstock, $5.00 par
value, 100,000 share authorized - -
Common stock, $.001 par value; 100,000,000
shares authorized, 47,565,757 shares
issued and outstanding on June 30,
1998, excluding 771,200 shares subject
to rescission offer; 50,086,998 issued &
outstanding as of December 31, 1998 50,087 47,566
Additional paid-in capital 19,597,412 18,373,060
Subscription receivable (525,000) (525,000)
Losses accumulated during the development
stage (23,028,792) (20,682,969)
------------ ------------
Total stockholders' deficit (3,906,293) (2,787,343)
------------ ------------
Total liabilities and stockholders'
deficit $ 387,577 $ 381,525
============ ============
</TABLE>
The accompanying selected notes are an integral part
of these interim financial statements.
F-33
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997,
THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997,
AND INCEPTION ON JUNE 10, 1987 THOUGH DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Interest income $ 934 $ 913 $ 1,667 $ 1,247 $ 21,550
Income from sale of prototype - - - - 180,815
------------ ------------ ------------ ------------ -------------
Total income 934 913 1,667 1,247 202,365
------------ ------------ ------------ ------------ -------------
Operating, general and admin-
istrative expenses 334,614 1,679,941 805,848 2,030,345 14,391,675
Research and development costs 593,411 652,349 1,148,164 909,651 6,343,228
Interest expense 202,783 5,960 371,272 173,978 1,943,384
Depreciation expense 10,686 59,423 22,206 12,348 104,127
Litigation settlement - - - - 514,380
------------ ------------ ------------ ------------ -------------
Total expenses 1,141,494 2,937,673 2,347,490 3,126,322 23,296,794
------------ ------------ ------------ ------------ -------------
Net loss before extraordinary (1,140,560) (2,396,760) (2,345,823) (3,125,075) (23,094,429)
item
Extraordinary gain on extin-
guishment of debt - - - - 65,637
------------ ------------ ------------ ------------ -------------
Net loss $ (1,140,560) $ (2,396,760) $ (2,345,823) $ (3,125,075) $(23,028,792)
============ ============ ============ ============ =============
Weighted average shares
outstanding 48,931,925 40,030,358 48,248,841 38,769,017
============ ============ ============ ============
Loss per common share $ (0.023) $ (0.060) $ (0.049) $ (0.081)
============ ============ ============ ============
</TABLE>
The accompanying selected notes are an integral
part of these interim financial statements
F-34
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND THE
PERIOD FROM INCEPTION, JUNE 10, 1987, THROUGH DECEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,345,823) $ (3,125,075) $(23,028,792)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary gain on debt extin-
guishment - - (65,637)
Depreciation expense 22,206 12,348 104,127
Amortization of debt issuance costs
and discounts 329,833 134,727 670,302
Common stock issued as compensation
for services - 1,198,334 8,355,910
Common stock issued for interest expense - - 423,596
Common stock issued in settlement of
litigation - - 514,380
Common stock issued for failure to
complete timely registration - - 82,216
Changes in operating assets and liabilities:
Increase in deposits - - (2,204)
Increase (decrease) in accounts payable
and accrued liabilities 173,089 (60,904) 963,120
----------- ------------ ------------
Net cash used in operating activities (1,820,695) (1,840,570) (11,982,982)
----------- ------------ ------------
Cash Flows Used in Investing Activities:
Fixed asset capital expenditures (618) (19,211) (231,796)
----------- ------------ ------------
Cash used in investing activities (618) (19,211) (231,796)
Cash Flows from Financing Activities:
Common stock issued for cash 920,000 - 7,894,762
Stock offering costs - (54,287) (125,000)
Advances from stockholders 631,833 1,680,610 2,048,407
Proceeds from notes payable and accrued
interest 377,218 - 3,235,832
Legal fees and interest added to note 219,902 296,525 519,902
Payment of debt issuance costs - - (133,600)
Payment of notes and convertible debentures (300,000) - (967,821)
----------- ------------ ------------
Cash provided in financing activities 1,848,953 1,922,848 12,472,482
Net (decrease) increase in cash 27,640 63,067 257,704
Cash beginning of period 230,064 193,852 -
----------- ------------ ------------
Cash, end of period $ 257,704 $ 256,919 $ 257,704
=========== ============ ============
Supplemental Schedule of Non-Cash Financing
and Investing Activities:
Common Stock (4,727,177 shares) issued for
advances from shareholders $ - $ 1,608,260
Common stock (801,439 shares) issued for
convertible subordinated debentures - 355,500
Common Stock (711,200 shares) returned to
equity, rescission offer declined 306,873 -
----------- ------------
Total Supplemental Non-Cash Activities $ 306,873 $ 1,963,760
=========== ============ ============
Cash paid for interest (no income tax paid) $ 0 $ 0 $ 8,770
=========== ============ ============
</TABLE>
The accompanying selected notes are an integral
part of these interim financial statements.
F-35
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Common Common Accumu- Stock-
Stock Stock Paid-in Subscription lated Holders'
Shares Amount Capital Receivable Deficit Deficit
---------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,1998 47,565,757 $ 47,566 $ 18,373,060 $ (525,000) $(20,682,969) $(2,787,343)
Reclassification of stock
no longer subject to
recission offer 771,200 771 306,102 - - 306,873
Shares issued in a private
placement to a director &
a stockholder for cash 285,000 285 199,715 - - 200,000
Shares issued to a
corporation for a cash in
Regulation D, 504 offering
prior to effective date of
Prospectus with 100,467
shares issued for a
placement fee to a
third party 1,465,041 1,465 718,535 - - 720,000
Net loss for six months
ended December 31, 1998 - - - - (2,345,823) (2,345,823)
---------- -------- ------------ ------------- ------------- ------------
Balance, December 31, 1998 50,086,998 $ 50,087 $ 19,597,412 $ (525,000) $(23,028,792) $(3,906,293)
========== ======== ============ ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-36
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND UBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL STATEMENTS:
The unaudited consolidated financial statements for the six months and three
months ended December 31, 1998, 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 and six
month periods December, 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 financial statements for its second
quarter ended December 31, 1998, 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, as contained in the Company's
Prospectus, declared effective on January 8, 1999 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. 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 seven-month term of the note and, accordingly, the note bears an
effective interest rate of approximately 131% per year. This note and a related
note in the amount of $250,000 issued on April 15, 1998, were assigned to
Thermal Imaging, Inc. ("TII") and totaled $1,061,218 at December 31, 1998, which
represents the original note balances of $597,750, accrued amortization discount
of $434,000 and accrued interest of $29,468.
3. INCOME TAXES:
The Company has incurred losses since its inception and has a net operating loss
carry-forward of approximately $15,000,000 dat December 31, 1998.
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. The Company's financial statements
include none of the additional elements that affect comprehensive income,
therefore comprehensive income and net income are identical.
F-37
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND
SUBSIDIARY (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO CONSOLIDATED
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
affiliates of the Company for cash or other consideration and such common shares
are considered to be "restricted" securities with limited transferability under
state and federal securities laws. These affiliates, in secondary transactions,
subsequently sold or otherwise transferred certain of the foregoing shares to
fourteen non-affiliates. Because of the limited number of parties involved,
Management of the Company does not believe the transfers constituted a "public
offering" of the shares; however, in order to limit certain potential
liabilities which could arise from such transfers which could be deemed in
violation of various securities laws, of the shares transferred to non-
affiliates, 771,200 shares became the subject of a rescission offer made by the
affiliates to the non-affiliate transferees. Such recission offer was made in
compliance with certain available exemptions under the applicable states'
securities laws where the transfers took place. Subsequent to September 30,
1998, all of the stockholders in question elected to reject the rescission
offers and the balance of common stock subject to rescission orders was
reclassified and included in stockholders' equity at December 31, 1998.
F-38
<PAGE>
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The Company's Articles of Incorporation do not specifically address
indemnification of directors and officers, except to make a general reference
that the directors "may exercise all rights, powers, and privileges . . .
conferred upon similar corporations organized under and by virtue of the laws of
the State of Nevada". Sections 78.751 and 78.752 of the Nevada Revised Statutes
permit a corporation to indemnify, among others, any officer or director against
certain liabilities under specified circumstances, and to purchase and maintain
insurance on behalf of its officers and directors.
Consistent with the overall scope of Section78.751 of the Nevada
Revised Statutes, Article VI of the Company's Bylaws, included in Exhibit 3.2
hereto and incorporated herein by reference, provides, in general, that any
director or officer of the Company who is the subject of or a participant in a
threatened, pending or completed legal action by reason of the fact that such
individual is or was a director or officer shall be indemnified and held
harmless by the Company from and against the consequences of such action if it
is determined that he acted in good faith and reasonably believed (i) his
conduct was in the Company's best interest, (ii) in all other cases, that his
conduct was not opposed to the best interests of the Company, and (iii) with
respect to criminal proceedings, that he had no reasonable cause to believe his
conduct was unlawful; provided that if it is determined that such person is
liable to the Company or is found liable on the basis that personal benefit was
improperly received by such person, the indemnification is limited to reasonable
expenses actually incurred by such person in connection with the legal action
and shall not be made in respect of any legal action in which such person shall
have been found liable for willful or intentional misconduct in the performance
of his duty to the Company. Any indemnification (unless ordered by a court of
competent jurisdiction) shall be made by the Company only upon a determination
that indemnification of such person is proper in the circumstances by virtue of
the fact that it shall have been determined that such person has met the
applicable standard of conduct.
The Bylaws also provide that reasonable expenses, including court
costs and attorneys' fees, incurred by officers and directors in connection with
a covered legal action shall be paid by the Company at reasonable intervals in
advance of the final disposition of such action, upon receipt by the Company of
a written affirmation by such person of his good faith belief that he has met
the standard of conduct necessary for indemnification, and a written undertaking
by or on behalf of such person to repay the amount paid or reimbursed by the
Company if it is ultimately determined that he is not entitled to be
indemnified.
The Board of Directors of the Company may also authorize the Company
to indemnify employees or agents of the Company, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to directors and officers of the Company. As of the
date of this Registration Statement, the Board of Directors has not extended
indemnification rights to persons other than directors and officers.
The Bylaws also provide that the Company has the power and authority
to purchase and maintain insurance or another arrangements on behalf of any
director, officer, employee, or agent of the Company or any affiliate of the
Company on similar terms as those described in Section 78.752 of the Nevada
Revised Statutes. The Company's Articles of Incorporation relieve its directors
from liability for monetary damages to the full extent permitted by Nevada law.
Sections 78.751 and 78.752 of the General Corporation Law of the State of Nevada
authorize a corporation to indemnify, among others, any officer or director
against certain liabilities under specified circumstances, and to purchase and
maintain insurance on behalf of its officers and directors.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant. No expenses will be paid by the
security holders.
<TABLE>
<S> <C>
SEC Registration Fee.............. $ 7,265.00
Printing and Engraving Expenses... $ 35,000.00
Legal Fees and Expenses........... $175,000.00
Accounting Fees and Expenses...... $ 25,000.00
Blue Sky Fees and Expenses........ $ 10,000.00
Transfer Agent Fees............... -0-
Miscellaneous..................... -0-
Total........................... $252,265.00
===========
</TABLE>
Item 26. Recent Sales of Unregistered Securities
Set forth below is certain information regarding securities that the
Company has sold in the past three years to directors ("D"), officers ("O"),
employees ('E'), consultants ("C"), institutional investors ('I"), affiliates
("A'), and non-affiliates ('N').
In December 1995, the Company issued 20,000 shares of the Common Stock
to Keith Bessinger (C) for legal services rendered to the Company with an
approximate value of $10,600.
In December 1995, the Company issued 50,000 shares of the Common Stock
to Thermal Imaging, Inc. (A) as compensation due to David B. Johnston (O, D, A)
for services rendered to the Company. The value of the services rendered
equaled approximately $26,500.
In December 1995, the Company issued 10,000 shares of the Common Stock
to Douglas J. Emery (N) in consideration for a cash contribution of
approximately $5,300.
In December 1995, the Company issued 10,000 shares of the Common Stock
to Willard Harpster (C) in consideration for customer relations services
rendered. The Company has valued the services at approximately $9,500.
In December 1995, the Company issued 60,000 shares of the Common Stock
to Mark Lewis (N) in connection with the settlement of a threatened lawsuit
against the Company arising out of a transaction relating to the lease of
certain thermal imaging equipment and the donation of such equipment to the
State University of New York - Buffalo.
From November 1995 through February 1996, the Company issued an
aggregate of 2,000,000 shares of the Common Stock and 2,000,000 warrants,
entitling holders to purchase one share of the Common Stock at an exercise price
of $5.00 per share, to various subscribers in conjunction with the Private
Placement Memorandum dated November 13, 1995 for an aggregate amount of
approximately $2,000,000.
In February 1996, in conjunction with the Private Placement Memorandum
dated November 13, 1995, the Company also issued an aggregate of 52,500 shares
of the Common Stock and 31,500 warrants at an exercise price of $5.00 per share
to various underwriters who provided services to the Company in connection
therewith. The shares of the Common Stock and warrants issued were valued at
approximately $49,500.
In February 1996, the Company issued 50,000 shares of the Common Stock
to Lewis Woodworth (N) in consideration for the settlement of a threatened
lawsuit arising out of the Company's acquisition of a certain research contracts
with the State University of New York - Buffalo and thermal imaging
technologies. The Common Stock issued was valued at approximately $42,500.
II-2
<PAGE>
In March 1996, the Company issued 30,000 shares of the Common Stock to
M&S Acquisition (C) in consideration for valuation and financial consultant
services rendered to the Company and valued at approximately $45,000. These
shares were offered and sold pursuant to a written contract between the Company
and M&S Acquisition for compensation. As such, the Company believes that the
transaction is exempt from registration pursuant to Rule 701 of the Securities
Act.
In April 1996, the Company issued 494,383 shares of the Common Stock
to PDH, Ltd.(C), in consideration for administrative and stockholder relations
services rendered to the Company and valued at $214,160.
In April 1996, the Company issued 112,250 shares of the Common Stock
to Thermal Imaging, Inc. (A) in connection with the Assumption of Liability
Agreement wherein Thermal Imaging agreed to assume responsibility for and
indemnify the Company from all claims asserted or to be asserted by Dorex, Inc.
stockholders in connection with the Company's acquisition of certain research
contracts with the State University of New York - Buffalo and thermal imaging
technologies. The stock issued to Thermal Imaging, Inc. was valued at
approximately $67,350.
In April 1996, the Company issued 4,000 shares of the Common Stock to
Eric Wagner (N) in connection with the conversion of principal and interest due
under a corporate note. An outstanding amount of approximately $7,000 was
converted at a price of $1.75 per share. The shares of the Common Stock issued
by the Company in exchange for the securities surrendered were exempt from
registration pursuant to Section3(a)(9) of the Securities Act.
In June 1996, the Company issued 5,000 shares of the Common Stock to
M&S Acquisition (C) as reimbursement for expenses totaling $7,500 incurred in
the performance of services.
In August 1996, the Company issued its 6% Convertible Debenture due
August 15, 1999 in the principal amount of $550,000 (the "6% Convertible
Debenture") to Cameron Capital, Ltd. (N). The 6% Convertible Debenture is
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.
In September 1996, the Company issued an additional 203,150 warrants
to investors in the Private Placement Memorandum dated November 13, 1995, as a
penalty due as a result of the failure of the Company to timely file a
registration statement covering the shares of the Common Stock in the Offering.
In November 1996, the Company issued 100,000 shares of the Common
Stock to PDH, Ltd. (C) in consideration for services rendered and as
reimbursement for expenses incurred from March 1, 1996 through November 15,
1996. The estimated value of the stock issued equaled $73,000.
In January 1997, the Company issued 250,000 shares of the Common Stock
to Thermal Imaging, Inc. (A), in consideration for a cash contribution of
approximately $70,000.
In January 1997, the Company issued 50,000 shares of the Common Stock
to Jack Gately (N) in connection with the settlement of obligations with Fred
Redolfy. The estimated value of the Common Stock issued equaled $30,000.
In February 1997, the Company issued 750,000 shares of the Common
Stock to Thermal Imaging, Inc. (A) in consideration for a cash contribution of
approximately $427,500.
In February 1997, the Company issued 87,816 shares of the Common Stock
to Thermal Imaging, Inc. (A) in consideration for a cash contribution of
approximately $50,055.
In March 1997, the Company issued an aggregate of 982,602 shares of
the Common Stock to Thermal Imaging, Inc. (A) in consideration for cash
contributions in the aggregate amount of $530,137.12.
II-3
<PAGE>
In March 1997, the Company issued its 8% Convertible Debenture due
March 13, 2000 in the principal amount of $125,000 (the "8% Convertible
Debenture") to Cameron Capital, Ltd. (N). The 8% Convertible Debenture is
convertible into shares of the Common Stock upon the effective date of this
Registration Statement 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.
In April 1997, the Company issued 12 % Series A Senior Subordinated
Convertible Redeemable Debentures (aggregate face value of $662,500), through
Select Capital Advisors, Inc., to various investors (N)for an aggregate cash
contribution of approximately $530,000.
From April through June 1997, the Company issued warrants covering
3,273,950 shares of the Common Stock to warrant holders (N, A) who were
subscribers to the Private Placement Memorandum dated November 13, 1995. The
Warrants were issued as a further settlement with investors in the private
placement regarding the Company's obligation to register the shares of the
Common Stock in the private placement. The terms of the settlement provided
that settling investors would turn in the warrants held in exchange for new
warrants entitling the holder to purchase shares of Common Stock at $2.50 per
share.
In July 1997, the Company issued 50,000 shares of the Common Stock to
Sylvia Epstein (C) in consideration for services rendered and valued at
approximately $50,000.
In July 1997, the Company issued 500,000 shares of the Common Stock to
Manhattan Financial Group (A, C) in consideration for contributions up to
$150,000 pursuant to the terms of the Restricted Stock Purchase Agreement.
In July 1997, the Company issued 322,545 shares of the Common Stock to
Cameron Capital, Ltd. (N) in connection with the conversion of $150,000 of the
amount outstanding under the 6% Convertible Debenture ($550,000). The shares of
the Common Stock issued by the Company in exchange for the securities
surrendered are exempt from registration pursuant to Section3(a)(9) of the
Securities Act.
In July 1997, the Company issued 138,000 shares of the Common Stock to
Robert A. Dresser (C) in consideration for services rendered in connection with
the Company's marketing efforts. The services were valued at approximately
$42,780.
In July 1997, the Company issued an aggregate of 740,656 shares of the
Common Stock to Thermal Imaging, Inc. (A) in consideration for cash
contributions in the aggregate amount of $339,000.
In September 1997, the Company issued 666,666 shares of the Common
Stock to PDH, Ltd. (C), in consideration for a cash contribution of
approximately $250,000.
In September 1997, the Company issued 941,176 shares of the Common
Stock to Thermal Imaging, Inc. (A) in consideration for a cash contribution of
approximately $320,000.
In November 1997, the Company issued 551,429 shares of the Common
Stock to Thermal Imaging, Inc. (A), in consideration for a cash contribution of
approximately $193,000.
In November 1997, the Company issued 478,894 shares of the Common
Stock to Cameron Capital, Ltd. (N) in connection with the conversion of
$200,000 of the outstanding amount due under the 6% Convertible Debenture
($550,000). The shares of the Common Stock issued by the Company in exchange
for the securities surrendered were exempt from registration pursuant to Section
3(a)(9) of the Securities Act.
II-4
<PAGE>
From October to November 1997, the Company issued 83,333 shares of the
Common Stock to Ambient Capital Group, Inc. (C), as a retainer fee for acting as
a financial advisor. The estimated value of the shares issued equaled
$29,166.55. In addition, the Company issued 83,333 warrants to Ambient Capital
Group, Inc., at an exercise price of $ 0.72 per share. The terms of the
warrants entitle the holder to purchase five shares of the Common Stock for each
warrant issued and such warrants are valid for a period of four years from the
date of issuance.
In January 1998, the Company issued 100,000 shares of the Common Stock
to Manhattan Financial Group (A, C) in partial consideration for services
rendered pursuant to the Consulting Agreement. The estimated value of the stock
issued is equal to $30,000.
In January and February 1998, the Company issued an aggregate of
3,482,813 shares of the Common Stock to Thermal Imaging, Inc. (A), in
consideration for cash contributions of approximately $975,130 (252,597 shares
were subsequently canceled due to a mathematical error in calculating number of
shares to be issued).
In January 1998, the Company issued an aggregate of 102,752 shares of
the Common Stock to David Finney (C) and Meto Miteff (C) in consideration for
legal services rendered and valued at approximately $64,220.
During January and February 1998, the Company issued an aggregate of
603,489 shares of the Common Stock to Cameron Capital, Ltd. (N) in connection
with the conversion of $200,000 of the outstanding amount due under the 6%
Convertible Debenture and payment of penalties due for non-registration. The
shares of the Common Stock issued by the Company in exchange for the securities
surrendered were exempt from registration pursuant to Section3(a)(9) of the
Securities Act.
In March 1998, the Company issued 600,000 shares of the Common Stock
to Benjamin or Nancy Anderson (N) in consideration for cash contributions of
approximately $140,000.
In March 1998, the Company issued 2,246,275 shares to Manhattan
Financial Group (C) in consideration for cash contributions of approximately
$539,106 (147,725 shares were subsequently canceled due to a mathematical error
in calculating number of shares to be issued).
In April 1998, the Company issued an aggregate of 216,598 shares of
the Common Stock to Cameron Capital, Ltd. (N) in connection with the conversion
of $62,500 of a $125,000 8% Convertible Debenture and payment of penalties due
for non-registration. The shares of the Common Stock issued by the Company in
exchange for the securities surrendered were exempt from registration pursuant
to Section 3(a)(9) of the Securities Act.
In June 1998, the Company issued 978,000 shares of the Common Stock to
Lynch, Rowin, Novack, Burnbaum & Crystal P.C. FBO Y. L. Hirsch (N) and Lockwood
Resources (N). The shares were issued in conversion of 12% Convertible
Debentures and in settlement of all claims between the Company and Y. L. Hirsch
and Lockwood Resources relating to said debentures. The shares issued had an
estimated aggregate value of $415,000. The shares of the Common Stock issued by
the Company in exchange for the securities surrendered were exempt from
registration pursuant to Section 3(a)(9) of the Securities Act.
In October 1998, the Company issued an aggregate of 208,261shares of
the Common Stock to Cameron Capital, Ltd. (N) in connection with the conversion
of $62,500 of a $125,000 8% Convertible Debenture and payment of penalties due
for non-registration for which notice of conversion had been given in March
1998. The shares of the Common Stock issued by the Company in exchange for the
securities surrendered were exempt from registration pursuant to Section 3(a)(9)
of the Securities Act.
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
II-5
<PAGE>
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.
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.
Unless otherwise indicated above, the issuance of securities was
exempt from registration under the Securities Act under Section 4(2) as a
transaction by an issuer not involving any public offering. In each instance,
the purchaser had a pre-existing relationship with the Company, was provided
with, and/or had access to, current information regarding the Company, and
management reasonably believed that each purchaser had sufficient investment
knowledge and experience to understand the risks and merits of investing in the
securities of Company, or was represented by a person with such knowledge and
experience. Moreover, all offers and sales of the securities were made without
public solicitation, the certificates bear restrictive legends, and appropriate
stop-transfer orders have been given to the transfer agent. No underwriter was
involved in the transactions and no commissions were paid.
II-6
<PAGE>
Item 27. Exhibits
The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
----------- -------------------------
<C> <S>
3(a)* Articles of Incorporation filed June 10, 1987.
3(b)* Amendment to Articles of Incorporation filed July 31, 1987.
3(c)* Amendment to Articles of Incorporation filed September 12, 1989.
3(d)* Amendment to Articles of Incorporation filed November 6, 1989.
3(e)* Amendment to Articles of Incorporation filed April 22, 1992.
3(f)* Amendment to Articles of Incorporation dated February 17, 1998.
3(g)* Bylaws, as Amended January 15, 1998.
4* Common Stock Specimen.
5** Opinion Regarding Legality.
10(a)* PR Expense Funds Administration Agreement dated July 9, 1997 between the
Company, Liberty Capital Group, Inc. and Manhattan Financial Group.
10(b)* Financial Advisory Agreement dated October 29, 1997 between the Company and
Ambient Capital Group, Inc.
10(c)* Assumption of Liability Agreement dated April 17, 1996 between the Company
and Thermal Imaging, Inc.
10(d)* Investment Agreement dated January 20, 1998 between the Company and Bristol
Asset Management, LLC.
10(e)* Consulting Agreement dated November 5, 1997 between the Company and Daron
Dillia doing business as Manhattan Financial Group.
10(f)* Consulting Agreement dated November 5, 1997 between the Company and Willard
Harpster.
10(g)* Subscription Agreement dated August 15, 1996 between the Company and
Cameron Capital Management Ltd. With respect to 6% Convertible Debentures
aggregating $550,000.
10(h)* Subscription Agreement dated March 13, 1997 between the Company and C
ameron Capital Management Ltd. With respect to 8% Convertible Debentures
aggregating $125,000.
10(i)* 12% Series A Senior Subordinated Convertible Redeemable Debenture due April
30, 1998.
10(j)* Signatories to Dorex Release.
10(k)* Employment Agreement dated October 11, 1995 between the Company and Kenneth
M. Dodd.
10(l)* Letter Agreement dated June 12, 1995 between the Company and Richard V.
Secord confirming terms for Personal Services Agreement.
10(m)* Employment Agreement dated April 30, 1997 between the Company and David A.
Packer.
10(n)* Escrow Agreement dated November 20, 1997 between the Company, Roger Sack
and First Nebraska Trust Company.
10(o)* Golden Health Card Contract dated April 24, 1995 between TriSun Medical
Corporation and TriSun/CTI Asia, Ltd.
10(p)* Golden Health Plan Hospital Systems Integration Contract dated April 24,
1995 between TriSun Medical Corporation and TriSun/CTI Asia, Ltd.
10(q)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
October 29, 1997 between the Company and David B. Johnston.
10(r)* Employment Agreement dated October 29, 1997 between the Company and David
B. Johnston.
10(s)* Letter Agreement dated July 10, 1997 between the Company and Liberty
Capital Group, Inc. s with respect to public relations.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
----------- -------------------------
<C> <S>
10(t)* License Agreement dated June 8, 1996 between the Company and Thermal
Imaging, Inc.
10(u)* Participation Option Notices by various signatories to a Private Placement
Subscription Participation Option.
10(v)* Pledge Agreement dated September 11, 1997 between the Company and Looper,
Reed, Mark & McGraw Incorporated.
10(w)* Pledge Agreement dated September 11, 1997 between Thermal Medical Imaging,
Inc. and Looper, Reed, Mark & McGraw Incorporated.
10(x)* Employment Agreement dated November 13, 1997 between the Company and
Richard V. Secord.
10(y)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
January 15, 1998 between the Company and Richard V. Secord.
10(z)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
June 12, 1995 between the Company and Richard V. Secord.
10(aa)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
June 12, 1995 between the Company and Richard V. Secord.
10(bb)* Commitment Letter Agreement dated March 6, 1997 between the Company and
Select Capital Advisors, Inc.
10(cc)* Services Agreement dated July 1997 between the Company and Liberty Capital
Group, Inc.
10(dd)* Stock Transfer Agreement dated January 28, 1997 between the Company and
Thermal Medical Imaging, Inc.
10(ee)* Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and David Packer.
10(ff)* Amendment to Employee Stock Option Agreement dated January 22, 1998 between
the Company and Kenneth M. Dodd.
10(gg)* Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and Richard V. Secord.
10(hh)* Computerized Thermal Imaging, Inc. Consultant Stock Option Agreement dated
November 5, 1997 between the Company and Willard Harpster.
10(ii)* Computerized Thermal Imaging, Inc. Consultant Stock Option Agreement dated
November 18, 1997 between the Company and Daron Dillia D/b/a Manhattan
Financial Group.
10(jj)* Computerized Thermal Imaging, Inc. Restricted Stock Purchase Agreement
dated July 9, 1997 between the Company and Manhattan Financial Group.
10(kk)* Computerized Thermal Imaging, Inc. 1995 Stock Option Plan.
10(ll)* Computerized Thermal Imaging, Inc. 1997 Stock Option and Restricted Stock
Plan.
10(mm)* Offshore Securities Subscription Agreement relating to 12% Series A Senior
Subordinated Convertible Redeemable Debentures of the Company.
10(nn)* 12% Series A Senior Subordinated Convertible Redeemable Debentures of the
Company.
10(oo)* Golden Health Telemedicine Contract dated April 24, 1995 between TriSun
Medical Corporation - China and TriSun/CTI Asia, Ltd.
10(pp)* Contract between TRW Systems Integration Group and Computerized Thermal
Imaging, Inc. dated October 29, 1996. [Articles VI, XXIV, XXXII, and
Appendix A have been omitted pursuant to a Request for Confidential
Treatment. Accordingly, the material has been filed separately with the
SEC.]
10(qq)* Clinical Trial Agreement dated September 16, 1997 between Thermal Medical
Imaging, Inc. and Health Research Association.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
<C>
Exhibit No. Identification of Exhibit
----------- -------------------------
<C> <S>
10(rr)* Contract between TRW Systems Integration Group and Thermal Medical Imaging,
Inc. dated June 19, 1997. [Articles VI, XXIV, XXXII, and Appendix A have
been omitted pursuant to a Request for Confidential Treatment.
Accordingly, the material has been filed separately with the SEC.]
10(ss)* Clinical Trial Agreement dated November 7, 1997 between Thermal Medical
Imaging, Inc. and the University of Southern California.
10(tt)* Clinical Trial Agreement dated June 4, 1998 between Thermal Medical
Imaging, Inc. and Mt. Sinai Hospital.
10(uu)* Clinical Trial Agreement dated February 14, 1998 between Thermal
Medical Imaging, Inc. and Providence Hospital.
10(vv)* Clinical Study of Examination of Breast for Identification of
Suspicious Tissue Using Clinical Examination and Mammography With and
Without the TMI Thermal Imaging System (Protocol for all clinical
trial agreements).
10(ww)* Promissory Note dated May 1, 1998 between Computerized Thermal
Imaging, Inc. and Looper, Reed, Mark & McGraw Incorporated.
10(xx)* Confidential Settlement and Release Agreement dated February 5, 1998
between the Company and Reg. S Intercontinental Ltd., Banco Cooperativo
Costaricense, Mardi International Corporation, Pegasus Financial Services
Corp. and Manny Lopez. [Portions of Section 1 have been omitted pursuant to
a Request for Confidential Treatment. Accordingly, the material has been
filed separately with the SEC.]
statements contained in the registration statement.
10(yy)* Settlement Agreement dated April 30, 1998 between the Company and Lockwood
Resources Limited, Y.L. Hirsch, and Ari Goldstein. [Portions of Sections 1,
2, and 3 have been omitted pursuant to a Request for Confidential
Treatment. Accordingly, the material has been filed separately with the
SEC.]
10(zz)* Confidential Settlement and Release Agreement dated August 12, 1998 between
the Company and A.M.H.C. Wehneijer de Affiliate, B.V. [Portions of Section
1 have been omitted pursuant to a Request for Confidential Treatment.
Accordingly, the material has been filed separately with the SEC.]
10(aaa)* Corporate Note between the Company and Manhattan Financial Group dated
April 15, 1998.
10(bbb)* Corporate Note between the Company and Manhattan Financial Group dated
September 11, 1998.
10(ccc)* Marketing Agreement dated November 19, 1998 between the Company and
T.S.E.T., Inc.
10(ddd)** Manhattan Financial Group Rule 144 Investment
10(eee)** Beach Boulevard L.L.C. Securities Purchase Agreement
11* Computation of Per Share Earnings.
16(a)* Letter from King, Griffin & Adamson, P.C. consenting to the disclosure
statements contained in the registration statement.
16(b)* Letter from Randy Simpson, C.P.A. consenting to the disclosure statements
contained in the registration statement.
21* Subsidiaries of the Registrant.
23(a)** Consent of Counsel (included in Exhibit 5).
23(b)* Consent of Ham, Langston & Brezina, LLP.
24 (1)* Powers of Attorney.
27 (1)* Financial Data Schedule
</TABLE>
. Previously filed
. ** Filed herewith
II-9
<PAGE>
Item 28. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That for purposes of determining any liability under the Securities
Act, (i) the information omitted from the Prospectus filed as part
of this Registration Statement, as permitted by Rule 430A of the
Securities Act and to be contained in the form of Prospectus to be
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act, shall be deemed to be incorporated by
reference into this Registration Statement at the time it is
declared effective, and (ii) each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
Registration Statement relating to the securities offered therein
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on the Registration Statement on Form SB-2 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Layton, State of Utah, on the 31st day of March, 1999.
COMPUTERIZED THERMAL IMAGING, INC.
By /s/ David A. Packer
---------------------------------------------------
David A. Packer, President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David B. Johnston* Chairman of the Board and March 31, 1999
- ------------------------ Chief Executive Officer
DAVID B. JOHNSTON
/s/ Richard V. Secord* Chief Operating Officer, Secretary March 31, 1999
- ------------------------ and Director
RICHARD V. SECORD
/s/ Brent M. Pratley, M.D.* Director March 31, 1999
- -----------------------------
BRENT M. PRATLEY, M.D.
/s/ Milton R. Geilmann* Director March 31, 1999
- -------------------------
MILTON R. GEILMANN
/s/ Harry C. Aderholt* Director March 31, 1999
- ------------------------
HARRY C. ADERHOLT
/s/ David A. Packer President and Treasurer March 31, 1999
- ---------------------
DAVID A. PACKER
*By /s/ David A. Packer March 31, 1999
---------------------
David A. Packer,
Attorney in Fact
</TABLE>
II-11
<PAGE>
INDEX TO EXHIBITS
Item 27. Exhibits
The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
----------- -------------------------
<C> <S>
3(a)* Articles of Incorporation filed June 10, 1987.
3(b)* Amendment to Articles of Incorporation filed July 31, 1987.
3(c)* Amendment to Articles of Incorporation filed September 12, 1989.
3(d)* Amendment to Articles of Incorporation filed November 6, 1989.
3(e)* Amendment to Articles of Incorporation filed April 22, 1992.
3(f)* Amendment to Articles of Incorporation dated February 17, 1998.
3(g)* Bylaws, as Amended January 15, 1998.
4* Common Stock Specimen.
5** Opinion Regarding Legality.
10(a)* PR Expense Funds Administration Agreement dated July 9, 1997 between the
Company, Liberty Capital Group, Inc. and Manhattan Financial Group.
10(b)* Financial Advisory Agreement dated October 29, 1997 between the Company and
Ambient Capital Group, Inc.
10(c)* Assumption of Liability Agreement dated April 17, 1996 between the Company
and Thermal Imaging, Inc.
10(d)* Investment Agreement dated January 20, 1998 between the Company and Bristol
Asset Management, LLC.
10(e)* Consulting Agreement dated November 5, 1997 between the Company and Daron
Dillia doing business as Manhattan Financial Group.
10(f)* Consulting Agreement dated November 5, 1997 between the Company and Willard
Harpster.
10(g)* Subscription Agreement dated August 15, 1996 between the Company and
Cameron Capital Management Ltd. With respect to 6% Convertible Debentures
aggregating $550,000.
10(h)* Subscription Agreement dated March 13, 1997 between the Company and C
ameron Capital Management Ltd. With respect to 8% Convertible Debentures
aggregating $125,000.
10(i)* 12% Series A Senior Subordinated Convertible Redeemable Debenture due April
30, 1998.
10(j)* Signatories to Dorex Release.
10(k)* Employment Agreement dated October 11, 1995 between the Company and Kenneth
M. Dodd.
10(l)* Letter Agreement dated June 12, 1995 between the Company and Richard V.
Secord confirming terms for Personal Services Agreement.
10(m)* Employment Agreement dated April 30, 1997 between the Company and David A.
Packer.
10(n)* Escrow Agreement dated November 20, 1997 between the Company, Roger Sack
and First Nebraska Trust Company.
10(o)* Golden Health Card Contract dated April 24, 1995 between TriSun Medical
Corporation and TriSun/CTI Asia, Ltd.
10(p)* Golden Health Plan Hospital Systems Integration Contract dated April 24,
1995 between TriSun Medical Corporation and TriSun/CTI Asia, Ltd.
10(q)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
October 29, 1997 between the Company and David B. Johnston.
10(r)* Employment Agreement dated October 29, 1997 between the Company and David
B. Johnston.
10(s)* Letter Agreement dated July 10, 1997 between the Company and Liberty
Capital Group, Inc. s with respect to public relations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
----------- -------------------------
<C> <S>
10(t)* License Agreement dated June 8, 1996 between the Company and Thermal
Imaging, Inc.
10(u)* Participation Option Notices by various signatories to a Private Placement
Subscription Participation Option.
10(v)* Pledge Agreement dated September 11, 1997 between the Company and Looper,
Reed, Mark & McGraw Incorporated.
10(w)* Pledge Agreement dated September 11, 1997 between Thermal Medical Imaging,
Inc. and Looper, Reed, Mark & McGraw Incorporated.
10(x)* Employment Agreement dated November 13, 1997 between the Company and
Richard V. Secord.
10(y)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
January 15, 1998 between the Company and Richard V. Secord.
10(z)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
June 12, 1995 between the Company and Richard V. Secord.
10(aa)* Computerized Thermal Imaging, Inc. Employee Stock Option Agreement dated
June 12, 1995 between the Company and Richard V. Secord.
10(bb)* Commitment Letter Agreement dated March 6, 1997 between the Company and
Select Capital Advisors, Inc.
10(cc)* Services Agreement dated July 1997 between the Company and Liberty Capital
Group, Inc.
10(dd)* Stock Transfer Agreement dated January 28, 1997 between the Company and
Thermal Medical Imaging, Inc.
10(ee)* Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and David Packer.
10(ff)* Amendment to Employee Stock Option Agreement dated January 22, 1998 between
the Company and Kenneth M. Dodd.
10(gg)* Amendment to Employee Stock Option Agreement dated January 26, 1998 between
the Company and Richard V. Secord.
10(hh)* Computerized Thermal Imaging, Inc. Consultant Stock Option Agreement dated
November 5, 1997 between the Company and Willard Harpster.
10(ii)* Computerized Thermal Imaging, Inc. Consultant Stock Option Agreement dated
November 18, 1997 between the Company and Daron Dillia D/b/a Manhattan
Financial Group.
10(jj)* Computerized Thermal Imaging, Inc. Restricted Stock Purchase Agreement
dated July 9, 1997 between the Company and Manhattan Financial Group.
10(kk)* Computerized Thermal Imaging, Inc. 1995 Stock Option Plan.
10(ll)* Computerized Thermal Imaging, Inc. 1997 Stock Option and Restricted Stock
Plan.
10(mm)* Offshore Securities Subscription Agreement relating to 12% Series A Senior
Subordinated Convertible Redeemable Debentures of the Company.
10(nn)* 12% Series A Senior Subordinated Convertible Redeemable Debentures of the
Company.
10(oo)* Golden Health Telemedicine Contract dated April 24, 1995 between TriSun
Medical Corporation - China and TriSun/CTI Asia, Ltd.
10(pp)* Contract between TRW Systems Integration Group and Computerized Thermal
Imaging, Inc. dated October 29, 1996. [Articles VI, XXIV, XXXII, and
Appendix A have been omitted pursuant to a Request for Confidential
Treatment. Accordingly, the material has been filed separately with the
SEC.]
10(qq)* Clinical Trial Agreement dated September 16, 1997 between Thermal Medical
Imaging, Inc. and Health Research Association.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C>
Exhibit No. Identification of Exhibit
----------- -------------------------
<C> <S>
10(rr)* Contract between TRW Systems Integration Group and Thermal Medical Imaging,
Inc. dated June 19, 1997. [Articles VI, XXIV, XXXII, and Appendix A have
been omitted pursuant to a Request for Confidential Treatment.
Accordingly, the material has been filed separately with the SEC.]
10(ss)* Clinical Trial Agreement dated November 7, 1997 between Thermal Medical
Imaging, Inc. and the University of Southern California.
10(tt)* Clinical Trial Agreement dated June 4, 1998 between Thermal Medical
Imaging, Inc. and Mt. Sinai Hospital.
10(uu)* Clinical Trial Agreement dated February 14, 1998 between Thermal
Medical Imaging, Inc. and Providence Hospital.
10(vv)* Clinical Study of Examination of Breast for Identification of
Suspicious Tissue Using Clinical Examination and Mammography With and
Without the TMI Thermal Imaging System (Protocol for all clinical
trial agreements).
10(ww)* Promissory Note dated May 1, 1998 between Computerized Thermal
Imaging, Inc. and Looper, Reed, Mark & McGraw Incorporated.
10(xx)* Confidential Settlement and Release Agreement dated February 5, 1998
between the Company and Reg. S Intercontinental Ltd., Banco Cooperativo
Costaricense, Mardi International Corporation, Pegasus Financial Services
Corp. and Manny Lopez. [Portions of Section 1 have been omitted pursuant to
a Request for Confidential Treatment. Accordingly, the material has been
filed separately with the SEC.]
statements contained in the registration statement.
10(yy)* Settlement Agreement dated April 30, 1998 between the Company and Lockwood
Resources Limited, Y.L. Hirsch, and Ari Goldstein. [Portions of Sections 1,
2, and 3 have been omitted pursuant to a Request for Confidential
Treatment. Accordingly, the material has been filed separately with the
SEC.]
10(zz)* Confidential Settlement and Release Agreement dated August 12, 1998 between
the Company and A.M.H.C. Wehneijer de Affiliate, B.V. [Portions of Section
1 have been omitted pursuant to a Request for Confidential Treatment.
Accordingly, the material has been filed separately with the SEC.]
10(aaa)* Corporate Note between the Company and Manhattan Financial Group dated
April 15, 1998.
10(bbb)* Corporate Note between the Company and Manhattan Financial Group dated
September 11, 1998.
10(ccc)* Marketing Agreement dated November 19, 1998 between the Company and
T.S.E.T., Inc.
10(ddd)** Manhattan Financial Group Rule 144 Investment
10(eee)** Beach Boulevard L.L.C. Securities Purchase Agreement
11* Computation of Per Share Earnings.
16(a)* Letter from King, Griffin & Adamson, P.C. consenting to the disclosure
statements contained in the registration statement.
16(b)* Letter from Randy Simpson, C.P.A. consenting to the disclosure statements
contained in the registration statement.
21* Subsidiaries of the Registrant.
23(a)** Consent of Counsel (included in Exhibit 5).
23(b)* Consent of Ham, Langston & Brezina, LLP.
24 (1)* Powers of Attorney.
27 (1)* Financial Data Schedule
</TABLE>
. Previously filed
. ** Filed herewith
<PAGE>
EXHIBITS 5 and 23(a)
Owen M. Naccarato, Esq,
31 Grenache
Irvine, California 92614
Telephone (949) 551-4982
Telecopier (310) 473-5442
March 29, 1999
Computerized Thermal Imaging, Inc.
476 Heritage Park Boulevard
Suite 210
Layton, Utah 84041
Re: Post Effective Amendment to Form SB-2 Registration Statement
Gentlemen:
As counsel for Computerized Thermal Imaging, Inc. (the "Company"), you have
requested our firm to render this opinion in connection with the Registration
Statement on Form SB-2 filed under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission relating to the
resale of 36,209,606 shares of the common stock of the Company, which may be
sold by the holders thereof (the "Selling Stockholders") from time to time as
market conditions permit 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) 20,781,250
shares to be purchased by an unrelated investor (the "Newly Issued Shares");
(ii) 5,337,741 shares currently issued and outstanding; (iii) 3,840,615 shares
underlying outstanding warrants exercisable at prices ranging from $0.72 to
$5.00 per share which expire on various dates ranging from March 31, 1999 to
March 13, 2002 (the "Resale Warrants"); and (iv) 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").
We are familiar with the Registration Statement and the registration of the
shares of the Common Stock contemplated thereby. In giving this opinion, we
have reviewed the Registration Statement and such other documents and
certificates of public officials and officers of the Company with respect to the
accuracy of the factual matters contained therein as we have felt necessary or
appropriate in order to render the opinions expressed herein. In making our
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents presented to us as originals, the conformity to original
documents of all documents presented to us as copies thereof, and the
authenticity of the original documents from which any such copies were made,
which assumptions we have not independently verified.
Based upon and subject to the foregoing, and upon such other matters as we
have determined to be relevant, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Nevada.
2. The shares of the Common Stock to be issued upon the purchase of the
Newly Issued Shares are validly authorized and, when purchased, will be validly
issued, fully paid and nonassessable.
3. The shares of the Common Stock underlying the Compensation Warrants to
be issued upon the exercise thereof are validly authorized and, upon exercise,
will be validly issued, fully paid and nonassessable.
<PAGE>
Computerized Thermal Imaging, Inc.
March 29, 1999
Page 2
4. The shares of the Common Stock underlying the Resale Warrants and the
Options to be issued upon the exercise/and or the conversion of such Resale
Warrants and Options are validly authorized and, upon exercise or conversion,
will be validly issued, fully paid and nonassessable.
We hereby consent to use in the Registration Statement of the reference to
Owen M. Naccarato under the heading "Legal Matters". We also consent to the
filing of this opinion letter as an exhibit to the Registration Statement.
This opinion is conditioned upon the Registration Statement being declared
effective.
Very truly yours,
/s/ Owen M. Naccarato
---------------------
Owen M. Naccarato, Esq.
<PAGE>
Exhibit 10(ddd)
Manhattan Financial Group
1147 Manhattan Avenue, #134
Manhattan Beach, CA 90266
To: David B. Johnston
From: Daron C. Dillia
Dated: February 8, 1999
RE: 144 Investment
Manhattan Financial Group (MFG) agrees on or before March 15, 1999 to provide
Computerized Thermal Imaging, Inc. (CTI) with a minimum investment of $250,000
and a maximum investment of $1,250,000 for the purchase of CTI common stock
subject to rule #144 of the SEC act of 1933. As consideration for such
investment CTI will allow MFG to purchase the common stock at 50% of the low bid
price during the time period (2/8/99 to 3/15/99). The stock purchased will be
granted piggy back registration rights.
/s/ Daron C. Dillia
- ---------------------------------------------
Daron C. Dillia dba Manhattan Financial Group
Agreed:
/s/ David B. Johnston
- --------------------------------------------
David B. Johnston - CEO
Computerized Thermal Imaging
<PAGE>
EXHIBIT 10(eee)
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of March 4 , 1999, is
-----
entered into by and between COMPUTERIZED THERMAL IMAGING, INC., a Nevada
corporation, with headquarters located at 476 Heritage Park Boulevard, Suite
210, Layton, UT 84041 (the "Company"), and each entity named on a signature page
hereto (each, a "Buyer") (each agreement with a Buyer being deemed a separate
and independent agreement between the Company and such Buyer, except that each
Buyer acknowledges and consents to the rights granted to each other Buyer under
such agreement and the Transaction Agreements, as defined below, referred to
therein).
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation
----- ----
D") as promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or
Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase from the Company and the Company
desires to sell to the Buyer, upon the terms and subject to the conditions of
this Agreement, shares of the Common Stock, par value $.001 per share (the
"Common Stock"), of the Company for an aggregate purchase price of not less than
$1,500,000 and not more than $7,000,000, with the purchase price for each share
to be determined as provided below (the shares actually purchased or to be
purchased pursuant to this Agreement being referred to herein as the "Purchased
Shares"); and
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase; Certain Definitions. (i) The undersigned hereby agrees
to purchase from the Company, and the Company hereby agrees to sell to the
Buyer, in one or more tranches (each, a "Tranche"), as hereinafter provided, the
Purchased Shares. The purchase price for each Tranche (the "Purchase Price")
shall be determined in accordance with the provisions set forth below, except
that the Purchase Price for the first Tranche (the "Initial Tranche" or the
"Initial Securities") for all Buyers shall aggregate $1,500,000, with the
portion thereof subscribed for the Buyer being specified on the Buyer's
signature page hereto. The fraction of which the numerator is the Buyer's share
of the Initial Tranche and the denominator is $1,500,000 is referred to as the
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"Buyer's Allocable Share." The aggregate Purchase Price for all Buyers of the
Initial Tranche and each subsequent Tranche (each, an "Additional Tranche")
shall not exceed the aggregate amount of $7,000,000. The Purchase Price for
each Tranche shall be payable in United States Dollars.
(ii) As used herein, the term "Initial Closing Date" means the date
of the closing of the purchase and sale of the Initial Tranche, which date shall
be a date specified on at least ten (10) business days' written notice from the
Company to the Buyer, which notice shall also certify that the Registration
Statement covering the Registrable Securities (as those terms are defined in the
Registration Rights Agreement defined below) has been declared effective by the
SEC..
(iii) As used herein, the term "Additional Closing Date" means the
date of the closing of the purchase and sale of the relevant Additional Tranche,
as provided herein.
(iv) As used herein, the term "Closing Date" means the relevant
Initial Closing Date or Additional Closing Date, as the case may be.
(v) As used herein, the term "Effective Date" means the effective
date of the Registration Statement covering the Registrable Securities.
(vi) As used herein, the term "Current Price of the Common Stock"
means the lowest sale price of the Common Stock, as reported by Bloomberg, LP
or, if not so reported, as reported on the over-the-counter market, (x) with
respect to the Initial Tranche, during the ten (10) trading days prior to the
Initial Closing Date and (y) with respect to each Additional Tranche, during the
period commencing on the relevant Tranche Notice Date (as defined below) or, if
such day is not a trading day, the next trading day and continuing through and
including the trading day immediately before the relevant Additional Closing
Date.
(vii) As used herein, the term "Securities" means all of or part of
the Purchased Shares and the Supplemental Shares (as defined below), as the
context may require.
b. Form of Payment; Delivery of Certificates.
(i) The Buyer shall pay the Purchase Price for the relevant
Purchased Shares by delivering immediately available good funds in United States
Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as Annex I (the "Joint Escrow Instructions") on the
date prior to the relevant Closing Date.
(ii) No later than the relevant Closing Date, but in any event
promptly following payment by the Buyer to the Escrow Agent of the relevant
Purchase Price, the Company shall deliver one or more certificates representing
the relevant Purchased Shares, each duly executed on behalf of the Company and
issued in the name of the Buyer (collectively, "Certificates"), to the Escrow
Agent.
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(iii) By signing this Agreement, each of the Buyer and the Company,
subject to acceptance by the Escrow Agent, agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow Instructions, all of the
provisions of which are incorporated herein by this reference as if set forth in
full.
c. Method of Payment. Payment into escrow of the Purchase Price
shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: [To be provided to the Buyer by Krieger & Prager]
Re: Computerized Thermal Imaging Transaction
d. Escrow Property. The Purchase Price installments and the
Certificates delivered to the Escrow Agent as contemplated by this Sections 1
are referred to as the "Escrow Property."
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
a. Without limiting Buyer's right to sell the Securities
(sometimes referred to as the "Shares") pursuant to the Registration Statement,
the Buyer is purchasing the Securities for its own account, for investment only
and not with a view towards the public sale or distribution thereof and not with
a view to or for sale in connection with any distribution thereof.
b. The Buyer is (i) an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason of
the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the Securities.
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c. All subsequent offers and sales of the Shares by the Buyer
shall be made pursuant to registration of the Shares under the 1933 Act or
pursuant to an exemption from registration.
d. The Buyer understands that the Securities are being offered and
sold to it in reliance on specific exemptions from the registration requirements
of United States federal and state securities laws and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of the Buyer to acquire the Securities. The
Buyer represents and warrants that the address of its principal place of
business is as set forth on the Buyer's signature page of this Agreement.
e. The Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities and the offer of
the Shares which have been requested by the Buyer, including Annex IV hereto.
The Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers to
any such inquiries. Without limiting the generality of the foregoing, the Buyer
has also had the opportunity to obtain and to review the Company's (1) Quarterly
Report on Form 10-Q for the fiscal quarter ended December 31, 1998, and (2)
Registration Statement on Form SB-2, filed on January 8, 1999 (the "Company's
SEC Documents").
f. The Buyer understands that its investment in the Securities
involves a high degree of risk.
g. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized, executed
and delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that, except as
provided in Annex IV hereto:
a. Concerning the Shares. There are no preemptive rights of any
stockholder of the Company, as such, to acquire the Shares.
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<PAGE>
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada and has the requisite corporate power to own its properties and to carry
on its business as now being conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or condition (financial or otherwise) or results of operation of the Company and
its subsidiaries taken as a whole. The Company has registered its Common Stock
pursuant to Section 12 of the 1934 Act, and the Common Stock is listed and
traded on The NASDAQ/Bulletin Board Market. The Company has received no notice,
either oral or written, with respect to the continued eligibility of the Common
Stock for such listing, and the Company has maintained all requirements for the
continuation of such listing.
c. Authorized Shares. The Company has sufficient authorized and
unissued Shares as may be reasonably necessary to effect the sale of the maximum
number of Purchased Shares and Supplemental Shares (assuming, for such purposes,
the assumptions contemplated by Section 4(h)(x) and (y) hereof as of the date
hereof). The Purchased Shares and the Supplemental Shares have been duly
authorized and, when issued upon or in connection with the closing of a Tranche,
each as provided herein, will be duly and validly issued, fully paid and non-
assessable and will not subject the holder thereof to personal liability by
reason of being such holder.
d. Securities Purchase Agreement; Registration Rights Agreement
and Stock. This Agreement and the Registration Rights Agreement, the form of
which is attached hereto as Annex III (the "Registration Rights Agreement"), and
the transactions contemplated thereby, have been duly and validly authorized by
the Company. This Agreement has been duly executed and delivered by the Company
and this Agreement is, and the Registration Rights Agreement, when executed and
delivered by the Company, will be, valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium, and other similar laws affecting the enforcement of creditors'
rights generally.
e. Non-contravention. The execution and delivery of this Agreement
and the Registration Rights Agreement by the Company, the issuance of the
Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement and the Registration Rights Agreement do not and
will not conflict with or result in a breach by the Company of any of the terms
or provisions of, or constitute a default under (i) the articles of
incorporation or by-laws of the Company, each as currently in effect, (ii) any
indenture, mortgage, deed of trust, or other material agreement or instrument to
which the Company is a party or by which it or any of its properties or assets
are bound, including any listing agreement for the Common Stock except as herein
set forth, (iii) to its knowledge, any existing applicable law, rule, or
regulation or any applicable decree, judgment, or order of any court, United
States federal or state regulatory body, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, or (iv) the Company's listing agreement for its Common Stock, except
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<PAGE>
such conflict, breach or default which would not have a material adverse effect
on the business, operations or condition (financial or otherwise) or results of
operations of the Company and its subsidiaries, taken as a whole, or on the
transactions contemplated herein.
f. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained or that are contemplated by this Agreement to
be obtained on a date after the date hereof.
g. SEC Filings. None of the Company's SEC Documents contained, at
the time they were filed, any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements made therein in light of the circumstances under which they were
made, not misleading. Except for certain filings required to be filed by
persons subject and pursuant to Section 16 of the 1934 Act, the Company has
since January 1, 1998 timely filed all requisite forms, reports and exhibits
thereto with the SEC.
h. Absence of Certain Changes. Since January 1, 1998, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or otherwise), or results
of operations of the Company, except as disclosed in the Company's SEC
Documents. Since January 1, 1998, except as provided in the Company's SEC
Documents, the Company has not (i) incurred or become subject to any material
liabilities (absolute or contingent) except liabilities incurred in the ordinary
course of business consistent with past practices; (ii) discharged or satisfied
any material lien or encumbrance or paid any material obligation or liability
(absolute or contingent), other than current liabilities paid in the ordinary
course of business consistent with past practices; (iii) declared or made any
payment or distribution of cash or other property to stockholders with respect
to its capital stock, or purchased or redeemed, or made any agreements to
purchase or redeem, any shares of its capital stock; (iv) sold, assigned or
transferred any other tangible assets, or canceled any debts or claims, except
in the ordinary course of business consistent with past practices; (v) suffered
any substantial losses or waived any rights of material value, whether or not in
the ordinary course of business, or suffered the loss of any material amount of
existing business; (vi) made any changes in employee compensation, except in the
ordinary course of business consistent with past practices; or (vii) experienced
any material problems with labor or management in connection with the terms and
conditions of their employment.
i. Full Disclosure. There is no fact known to the Company (other
than general economic conditions known to the public generally or as disclosed
in the Company's SEC Documents) that has not been disclosed in writing to the
Buyer that (i) would reasonably be expected to have a material adverse effect on
the business, operations or condition (financial or otherwise) or results of
operations of the Company and its subsidiaries, taken as a whole, (ii) would
reasonably be expected to materially and adversely affect the ability of the
Company to perform its obligations
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<PAGE>
pursuant to this Agreement or any of the agreements contemplated hereby
(collectively, including this Agreement, the "Transaction Agreements"), or (iii)
would reasonably be expected to materially and adversely affect the value of the
rights granted to the Buyer in the Transaction Agreements.
j. Absence of Litigation. Except as set forth in the Company's SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business or financial condition, or results of operation of the
Company and its subsidiaries taken as a whole or the transactions contemplated
by any of the Transaction Agreements or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, any of the Transaction Agreements.
k. Absence of Events of Default. Except as set forth in Section
3(e) hereof, no Event of Default (or its equivalent term), as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (or its equivalent term) (as so defined in such agreement), has occurred
and is continuing, which would have a material adverse effect on the business,
operations or condition (financial or otherwise) or results of operations of the
Company and its subsidiaries, taken as a whole.
l. No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Company's SEC
Documents or those incurred in the ordinary course of the Company's business
since January 1, 1998, and which individually or in the aggregate, do not or
would not have a material adverse effect on the properties, business, condition
(financial or otherwise), or results of operations of the Company and its
subsidiaries, taken as a whole. Except for the transactions contemplated by the
Transaction Agreements, no event or circumstances has occurred or exists with
respect to the Company or its properties, business, condition (financial or
otherwise), or results of operations, which, under applicable law, rule or
regulation, requires public disclosure or announcement prior to the date hereof
by the Company but which has not been so publicly announced or disclosed.
There are no proposals currently under consideration or currently anticipated to
be under consideration by the Board of Directors or the executive officers of
the Company which proposal would (x) change the certificate of incorporation or
other charter document or by-laws of the Company, each as currently in effect,
with or without shareholder approval, which change would reduce or otherwise
adversely affect the rights and powers of the shareholders of the Common Stock
or (y) materially or substantially change the business, assets or capital of the
Company, including its interests in subsidiaries.
m. No Default. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material instrument
or agreement to which it is a party or by which it or its property is bound.
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<PAGE>
n. No Integrated Offering. Neither the Company nor any of its
affiliates nor any person acting on its or their behalf has, directly or
indirectly, at any time since July 1, 1998, made any offer or sales of any
security or solicited any offers to buy any security under circumstances that
would eliminate the availability of the exemption from registration under Rule
506 of Regulation D in connection with the offer and sale of the Securities as
contemplated hereby.
o. Dilution. The number of Shares issuable pursuant to the terms
of the Transaction Agreements may increase substantially in certain
circumstances, including, but not necessarily limited to, the circumstance
wherein the trading price of the Common Stock declines prior to the consummation
of particular transactions or the exercise of certain rights. The Company's
executive officers and directors have studied and fully understand the nature of
the Securities being sold hereby and recognize that they have a potential
dilutive effect. The board of directors of the Company has concluded, in its
good faith business judgment, that such issuance is in the best interests of the
Company. The Company specifically acknowledges that its obligation to issue the
Purchased Shares and the Supplemental Shares on or in connection with each
Closing Date as provided herein is binding upon the Company and enforceable
regardless of the dilution such issuance may have on the ownership interests of
other shareholders of the Company.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Filings. The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Securities to the Buyer
under any United States laws and regulations applicable to the Company, or by
any domestic securities exchange or trading market, and to provide a copy
thereof to the Buyer promptly after such filing.
b. Reporting Status. So long as the Buyer beneficially owns any of
the Securities, the Company shall file all reports required to be filed by the
Company with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the
Company shall not voluntarily terminate its status as an issuer required to file
reports under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would permit such termination. The Company will take all reasonable
action under its control to continue the listing and trading of its Common Stock
(including, without limitation, all Registrable Securities) on The
NASDAQ/Bulletin Board Market and will comply in all material respects with the
Company's reporting, filing and other obligations under the by-laws or rules of
the National Association of Securities Dealers, Inc. ("NASD") or The
NASDAQ/Bulletin Board Market.
c. Use of Proceeds. The Company shall use the proceeds from the
sale of the Securities (excluding amounts paid by the Company for legal fees,
finder's fees and escrow fees in connection with the sale of the Securities) for
internal working capital purposes, and shall not, directly or indirectly, use
such proceeds for any loan to or investment in any other corporation,
partnership, enterprise or other person, including any of its affiliates, or to
repay any debt to any of its affiliates.
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d. Certain Agreements. The Company covenants and agrees that it
will not, without the prior written consent of the Buyer, enter into any
subsequent or further offer or sale of Common Stock or securities convertible
into Common Stock with any third party on any date which is prior to the later
of (A) sixty (60) days after the Effective Date or (B) thirty (30) days after
the last Additional Closing Date. The foregoing provision shall not restrict the
Company from issuing shares of Common Stock upon the exercise of certain
warrants or other options for the purchase of up to approximately 3,671,590
shares, which warrants or options are outstanding as of the date hereof.
e. Future Purchases. (i) The Buyer hereby unconditionally and
irrevocably agrees to purchase from the Company, Additional Tranches of
Purchased Shares on and subject to the terms and conditions provided in Section
1 and this Section 4(e).
(ii) Commencing two (2) months after the Initial Closing Date, at any
time (but, unless otherwise consented to by Buyer, not more than once in any one
calendar month and not prior to five (5) business days after the immediately
preceding Closing Date), the Company may give a notice (a "Tranche Notice") to
the Buyer, with a copy to the Escrow Agent. The date the Tranche Notice is
given to the Buyers is referred to as the "Tranche Notice Date." The Tranche
Notice shall specify (x) the amount of the Purchase Price to be provided by all
Buyers (which amount shall be $500,000 in any given Tranche Notice) and the
Buyer's Allocable Share thereof and (y) the date of the Additional Closing Date
for such Tranche, which Additional Closing Date shall not be earlier than ten
(10) business days after the Tranche Notice Date.
(ii) The number of shares of Purchased Shares to be issued at the
Additional Closing Date (the "Additional Purchased Shares") shall be as provided
in Section 4(f) hereof. The Additional Purchased Shares shall be allocated among
the Buyers based on their relative Buyer's Allocable Shares.
(iii) Except to the extent specifically contemplated by the provisions
of this Section 4(h), the closing of each Additional Tranche shall be conducted
upon the same terms and conditions as those applicable to the closing held on
the Initial Closing Date.
(iv) If, for any reason, a Buyer does not purchase the Additional
Purchased Shares allocable to such Buyer on the Additional Closing Date as
provided above, each of the other Buyers shall have the option to purchase the
Additional Purchased Shares (and if there be more than one such Buyer elected to
exercise such option, pro rata among them based on their relative Buyer's
Allocable Shares) not then being purchased by such Buyer. The Buyer not
purchasing the Additional Purchased Shares shall not have the right to purchase
any other Additional Purchased Shares.
(v) It shall be a condition to the Buyer's obligation to purchase the
Additional Purchased Shares that, as of the Additional Closing Date, (A) the
Current Price of the Common Stock, as adjusted to reflect any stock splits,
reverse stock splits or stock dividends effected or
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<PAGE>
declared after the Initial Closing Date, be seventy-five cents ($0.75) or more,
and (B) the average daily trading volume for the twenty (20) consecutive trading
days ending the day before the Additional Closing Date be two hundred thousand
(200,000) or more shares.
(vi) On the relevant Additional Closing Date, (A) the Registration
Statement required to be filed under the Registration Rights Agreement shall
continue to be effective and shall cover at least (x) all Registrable Securities
for Purchased Shares and all related Supplemental Shares issued prior to such
Additional Closing plus (y) a number of shares equal to one hundred fifty
percent (150%) of the Purchased Shares to be issued in connection with the
transaction being consummated such Additional Closing Date, and (B) the
representations and warranties of the Company contained in Section 3 hereof
shall be true and correct in all material respects (and the Company's issuance
of the relevant Additional Purchased Shares shall constitute the Company's
making each such representation and warranty as of such date) and there shall
have been no material adverse changes (financial or otherwise) in the business,
operations or conditions (financial or otherwise) or results of operations of
the Company and its subsidiaries taken as a whole from the Initial Closing Date
through and including the relevant Additional Closing Date (and the Company's
issuance of the relevant Additional Purchased Shares shall constitute the
Company's making such representation and warranty as of such date).
(vii) The Buyer's obligations under this Section 4(e) shall terminate
if the Company's available shares does not satisfy the provisions of Section
4(h) hereof at any time.
f. Number of Purchased Shares. At each Closing Date, the number of
Purchased Shares to be issued to the Buyer shall be equal to (i) the relevant
Purchase Price, divided by (ii) the Current Price of the Common Stock as of such
Closing Date, multiplied by the Applicable Percentage. The "Applicable
Percentage" is (x) for the Initial Closing Date, eighty-two and one-half percent
(82.5%) and (y) for each Additional Closing Date, eighty-five percent (85%).
g. Supplemental Shares. (i) The Company agrees to issue to the
Buyer no later than the thirtieth trading day after each Closing Date
supplemental shares ("Supplemental Shares") equal in number to (x) the product
of (I) the Purchased Shares of the relevant Closing Date (equitably adjusted for
any stock split, stock dividend, reclassification of the Common Stock,
recapitalization, merger or consolidation, or like capital adjustment affecting
the Common Stock subsequent to such Closing Date; an "Equitable Adjustment"),
multiplied by (II) the excess of ninety-five percent of the Current Price of the
Common Stock applicable to that Closing Date (subject to Equitable Adjustment)
over the Market Price of the Common Stock, divided by (y) the Market Price of
the Common Stock.
(ii) For the purposes of this Section 4, the term "Market Price of
the Common Stock" shall be the average of the lowest sale price of a share of
Common Stock, as reported by Bloomberg, LP, for any five (5) trading days during
the Effective Period (as defined below), as such dates are selected by the
Buyer.
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(iii) Anything in any other provision of this Agreement, including
the preceding provisions of this Section 4, to the contrary notwithstanding, the
Company will be obligated to issue Supplemental Shares if, and only if, the
Market Price of the Common Stock is less than the Base Price at any trading day
during the period (the "Effective Period") beginning on the first trading day
after the relevant Closing Date and continuing through and including the
twentieth trading day after such Closing Date.
h. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield two hundred percent (200%) of the number of
shares of Common Stock issuable (i) for the remaining maximum Additional
Purchased Shares and (ii) the maximum Supplemental Shares which would be issued
in conjunction with the purchase and sale of the maximum Additional Purchased
Shares. The Company shall make such determination on the first trading day of
each calendar month. In making the foregoing calculations, the Company shall
assume that (x) the Current Price of the Common Stock at the next Closing Date
will be equal to seventy-five percent (75%) of the Current Price of the Common
Stock as of the last trading day of the preceding calendar month and (y) the
Market Price of the Common Stock will be equal to fifty percent (50%) of such
assumed Current Price of the Common Stock. The Company will promptly notify the
Buyer if at any time the terms of this Section 4(h) will not be satisfied.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company will take all steps necessary or appropriate to
ensure that the Company will not issue any instruction to the Subsidary's
transfer agent restricting the transfer of the Securities after the Effective
Date and that the Securities shall otherwise be freely transferable on the books
and records of the Company as and to the extent provided in this Agreement and
applicable law. Nothing in this Section shall affect in any way the Buyer's
obligations and agreement to comply with all applicable securities laws upon
resale of the Securities. If the Buyer provides the Company with an opinion of
counsel reasonably satisfactory to the Company that registration of a resale by
the Buyer of any of the Securities is not required under the 1933 Act, the
Company shall take all steps necessary or appropriate to ensure that the Company
shall permit the transfer of the Securities and promptly instruct the Company's
transfer agent to issue one or more certificates for Common Stock without legend
in such name and in such denominations as specified by the Buyer.
b. The Company will take all steps necessary or appropriate to
ensure that the Company will authorize its transfer agent to give information
relating to the Company directly to the Buyer or the Buyer's representatives
upon the request of the Buyer or any such representative. The Company will cause
the Company to provide the Buyer with a copy of the authorization so given to
the transfer agent.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
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The Buyer understands that the Company's obligation to sell the
Securities to the Buyer pursuant to this Agreement on each Closing Date is
conditioned upon:
a. The execution and delivery of this Agreement by the Buyer;
b. Delivery by the Buyer to the Escrow Agent of good funds in the
amount of the relevant Purchase Price;
c. The accuracy on such Closing Date of the representations and
warranties of the Buyer contained in this Agreement, each as if made on such
date, and the performance by the Buyer on or before such date of all covenants
and agreements of the Buyer required to be performed on or before such date; and
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Securities on each Closing Date is conditioned upon:
a. The execution and delivery of this Agreement and the Registration
Rights Agreement by the Company;
b. Delivery by the Company of the relevant Certificates in accordance
with this Agreement;
c. The accuracy in all material respects on such Closing Date of the
representations and warranties of the Company contained in this Agreement, each
as if made on such date, and the performance by the Company on or before such
date of all covenants and agreements of the Company required to be performed on
or before such date;
d. On such Closing Date, the Registration Rights Agreement shall be
in full force and effect and the Company shall not be in default thereunder;
e. On such Closing Date, the Buyer shall have received an opinion of
counsel for the Company, dated such Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer, substantially to the effect set forth in
Annex II attached hereto;
f. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained;
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g. From and after the date hereof to and including the Closing Date,
the trading of the Common Stock of the Company shall not have been suspended by
the SEC or the NASD and trading in securities generally on the New York Stock
Exchange or The NASDAQ/SmallCap Market shall not have been suspended or limited,
nor shall there be any outbreak or escalation of hostilities involving the
United States or any material adverse change in any financial market that in
either case in the reasonable judgment of the Buyer makes it impracticable or
inadvisable to purchase the Securities; and
h. With respect to the Initial Closing Date, the Registration
Statement covering the Registrable Securities shall continue to be effective,
and with respect to each Additional Closing Date, each of the conditions set
forth in Section 4(h) hereof shall have either been satisfied or waived by the
Buyer.
8. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York for contracts to be wholly performed in
such state and without giving effect to the principles thereof regarding the
conflict of laws. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the City of New York or the
state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non conveniens, to the bringing of any such proceeding in such
jurisdictions. To the extent determined by such court, the Company shall
reimburse the Buyer for any reasonable legal fees and disbursements incurred by
the Buyer in enforcement of or protection of any of its rights under any of the
Transaction Agreements.
b. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
c. This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of each of the parties hereto.
d. All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
e. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
f. This Agreement may be signed in one or more counterparts, each of
which shall be deemed an original.
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g. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.
h. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
i. This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement thereof.
j. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof.
9. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given on the earliest of
(a) the date delivered, if delivered by personal delivery as against
written receipt therefor or by confirmed facsimile transmission,
(b) the seventh business day after deposit, postage prepaid, in the
United States Postal Service by registered or certified mail, or
(c) the third business day after mailing by international express
courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at the
following addresses (or at such other addresses as such party may designate by
ten (10) days' advance written notice similarly given to each of the other
parties hereto):
COMPANY: COMPUTERIZED THERMAL IMAGING, INC.
At its address at the head of this Agreement
Attn: David B. Johnston, Chief Executive Officer
Telephone No.: (503) 650-0119
Telecopier No.: (503) 650-8551
BUYER: At the address set forth on the signature page of this Agreement.
with a copy to:
Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
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Attn: Samuel Krieger, Esq.
Telephone No.: (212) 689-3322
Telecopier No. (212) 213-2077
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Attn: Samuel Krieger, Esq.
Telephone No.: (212) 689-3322
Telecopier No. (212) 213-2077
10. LIMITATION ON LIABILITY. Anything herein or in the other
Transaction Agreements to the contrary notwithstanding, the Company shall have
no liability to the Buyer if the Registration Statement is not declared
effective at any time prior to the Initial Closing Date; provided, however, if
the Registration Statement is not declared effective within one hundred fifty
(150) days from the date hereof, Buyer shall not have any further obligations
hereunder or under any of the other Transaction Agreements.
11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the
Buyer's representations and warranties herein shall survive the execution and
delivery of this Agreement and the delivery of the Certificates and payment of
the Purchase Price, and shall inure to the benefit of the Buyer and the Company
and their respective successors and assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
or one of its officers thereunto duly authorized as of the date set forth below.
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed as of the date first above written.
BUYER:
INITIAL PURCHASE PRICE OF SECURITIES: $______________________
- ----------------------------- ------------------------------------
Address Printed Name of Subscriber
- -----------------------------
By:
Telecopier No. ---------------------------------
-------------- (Signature of Authorized Person)
------------------------------------
Printed Name and Title
- -----------------------------
Jurisdiction of Incorporation
or Organization
As of the date first above written, the undersigned hereby accepts this
Agreement and represents that the foregoing statements are true and correct and
that it has caused this Securities Purchase Agreement to be duly executed on its
behalf.
COMPUTERIZED THERMAL IMAGING, INC.
By:
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Title:
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