U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission file number: 000-23955
COMPUTERIZED THERMAL IMAGING, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 87-0458721
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
476 Heritage Park Blvd., Layton, UT 84041
-------------------------------------- -------
(Address of principal executive offices)(Zip Code)
(801) 776-4700
------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ]
No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date: Common stock, par value $0.001, of which 80,471,834 shares
were issued and outstanding as of September 30, 2000.
COMPUTERIZED THERMAL IMAGING, INC.
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements...............................................3
Independent Accountant's Review Report.............................3
Consolidated Balance Sheets as of September 30,
2000 and 1999......................................................4
Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999 and for
the period from inception on June 10, 1987 to
September 30, 2000.................................................5
Consolidated Statements of Stockholders' Equity
(Deficit) for the three months ended September 30,
2000 and 1999 and for the period from inception on
June 10, 1987 to September 30, 2000................................6
Consolidated Statements of Cash Flows for the three
months ended September 30, 2000 and 1999 and for
the period from inception on June 10, 1987
to September 30, 2000..............................................7
Notes to Consolidated Financial Statements.........................9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................10
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk.............18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................18
ITEM 2. Changes in Securities..............................................19
ITEM 3. Defaults upon Senior Securities....................................20
ITEM 4. Submission of Matters to a Vote of Security Holders................20
ITEM 5. Other Information..................................................20
ITEM 6. Exhibits and Reports on Form 8-K...................................22
SIGNATURES
2
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PART I - FINANCIAL INFORMATION
ITEM 1.
The following comprise our condensed (unaudited) consolidated financial
statements for the three months ended September 30, 2000 and 1999.
HJ & Associates, L.L.C.
-----------------------
Certified Public Accountants and Consultants
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors
Computerized Thermal Imaging, Inc.
(A Development Stage Company)
Layton, Utah
We have reviewed the accompanying condensed consolidated balance sheet of
Computerized Thermal Imaging, Inc. as of September 30, 2000 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the three months ended September 30, 2000 and 1999 and for the
period from inception on June 10, 1985 through September 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
consolidated financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards,
which will be performed for the full year with the objective of expressing an
opinion regarding the consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
/s/HJ & Associates, LLC
---------------------------
HJ & Associates, LLC
Salt Lake City, Utah
October 16, 2000
3
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COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(UNAUDITED)
ASSETS
September 30, June 30,
2000 2000
--------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 4,677,144 $ 8,997,767
Marketable securities 27,119,827 26,034,399
Accounts receivable, trade
(net of $4,600 allowance) 54,621 177,254
Inventory 360,307 110,206
Interest receivable 438,643 439,273
Prepaid expenses 211,889 204,541
Software maintenance contract 146,027 309,863
--------------- ---------------
Total Current Assets 33,008,458 36,273,303
--------------- ---------------
PROPERTY AND EQUIPMENT, NET 953,721 567,936
SOFTWARE LICENSES, NET 3,254,895 3,447,289
GOODWILL, NET 10,836,350 10,993,895
INTELLECTUAL PROPERTY RIGHTS 50,000 50,000
ADVANCES TO AFFILIATES 22,383 130,247
--------------- ---------------
TOTAL ASSETS $ 48,125,807 $ 51,462,670
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 311,629 $ 688,064
Accrued employee costs 241,191 375,920
Sales taxes payable 12,887 14,809
Deferred revenues - 1,750,000
Payable to CTII 1,750,000 -
Accrued liabilities 514,480 349,032
--------------- ---------------
Total Current Liabilities 2,830,187 3,177,825
--------------- ---------------
DEFERRED INCOME TAXES - -
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $5.00 par value,
3,000,000 shares authorized - -
Common stock, $.001 par value, 200,000,000
shares authorized, 80,471,834 and
80,149,516 issued and outstanding on
September 30, 2000 and June 30, 2000 80,472 80,150
Additional paid in capital 83,084,697 82,774,168
Other comprehensive income 92,493 32,492
Losses accumulated during the development
stage (37,962,042) (34,601,965)
--------------- ---------------
Total Stockholders' Equity (Deficit) 45,295,620 48,284,845
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 48,125,807 $ 51,462,670
=============== ===============
See notes to consolidated financial statements
4
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(UNAUDITED)
From
Inception
Three month periods ended through
September 30, September 30,
-------------------------- -------------
2000 1999 2000
------------- ------------ -------------
INCOME
Sales revenues $ 79,665 $ - $ 408,948
Cost of goods sold (43,019) - (219,995)
------------- ------------ -------------
Gross Margin 36,646 - 188,993
Interest income 616,842 1,493 1,480,531
Income from sale of prototypes - - 180,815
Miscellaneous Income 2,552 - 2,552
------------- ------------ -------------
Total Income 619,394 1,493 1,663,898
------------- ------------ -------------
COSTS AND EXPENSES
Operating, general and administrative
expenses 1,954,537 410,579 21,643,805
Research and development costs 1,623,793 679,372 13,770,557
Interest expense - - 2,173,812
Depreciation and amortization expense 437,787 16,305 1,194,962
Litigation settlement - - 1,097,434
------------- ------------ -------------
Total Costs and Expenses 4,016,117 1,106,256 39,880,570
------------- ------------ -------------
LOSS BEFORE EXTRAORDINARY ITEM (3,360,077) (1,104,763) (38,027,679)
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT - - 65,637
------------- ------------ -------------
NET LOSS $ (3,360,077) $(1,104,763) $(37,962,042)
============= ============ =============
OTHER COMPREHENSIVE INCOME
Unrealized gain on available-for-sale
securities 60,001 - 92,493
------------- ------------ -------------
Total Other Comprehensive Income 60,001 - 92,493
------------- ------------ -------------
NET COMPREHENSIVE LOSS $ (3,300,076) $(1,104,763) $(37,869,549)
============= ============ =============
WEIGHTED AVERAGE SHARES OUTSTANDING 80,405,262 64,473,681
============= ============
BASIC LOSS PER COMMON SHARE $ (0.04) $ (0.02)
============= ============
See notes to consolidated financial statements
5
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
(UNAUDITED)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional During the
-------------------------- Paid-in Development
Shares Amount Capital Stage Total
------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 2000 80,149,516 $ 80,150 $82,774,168 $(34,601,965) $ 48,284,845
Warrants exercised at
$1.70 per share on
cashless basis 162,430 162 (162) - -
Warrants exercised at
$5.00 per share for cash 26,246 26 131,204 - 131,230
Options exercised at $1.70
per share for cash 93,559 94 158,957 - 159,051
Warrants exercised at
$.9375 per share on
cashless basis 27,983 28 (28) - -
Options exercised at
$1.70 per share for cash 12,100 12 20,558 - 20,570
Other Comprehensive Income - - - - 60,001
Net loss for three months
ended September 30, 2000 - - - (3,360,077) (3,360,077)
------------ ------------- ------------ ------------- -------------
Balance at September 30,
2000 80,471,834 $ 80,472 $83,084,697 $(37,962,042) $ 45,295,620
============ ============= ============ ============= =============
See notes to consolidated financial statements.
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(UNAUDITED)
From
Inception
Three Months Ended through
September 30, September 30,
--------------------------- -------------
2000 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,360,077) $ (1,104,763) $(37,962,042)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 437,787 16,305 1,194,962
Loss (gain) on disposition of assets 36,357 - 965,670
Amortization of bond (premium) discount, net (23,336) - (23,336)
Common stock, warrants, and options
issued as compensation for services - 31,873 9,343,801
Common stock issued for interest expense - - 423,596
Common stock issued to settle litigation - - 514,380
Options issued at discount to market to
settle litigation - - 475,000
Options issued at discount to market as
compensation expense - - 91,750
Common stock issued for failure to complete
timely registration - - 82,216
Common stock issued to 401(k) plan - - 43,236
Extraordinary gain on extinguishment of debt - - (65,637)
Write off of advances to affiliate 130,537 - 130,537
Changes in operating assets and liabilities:
Increase in inventory (250,101) - (183,549)
Increase in accounts receivable - trade 122,633 - 62,634
Decrease in maintenance contract 163,836 - (146,027)
Increase (decrease) in deposits, receivables
and prepaids (4,959) - (340,447)
Increase (decrease) in accounts payable
and accrued liabilities (347,637) (242,237) 1,012,509
Increase in deferred revenues - - 1,750,000
------------- ------------- -------------
Net Cash Used in Operating Activities (3,094,960) (1,298,822) (22,630,747)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - - 4,790
Purchase of property and equipment (469,987) (71,501) (1,329,193)
Purchase of software license - - (3,850,000)
Purchase of marketable securities (1,003,852) - (27,336,467)
Legal fees capitalized in connection with
acquisition of Bales Scientific - - (41,970)
Acquisition of Bales Scientific Common Stock - - (5,600,910)
Acquisition of minority interest of subsidiary (40,000) - (100,000)
------------- ------------- -------------
Net Cash Used in Investing Activities $ (1,513,839) $ (71,501) $(38,253,750)
------------- ------------- -------------
See notes to consolidated financial statements.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
(UNAUDITED)
From
Inception
Three Months Ended through
September 30, September 30,
--------------------------- -------------
2000 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock and warrants issued for cash $ 310,850 $ 1,478,458 $ 63,941,002
Stock offering costs - - (3,007,324)
Cash purchased in Bales acquisition - - 38,822
Advances to affiliate (22,674) - (130,538)
Advances from stockholders - 25,641 2,320,738
Proceeds from borrowings and accrued interest - - 3,213,132
Legal fees and interest added to note - - 496,599
Payment of debt issuance costs - - (133,600)
Retirement of notes and debentures - - (1,177,190)
------------- ------------- -------------
Net Cash Provided by Financing Activities 288,176 1,504,099 65,561,641
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,320,623) 133,776 4,677,144
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,997,767 137,162 -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,677,144 $ 270,938 $ 4,677,144
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest expense $ - $ - $ -
Income taxes - - -
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Common stock issued to individuals to
acquire minority interest of subsidiary $ - $ - $ 165,500
Common stock issued in consideration of
Bales Scientific - - 5,500,000
Options issued at discount to market in
connection with offering - - 744,282
Options issued at discount to market in connection
with litigation settlement - - 475,000
Options issued at discount to market to officer
as compensation - - 91,750
Stock offering costs capitalized - - (744,282)
Common stock issued for advances from shareholders - - 2,320,738
Common stock issued for notes payable, accrued
discount & interest - - 2,224,953
Common stock issued for convertible subordinated
debentures - - 640,660
Common stock returned to equity, rescission
offer declined - - -
Common stock issued for liabilities - - 50,000
See notes to consolidated financial statements.
8
</TABLE>
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE A. UNAUDITED FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of results of operations have been included in the
financial statements. Results of operations for the three-month period ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ended June 30, 2001.
The balance sheet at June 30, 2000 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. A summary of the Company's significant
accounting policies and other information necessary to understand the
consolidated financial statements is included in the Company's audited
financial statements for the years ended June 30, 2000 and 1999 as contained
in the Company's Form 10-KSB for its year ended June 30, 2000. Such financial
statements should be read in connection with these financial statements.
NOTE B. NEW ACCOUNTING STANDARD AND GUIDANCE
In June 1998, the Financial Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), subsequently amended by FAS 138
"Accounting for Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities.
Effective for all fiscal quarters beginning after June 15, 2000, SFAS 133
requires the Company to recognize all derivative instruments as either assets
or liabilities in the statement of financial position and measure those
instruments at their fair value on an on-going basis. The Company adopted the
statement on July 1, 2000 and has determined that the adoption of SFAS 133 has
no material effect on the financial condition of the Company.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB No. 101") to
provide guidance on the recognition, presentation, and disclosure of revenue
in financial statements. However, SAB No. 101 does not change existing
literature on revenue recognition. SAB No. 101 explains the staff's general
framework for revenue recognition, stating that four criteria need to be
satisfied in order to recognize revenue. The four criteria, all of which must
be met, include:
a) There must be persuasive evidence of an arrangement;
b) Delivery must have occurred or services must have been rendered;
c) The selling price must be fixed or determinable; and
d) Collectibility must be reasonably assured.
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<PAGE>
Since releasing SAB No. 101, numerous implementation questions and
concerns have arisen in the financial reporting community. On June 26, 2000,
the SEC staff announced that they are delaying the required implementation
date for SAB No. 101. The Company is now required to adopt SAB No. 101 no
later than the fourth quarter of its fiscal year ended June 30, 2001. The
Company does not believe that the adoption of SAB No. 101 will have a material
effect on the financial condition of the Company. Until adoption, the Company
will continue to evaluate the impact, if any, of SAB No. 101 and any possible,
subsequent interpretations of SAB No. 101 on the Company's policies,
procedures and financial condition.
NOTE C. INVENTORIES
Inventories are valued at their lower of cost or market. The FIFO
(first-in, first out) method is used to determine the cost of inventories.
Inventories at September 30, by major classification, are comprised of the
following:
2000 1999
---------- ----------
Raw materials and work-in-process $ 360,307 $ -
Finished goods -
Supplies - -
---------- ----------
$ 360,307 $ -
========== ==========
NOTE D. INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax basis of
assets and liabilities and their financial amounts at year-end. The Company
has reviewed its net deferred tax assets, together with net operating loss
carryforwards, and has decided to forego recognition of potential tax benefits
arising there from. In making this determination, the Company has considered
the Company's history of tax losses incurred since inception and the fact that
the Company is still within the development stage. The Company has provided a
valuation allowance to reduce its potential deferred tax assets to their net
realizable value.
NOTE E. RECLASSIFICATIONS
Certain amounts for the three months ended September 30, 1999 have been
reclassified to conform to the presentation used at September 30, 2000. The
reclassifications have no effect on net income for either of the years
presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This document contains numerous forward-looking statements about our
business and future. The United States Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for certain forward-looking statements.
Our forward-looking statements are expressed in good faith and we believe that
there is a reasonable basis for us to make them. However, readers are
cautioned not to place undue reliance on such statements. Forward-looking
statements include, but are not limited to, statements about our: 1) plans; 2)
objectives; 3) goals; 4) strategies; 5) expectations for the future; 6) future
10
<PAGE>
performance and events; 7) underlying assumptions for all of the above; and 8)
other statements that are not statements of historical fact.
We make these forward-looking statements based on our analysis of
internal and external historical trends and future expectations. However, such
statements involve risks and uncertainties that could cause our actual results
to materially differ from our forward-looking statements and there can be no
assurance that we will achieve the results set forth in these forward-looking
statements. In addition to other factors, the following are important factors
that could cause our actual results to materially differ from our
forward-looking statements: 1) the results of our pre-clinical and clinical
testing; 2) the time and costs involved in obtaining regulatory approvals for
our systems and products; 3) our ability to respond to changes in the medical
technology marketplace including our ability to develop or acquire new
technologies; 4) competitive factors; 5) the availability of financing on
terms and conditions acceptable to us; 6) the availability of personnel with
requisite skills; and 7) the terms of any new collaborative, licensing and
other arrangements that we may establish.
We have no obligation, or intent, to update or revise these
forward-looking statements to reflect future events, new information or
otherwise.
The following discussion and analysis of our combined financial condition
and results of operations should be read in conjunction with our Audited
Consolidated Financial Statements and Notes thereto contained in our Form
10-KSB for the fiscal year ended June 30, 2000.
Trends/Uncertainties Affecting Continuing Operations
----------------------------------------------------
We are a development stage enterprise and have generated no significant
revenues since inception in 1987. Although our recently acquired subsidiary,
Bales, has generated limited revenues during the past several years, Bales has
also primarily been engaged in research and development activities since its
inception. Accordingly, our ability to achieve profitability will depend, in
part, on our ability to successfully develop clinical applications for our
products, obtain regulatory approvals, and develop the capacity to manufacture
and extensively market our products.
We can make no assurances that we 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, we will be subject to all risks inherent in a growing
venture, including, but not limited to, the need to develop and manufacture
reliable and effective products, develop marketing expertise and expand our
sales force.
General
-------
We are a medical imaging systems integrator producing thermal imaging
diagnostic and patient management systems configured to produce, interpret,
and catalogue computerized thermal images for medical applications. Through
our subsidiary, Bales, we design, manufacture and sell high resolution,
dynamic, digital infrared imaging workstations and related products for both
medical and industrial application. Specialized cameras developed as part of
these workstations are integral components of our Breast Imaging and General
Use Systems. Our Breast Imaging System are designed to serve as a
non-invasive, painless adjunct to mammography, whereas, our General Use System
will function as a diagnostic tool to help healthcare payers identify and
11
<PAGE>
reduce fraudulent workers' compensation claims. Our recently introduced
Photonic Stimulators are used to improve vascularity and increase blood flow
circulation in the treatment of pain. Industrial application of our imaging
systems include non-destructive inspection of aging aircraft, electronics,
composites, metals and other advanced materials, as well as breakthroughs in
the inspection of turbine blades of large power-generation equipment. TRW is
our primary systems development vendor, BATTELLE is our principal systems
engineer and INFORMIX is our primary software database provider.
Capital is required to satisfy general corporate expenses, software
license and maintenance contract payments, professional fees to comply with
securities reporting requirements, cost of clinical trials and technical
support, FDA consulting expenses, acquisition of technology and expenses
associated with the private placement and registration of our securities. Our
capital resources are principally derived from the sale and private placement
of our common stock and warrants, equity funding pursuant to our agreement in
effect with Beach Boulevard LLC, and the exercise of our common stock warrants
and options.
RESULTS OF OPERATIONS
---------------------
The following discussion provides a narrative comparison of our financial
position for the three months ended September 30, 2000 and 1999.
We incurred a loss of $3,360,077 for the quarter ended September 30 2000
compared to a loss of $1,104,762 for the quarter ended September 30, 1999.
The principal reason for the increased loss is due to a $1,702,114 increase in
general and administrative expenses (from $252,423 during the quarter ended
September 30, 1999 to $1,954,537 during the quarter ended September 30, 2000)
and a $786,266 increase in research and development costs (from $837,527
during the quarter ended September 30, 1999 to $1,623,793 during the quarter
ended September 30, 2000). We also experienced increases in depreciation and
amortization expense of $421,482 for the quarter ended September 30, 2000.
The foregoing increases in expenses were partially offset by a $615,349
increase in interest income.
The $1,702,114 increase in general and administrative expenses for the
quarter ended September 30, 2000 primarily resulted from a $432,774 increase
in legal expenses incurred in connection with our Nasdaq listing application,
regulatory filings, and various litigation; a $231,300 increase in salaries as
a result of a material increase in the number of employees; a $225,085
increase in professional services; a $334,280 increase in stockholder
service/public relations costs as a result of our involvement with the
Olympics in Sydney and the Olympic trials in Sacramento; and a $114,255
increase in travel costs during 2000. The overall increase in general and
administrative costs in the quarter ended September 30, 2000 resulted from
additional hiring of administrative and professional staff to support
regulatory reporting requirements, marketing efforts, and advancement of our
FDA Pre-Market Approval application.
The $786,266 increase in research and development expenses for the
quarter ended September 30, 2000 primarily resulted from a $101,150 increase
in clinic trial expenses; a $264,850 increase in salaries as a result of a
material increase in the number of employees; a $229,406 increase in payments
to Battelle and Therma Corp in connection with our clinical trials and FDA
Pre-Market Approval application; a $163,836 increase in software license fees
and an $87,960 increase in equipment supplies. The overall increase in
research and development costs in quarter ended September 30, 2000 resulted
12
<PAGE>
from additional hiring of technical personnel and outside consultants to
further our clinical trials and advance submission of our modules towards
final FDA approval.
The increase in depreciation and amortization expense primarily resulted
from amortization of goodwill associated with our acquisition of Bales
Scientific and amortization of our software licenses. The increase in
interest income primarily resulted from the investment of cash raised from the
placement of our equity securities.
During the quarter ended September 30, 2000 and all prior quarters, we
expensed all costs associated with processes and systems development,
including software code writings, computer systems hardware and software
purchases, material expenses in the development of our examination table and
all payroll expenses throughout the periods presented.
Sources of Liquidity
--------------------
We have generated no significant revenues from operations since inception
in 1987. Although our recently acquired subsidiary has generated limited
revenues during the past several years, Bales, like us, has primarily been a
development stage enterprise. Our cash requirements consist of, but are not
limited to: general corporate expenses including office salaries and expenses,
lease payments on our office space, acquisition of technology, software
license and maintenance contracts payments, legal and accounting fees to
comply with securities registration and reporting requirements, costs of
clinical trials and technical support, FDA consulting expenses, and expenses
associated with the private placement of our equity securities. Capital
resources needed to meet our planned expenditures are derived primarily from
equity funding on the private placement of our common stock and warrants,
equity funding pursuant to our agreement in effect with Beach, and the
exercise of our outstanding warrants and options.
Agreement with Beach Boulevard, LLC. On March 4, 1999, we entered into a
Securities Purchase Agreement (as amended in May 1999, the "Investment
Agreement") with Beach Boulevard L.L.C. ("Beach"). Subject to certain
conditions provided in the Investment Agreement, we could require Beach to
purchase up to $7 million of our common stock in a series of $500,000
tranches. As of the date hereof, we have required Beach to purchase
approximately $3 million of our common stock in a series of six tranches
during our fiscal years ended June 30, 2000 and 1999. Since Beach's
participation in the sixth tranche, we have made no requirements of funding by
Beach, although Beach's obligation to provide funding, should we elect to
require participation, continues in effect and is conditioned on various
factors specified in the Investment Agreement.
Because Beach is not required to purchase additional shares unless
certain provisions are met as set forth in the Investment Agreement, there is
no assurance that Beach will ultimately provide us with the remaining $4
million commitment.
Agreement with Manhattan Financial Group. During January 1, 1997 through
September 21, 2000, we were a party to a Consulting Agreement with Manhattan
Financial Group, a provider of financial advisory services. The initial term
of the Consulting Agreement was for one year and automatically renewed for
annual periods thereafter unless terminated upon proper notification.
Consideration paid in connection with the Consulting Agreement was 100,000
shares of our common stock and a five-year option to purchase an
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additional 2 million shares at $.60 per share. The options, if not exercised
previously, automatically terminate on November 18, 2002. On September 21,
2000, we terminated the Consulting Agreement with Manhattan Financial Group.
In connection with the termination of the Consulting Agreement, Daron
Dillia (d/b/a Manhattan Financial Group), who holds approximately 6.7 percent
of the beneficial ownership of the Company's outstanding common stock, has
entered into a voting agreement with respect to her shares of common stock of
the Company. The term of the agreement is three years beginning October 19,
2000. The voting agreement provides that, during the term of the agreement,
common shares owned by Daron Dillia (and any affiliated transferees) and David
Johnston shall be voted proportionate to the votes of common stock held by all
other shareholders. The voting restrictions end if the shares are transferred
to persons who are not affiliates of Daron Dillia. A copy of the voting
agreement is attached hereto as Exhibit 9.2.
Sources of Potential Long-term Liquidity. We expect that both Use
Agreements and Equipment Financing will be sources of long-term liquidity for
us, although it is premature to anticipate the results of either. Although we
have investigated both options and have entered into preliminary discussions
with equipment financing companies, we are awaiting Pre-Market Approval of our
Breast Imaging System before entering into any additional planning or
definitive agreements regarding either. Much of what we anticipate as being
sources of long-term liquidity is contingent upon (1) whether or not we
achieve Pre-Market Approval of our Breast Imaging System, (2) the development
of a definitive and successful marketing strategy, (3) whether we are able to
develop our Medical Imaging Systems for other applications in the United
States, and (4) the results of our marketing efforts in domestic and foreign
markets.
Capital Requirements/Plan of Operation
--------------------------------------
We are a development stage enterprise and, as such, are largely dependent
on the sale of our common stock and warrants, and the exercise of our warrants
and options, to provide liquidity. Since inception, we have continually
sought funding to meet our day-to-day operations and business plan and have
often sought substantial loans from affiliates and shareholders to meet our
financial obligations. Such loans were often repaid in stock. Although we
believe that we have sufficient resources to meet our current plan of
operations for the next 12 months, it is possible that, due to unforeseen
events, we will have insufficient resources and funding required to implement
our plan of operations. Until such time as we begin generating significant
revenues from operations, which is not likely until and unless Pre-Market
Approval of our Breast Imaging System is obtained from the FDA, we will be
faced with the difficulties and expenses associated with our financing needs
and obligations.
Our capital requirements may vary from our estimates and depend on
numerous factors including, but not limited to: 1) progress in our research
and development programs; 2) results of pre-clinical and clinical testing; 3)
costs of technology; 4) time and costs involved in obtaining regulatory
approvals; 5) costs of filing, defending and enforcing any patent claims and
other intellectual property rights; 6) economic impact of competing
technological and market developments; and 7) the terms of any new
collaborative, licensing and other arrangements that we may establish.
We estimate that we will require approximately $12.5 million in cash to
meet our business plan and obligations for the 12-month period ending June 30,
2001 including approximately $5.0 million in research and development to
complete our clinical trials, test our systems in connection with other
applications and complete our FDA PMA, $3.5 million for day-to-day operating
expenses including lease payments on our facilities, $2.5 million to cover
salaries, and $1.5 million for legal and accounting for SEC compliance with
reporting obligations and general legal representation. We currently have 38
employees and plan to hire additional employees as we move towards completion
of the FDA approval process and develop our marketing and distribution plan.
Certain aspects, listed in order of priority, of our Plan of Operation
for the next twelve months include: 1) completion of Pre-Market Application on
our Breast Imaging System through clinical trials as well as associated
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<PAGE>
system integration and algorithm development; 2) additional development of our
General Use System applications including imaging of lower-back and
reflex-sympathetic dystrophy-related diseases; 3) integration of new
technologies into the development of our Breast Imaging System; 4) development
of relationships with potential marketing and/or support entities; and 5)
listing our shares on the Nasdaq Stock Market and maintaining registration of
our shares.
There currently exists approximately 15.8 million shares underlying
options and warrants that can be purchased immediately upon conversion at
exercise prices ranging from $.60 to $9.0625 and representing gross proceeds
to us, upon conversion, of approximately $44.9 million. Additional proceeds
of approximately $11.1 million may be available to us at a future date upon
the vesting and exercise of yet unvested options. More specifically, as of
September 30, 2000, we had outstanding a total of 7,460,550 immediately
exercisable options to purchase our common stock at exercise prices ranging
from $.60 to $9.0625 per share. As of September 30, 2000, we also had
1,890,417 options to purchase our common stock at exercise prices ranging from
$.76 to $9.0625 that vest or may be granted at future dates pursuant to
various agreements. As of September 30, 2000, we had outstanding immediately
exercisable warrants to purchase 8,334,468 shares of our common stock at
prices ranging from $.72 to $7.25 per share. Of the immediately exercisable
options and warrants noted above, 2,211,083 expire at various times through
the year 2000, 3,115,000 expire at various times through the year 2002,
10,134,352 expire at various times through the year 2005 and 334,583 expire
after 2005.
The likelihood of warrants and options being exercised will be high as
long our common stock trades at a price above the respective strike prices of
these securities. However, we can provide no assurances that our outstanding
options and warrants will be exercised even if the price of our common stock
remains above the respective strike prices of these securities. Furthermore,
if the exercises of any of these warrants or options occur at below market
prices, you will be subject to an immediate dilution in your per-share net
tangible book value.
We also have a financing arrangement whereby Beach is currently required
to provide us with up to $4,000,000 in financing from time to time under
certain conditions and then only if we desire to obtain financing from Beach
from time to time. This financing arrangement is in the form of a Securities
Purchase Agreement whereby Beach purchases shares of our common stock at a 15%
discount to the market price of our common stock at the time of the funding.
We can provide no assurances that we will require additional funding under the
Securities Purchase Agreement or, if we desire additional funding, we will
meet the terms of the Securities Purchase Agreement necessary to require
additional funding. Furthermore, any issuance of shares to Beach could have a
severe dilutive effect on the existing holders of our common stock.
Based on the foregoing, we believe we will have sufficient capital to
fund our business plan over the next year from our existing cash and cash
equivalents and from the proceeds on the redemption of our marketable
securities. If, due to unforeseen events, funding falls short and we need to
obtain additional funds, we would seek them from private investors through
loans or on the sale of our restricted common stock. However, we can provide
no assurances that either of these avenues of financial support would be
available to us or, if available, on terms acceptable to us.
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Completion of PMA/FDA Approval/Clinical Trials
----------------------------------------------
Our Breast Imaging and General Use Systems qualify as medical devices
under 21 U.S.C. 321(h) because they are intended for use in the diagnosis,
cure, mitigation, treatment or prevention of disease and do not interact
chemically with the body. Typically, low risk, Class I or Class II devices
that are substantially similar to approved products already on the market can
obtain FDA clearance by the agency's pre-market notification known as a 510(k)
filing. Sophisticated instruments that entail significant risk are generally
classified as Class III devices and require manufacturers to submit a
Pre-Market Approval ("PMA") application to the FDA. A PMA is much more
complex and time-consuming to prepare than a 510(k) filing. A PMA typically
contains a significant quantity of clinical testing, manufacturing and other
data, all of which are carefully scrutinized by the FDA to demonstrate the
product's safety, reliability and effectiveness.
We are currently seeking FDA approval of our Breast Imaging System via
the PMA process. The FDA is permitting us to submit our PMA in five modules,
thereby, accelerating the data submittal process. The FDA clinical trials
requirement in connection with our PMA requires medical facilities to conduct
examinations and conduct and produce clinical statistical data from use of our
Breast Imaging System. The rate of conducting examinations determines, in
large respect, our monthly cash flow requirements and the time for qualifying
for PMA. We also incur 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 current estimated
requirements to fund our research and clinical testing are approximately $1.0
million per quarter. Research and clinical testing expenditures will continue
to grow and accelerate as we approach FDA approval of our Breast Imaging
Systems.
To date, we have submitted Modules 1 through 4 and anticipate submitting
our final module (Module 5) prior to December 31, 2000. We anticipate related
costs of approximately $2 million to complete the clinical trials. Recruiting
patients as part of our clinical trials and obtaining reliable data there from
are important elements to our submission of Module 5 to the FDA for review in
accordance with our plan. Although we anticipate that we will be able to
obtain and assemble the data necessary to timely submit Module 5, any delay or
difficulties experienced in the recruitment of patients or the assembly and
verification of patient data could delay our submission of Module 5 beyond
December 31, 2000. On September 15, 1999, we submitted Module 1 and received
FDA acceptance thereon on December 17, 1999. On February 9, 2000, we
submitted Module 2 and received FDA acceptance thereon on June 27, 2000. On
May 2, 2000, we submitted Module 3 and received FDA acceptance thereon on
September 21, 2000. On September 5, 2000, we submitted Module 4 which is
currently undergoing FDA review. On October 23, 2000, we announced completion
of the patient data collection segment of our clinical trial as required by
Module 5. We cannot determine if, or when, we will ultimately obtain FDA
approval of our Pre-Market Approval application.
Cancellation of Agreements with CTII.
-------------------------------------
In connection with Latin America markets, in September 1999, we engaged
William L. Mazilly and Amirali A. Rajwany, independent consultants, to
establish a consortium in Latin America to market and deploy our Breast
Imaging System throughout Central and South America. For services rendered in
connection therewith, each was paid 100,000 shares of our common stock valued
at $1.20 per share. As a result of their efforts, we entered into two
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<PAGE>
Letter Agreements (collectively, the "Agreements") on October 28, 1999 with
Computerized Thermal Imaging International, Inc. ("CTII"), an entity in which
we received a 15 percent interest, whereby CTII received, among other things,
1) the exclusive right to represent the expansion of our business into Central
and South America, 2) the obligation to prepare and implement a marketing
strategy for deployment of our Breast Imaging System in those areas of the
world, 3) the right of first refusal on our Health Card manufacturing
worldwide, and 4) the obligation to sell a minimum of 100 of our Breast
Imaging Systems over a two-year period in the target territories. The
Agreements further provided that we would grant to CTII, as compensation,
options to purchase up to 5 million shares of our common stock in 50,000 share
increments contingent on their placement of each Breast Imaging System into
commercial use in the specified territories. Each 50,000 block of options
granted the holder thereof the right to purchase, for a period of two years,
50,000 shares of our common stock at a strike price equal to $1.6745, a 15
percent discount to the bid price of our common stock on October 28,1999.
Pursuant to the Agreements, on June 6, 2000, we accepted a purchase order
for the sale of 10 Breast Imaging Systems to CTII for $5 million. In
connection therewith, we received a down payment of $1.75 million with the
remaining $3.25 million to be received upon delivery of the systems. The
invoice obligated us to deliver the 10 systems to CTII on, or about,
mid-October, 2000. In connection therewith, we expected to issue 500,000
options upon the delivery and placement of such systems into commercial use.
As of the date hereof, we have not issued any options to CTII.
In late September 2000, we advised CTII of our desire to renegotiate the
foregoing Agreements given the substantial change in market conditions, the
increased value of our common stock and unresolved issues concerning their
deployment of our systems in Mexico. On October 11, 2000, following attempts
to reach more favorable terms, we decided it was in the best interests of the
Company and our shareholders to mutually terminate the Agreements and the
purchase order for the 10 units. We accordingly did so and have refunded via
wire transfer the down payment received from CTII on the initial order of the
10 units. In connection with the termination of the Agreements, our 15%
ownership in CTII reverts back to the remaining principals of CTII and each
party to the Agreements will bear the respective costs of any performance
under the Agreements. In consideration of their efforts to expand our
business into Latin America, Mr. Mazilly and Mr. Rajwany will retain the
common stock previously granted to them. A copy of the Letter of Agreement
terminating the Agreements is attached hereto as Exhibit 10.1.
Source of Potential Long-term Liquidity: Equipment Financing/Use Agreements
---------------------------------------------------------------------------
The Company expects that both Use Agreements and Equipment Financing will
be sources of long term liquidity, although it is premature to anticipate the
results of either. Although the Company has investigated both options and has
entered into preliminary discussions with equipment financing companies, it is
awaiting PMA on its CTICO Breast Imaging System, before entering into any
additional planning regarding either. Much of what the Company anticipates as
being sources of long-term liquidity is contingent upon (1) whether or not it
achieves PMA on its CTICO System, (2) the development of a definitive and
successful marketing strategy, (3) whether it is able to develop its CTICO
System for other applications in the United States, and (4) the results of
marketing efforts of the CTICO System in domestic and foreign markets.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a development stage enterprise. We do not believe that we are
currently subject to market risks beyond the ordinary economic risks, such as
interest rate fluctuation and inflation, to which most enterprises are
subject.
At September 30, 2000, we had invested approximately $27.1 million in
marketable securities including investments in United States government
securities and corporate bonds. Although we believe the issuers of the
securities in which we have invested are solvent and are favorably rated by
recognized rating agencies, there is the risk that such issuers may not have
sufficient liquid assets to satisfy their obligations at the time such
obligations become due. If such were to occur, we may not be able to recover
the full amount of our investment.
Each of our marketable securities have a fixed rate of interest.
Accordingly, a change in market interest rates may result in an increase or
decrease in the market value of our marketable securities. If we liquidate
any of our marketable securities prior to the time of their maturity, we could
receive less than the face value of the security.
At a future date, when, and if, we become an operating company with
material revenues and operating costs, we may enter into derivative financial
instruments, such as interest rate swaps, foreign currency forward exchange
contracts or hedging contracts, to help mitigate market risks.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Kenneth M. Dodd Executive Employment Agreement
----------------------------------------------
On February 24, 1999, we filed a complaint against Kenneth M. Dodd
("Defendant") in the Eighth Judicial District Court, Clark County, Nevada,
Case No. A399754, seeking to enforce confidentiality agreements and certain
terms in connection with Defendant's employment contract with us. Defendant
resigned as CEO and President of CTICO, our subsidiary, in December 1998.
In 1995, Defendant entered into employment agreements with us under which
he would receive agreed upon consideration, including certain options to
purchase shares of our common stock and shares of CTICO. During his tenure,
we allege that Defendant gave unauthorized salary increases and bonuses that
were not disclosed to our Board of Directors, that Defendant misappropriated
certain funds and equipment for his own use, and that Defendant disclosed
certain proprietary information concerning our business. In connection with
Defendant's actions, we allege breach of contract, breach of fiduciary duty,
conversion, breach of duty of care, breach of duty of loyalty, and usurpation
of corporate opportunity.
In August 2000, we made an offer of settlement whereby we would release
the Defendant of all claims under our complaint and pay Defendant $10,000 in
exchange for his 7.5 percent interest in our subsidiary, Computerized Thermal
Imaging Company ("CTICO", previously Thermal Medical Imaging, Inc.). On
August 25, 2000, the Defendant accepted our offer of settlement. As a result
of our settlement with Defendant, we now own approximately 97.9 percent of the
outstanding common stock of CTICO.
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Bloomberg/Evans Defamation Action
---------------------------------
On August 28, 2000, we filed a complaint for libel in the United States
District Court for the District of Utah, Northern Division, Case No.
1:00CV00098K against Bloomberg, L.P. (the "Defendant"). The complaint and
summons were also serviced on Defendant through its registered agent in Utah.
The lawsuit alleges that on June 29 and July 18, 2000, Defendant published
certain "Defamatory Articles" about the Company that were written by David
Evans through its news service, Bloomberg News. According to the Complaint,
the Defamatory Articles were published over Defendant's Internet web site and
elsewhere to millions of people, and contained certain false, misleading, and
defamatory statements regarding our business and thermal imaging technology,
which we are focusing on developing as an adjunct imaging tool to mammography
in the detection of breast cancer. The lawsuit alleges that, after publication
of the "First Defamatory Article" on June 29, 2000, we wrote to Defendant and
explained the numerous inaccuracies and falsehoods contained therein. Although
Defendant then published on July 18, 2000 what it labeled as a "correction" to
the first story, this "Second Defamatory Article" still contained defamatory
matter calling into doubt (among other things) our ability to attract capital
as well as the efficacy of our Breast Imaging System, which is currently
undergoing clinical testing by physicians at five independent hospital sites
in accordance with a protocol used in connection with our application for
Pre-Market Approval from the Food and Drug Administration. The Complaint
alleges damages against Defendant in excess of One Hundred Million Dollars
($100,000,000). On October 23, 2000, Defendant filed a motion to dismiss
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Our
response to that motion is not yet due and a trial date has yet to be
determined.
State Securities Matters
------------------------
On May 22, 2000, the Alabama Securities Commission, without a hearing,
entered order No. CD-2000-0031 setting forth that we cease and desist from
further sales of our securities in Alabama. The order reflects that, in
connection with our December 31, 1999 private placement, no commissions can be
paid for soliciting except by a registered agent of a broker-dealer. Pursuant
to the order, we had a right to both a formal and an informal hearing before
the order became final. On July 19, 2000, we attended an informal hearing
with the Alabama Securities Commission. On August 22, 2000, the Alabama
Securities Commission vacated their May 22, 2000 Cease and Desist Order.
In a letter dated May 17, 2000, the Utah Division of Securities proposed
terms of an order whereby we would cease and desist from paying commissions
except to broker-dealers and we would pay a $500 fine in connection with our
recent private placement. On July 21, 2000, we responded and requested that
they reconsider the proposed terms of their order. On August 17, 2000, we
were advised that the Utah Securities division had considered our letter but
was not predisposed to consider a change to their initial order. We have
requested a formal hearing before the Utah State Securities Commission.
ITEM 2. CHANGES IN SECURITIES
No instruments defining the rights of the holders of any class of
registered securities have been materially modified, limited or qualified.
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The following securities, which are not registered under the Securities
Act of 1933 (the "Act"), were issued since the Company's last report for the
fiscal year ended June 30, 2000. The following includes the issuance of
shares upon conversion of warrants and options.
On July 11, 2000, we issued 162,430 common shares to Sutro & Company upon
the cashless conversion of 200,000 warrants at $1.70 equivalent per share.
This transaction was a private placement made in reliance on Section 4(2) of
the Act.
On July 11, 2000, we issued 93,559 common shares to one individual upon
exercise of options at $1.70 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
On August 2, 2000, we issued 27,983 common shares to Sitrick & Company
upon the cashless conversion of 32,333 warrants at $0.9375 equivalent per
share. This transaction was a private placement made in reliance on Section
4(2) of the Act.
On August 23, 2000, we issued 26,246 common shares to two entities upon
conversion of warrants at $5.00 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In September 2000, we issued 12,100 common shares to one individual upon
exercise of options at $1.70 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In September 2000, our Board of Directors ratified the issuance of
1,000,000 options to David A. Packer, our President and Chief Operating
Officer in connection with the renewal of his employment agreement. Such
options were granted pursuant to our 1997 Stock Option and Restricted Stock
Plan and vest over a period of 3 years. Each option entitles the holder
thereof, upon exercise, to one share of common stock at an exercise price of
$3.625 per share. This transaction was a private placement made in reliance
on Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Retirement of David B. Johnston, Chairman & CEO
-----------------------------------------------
On September 21, 2000, Mr. Johnston retired from his position as
Chairman of the Board, a Director and Chief Executive Officer. On September
22, 2000, our Board of Directors elected General Richard V. Secord, age 67, as
our Chairman and Chief Executive Officer. General Secord has served as Vice
Chairman from July 1, 1997 through September 21, 2000, as a director since
February 1996, as our Secretary from July 1, 1997 to June 27, 2000, as our
President from February 1996 to April 1997 and as our Chief Operating Officer
from June 1995 to December 1999. He is also Chief Executive Officer and a
director of CTICO. General Secord served in numerous positions while
performing military service. He was the first
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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 United States Naval War
College. In addition, he holds a Masters degree in International Affairs from
George Washington University.
General Secord's 3-year employment agreement with us expired on September
18, 2000. We are currently renegotiating a new employment agreement with
General Secord.
David A. Packer Executes Employment Agreement
---------------------------------------------
David A. Packer signed a new employment agreement on September 29, 2000.
The term of the agreement is for three years beginning April 30, 2000 and
calls for compensation of $200,000 per year, plus statutory stock options
covering 1,000,000 shares of Common Stock at an exercise price of $3.625 per
share. One-fourth (250,000) of the options vest immediately and one-fourth of
the options vest on each anniversary date of the agreement. The options
granted to Mr. Packer are governed by our 1997 Stock Option and Restricted
Stock Plan. If the employment 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 vested, shall
be forfeited. The agreement subjects Mr. Packer to a two-year non-compete
restriction, the obligation to give us the right to take advantage of any
business opportunity, and the duty not to reveal any confidential information
about the business of the Company. A copy of Mr. Packer's Employment
Agreement is attached hereto as Exhibit 10.2.
NASDAQ Application
------------------
On March 30, 2000, we applied to have our common stock listed on the
Nasdaq National Market. On June 26, 2000, Nasdaq approved the listing of our
common stock to be effective June 29, 2000. On June 28, 2000, Nasdaq informed
us that our listing was "on hold" and requested additional information from
us. We are continuing to work with Nasdaq staff to complete the application
process. Our stock is currently trading below the $5 minimum bid price
required to be eligible for Nasdaq National Market listing. There can be no
assurance that our common stock will be listed on Nasdaq or, if listed, that
we will continue to meet the qualifications for listing.
Voting Agreements
-----------------
In connection with our Nasdaq application, David Johnston and Daron
Dillia (d/b/a Manhattan Financial Group), who combined hold approximately 24.5
percent of the beneficial ownership of the Company's outstanding common stock,
have entered into voting agreements with respect to their respective shares of
common stock of the Company. The term of the agreements is three years
beginning October 19, 2000. The voting agreements provide that, during the
term of the agreements, common shares owned by both David Johnston and Daron
Dillia (and any affiliated transferees) shall be voted proportionate to the
votes of common stock held by all other shareholders. The voting restrictions
end if the shares are transferred to persons who are not affiliates of David
Johnston or Daron Dillia. Copies of each of the voting agreements are
attached hereto as Exhibits 9.1 and 9.2.
Current Registration Statements
-------------------------------
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On June 6, 2000, we filed an amended registration statement on Form SB-2,
Amendment #9, File #333-47237, with the Securities and Exchange Commission to
register 7,443,948 shares of our common stock issued in connection with
transactions prior to the fiscal year ended June 30, 1999. Such registration
statement was declared effective on June 15, 2000, and on June 15, 2000, we
filed a Prospectus pursuant to Rule 424(b)(4). On June 20, 2000, we filed an
initial registration statement on Form SB-2, File #333-39654, with the
Securities and Exchange Commission to register 23,427,338 shares of our common
stock including common stock underlying each of the transactions occurring
July 1, 1999 through June 17, 2000. On June 30, 2000, the Securities and
Exchange Commission declared the registration statement effective and on July
3, 2000, we filed a Prospectus pursuant to Rule 424(b)(4).
On October 16, 2000, we filed an amended combined registration statement
on Form S-3, File #333-39654 Amendment #1, that included the common stock
transactions covered by the two foregoing registration statements. On October
26, 2000 we filed Amendment #2 to such registration statement and, on October
27, 2000, the Securities and Exchange Commission declared the combined
registration statement effective. Accordingly, all of the common stock
underlying the transactions covered by our Registration Statement #333-39654
can be sold, traded or otherwise transferred pursuant to the terms of such
registration statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report of Form 8-K filed October 13, 2000 reporting the termination
of Agreements with CTII dated October 28, 1999 and Purchase Order
dated June 5, 2000.
Exhibits. The following exhibits are filed herewith:
(9.1) Voting Trust dated October 19, 2000 between David B. Johnston and
Computerized Thermal Imaging, Inc.
(9.2) Voting Trust dated October 19, 2000 between Daron C. Dillia dba
Manhattan Financial Group and Computerized Thermal Imaging, Inc.
(10.1) Letter of Agreement terminating Agreements dated October 28, 1999
with CTII and Purchase Order dated June 5, 2000.
(10.2) Employment Agreement of David A. Packer effective as of April 30,
2000.
(27) Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTERIZED THERMAL IMAGING, INC.
(Registrant)
/s/ David A. Packer
Dated November 2, 2000 -----------------------------------------
22
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David A. Packer
Director, President & Chief Operating
Officer
/s/ Kevin L. Packard
Dated November 2, 2000 -----------------------------------------
Kevin L. Packard
Chief Financial Officer, Treasurer &
Secretary
23
