<PAGE>
As Filed with Securities and Exchange Commission on June 20, 2000
Registration No. ____________
United States Securities and Exchange Commission
Washington, D.C. 20549
Form SB-2
Registration Statement under the Securities Act of 1933
COMPUTERIZED THERMAL IMAGING, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 3815 87-0458721
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(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industries Identification Number)
Incorporation or Classification Code
Organization) Number)
476 Heritage Park Boulevard, Suite 210
Layton, Utah 84041
voice: (801) 776-4700 fax: (801) 776-6440
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(Address and Telephone Number of Principal Executive Offices)
476 Heritage Park Boulevard, Suite 210
Layton, Utah 84041
voice: (801) 776-4700 fax: (801) 776-6440
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(Address of Principal Place of Business)
Kevin Packard, CFO
476 Heritage Park Boulevard, Suite 210
Layton, Utah 84041
voice: (801) 776-4700 fax: (801) 776-6440
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(Name, Address and Telephone Number of Agent For Service)
With a copy to:
Joel Seidner, Esq.
5300 Memorial Drive, Suite 700
Houston, Texas 77007
voice: (713) 861-1996 ext. 112 fax: (713) 552-0202
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement has been declared effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and
<PAGE>
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
Proposed
Maximum
Offering Proposed Maximum
Title of Each Class of Price Per Aggregate
Registration Securities to be Amount To Be Share Offering Price Amount of
Registered Registered (1)(2) (1)(2) Fee
--------------------------------- ------------ ---------- ---------------- ------------
<S> <C> <C> <C> <C>
Common Stock to be Resold (3):
Shares Outstanding 16,129,153 $9.50 $ 153,226,954 $40,451.92
Shares Underlying Resale Warrants 6,381,963 $9.50 $ 60,628,649 $16,005.96
Shares Underlying Resale Options 916,222 $9.50 $ 8,704,109 $ 2,297.88
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Total 23,427,338 $ 222,559,712 $58,755.76
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</TABLE>
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(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 June 15, 2000.
(3) Common Stock to be Resold includes shares of the Common Stock underlying
outstanding securities which are exercisable for or convertible into 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>
The information in this Prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to completion, dated June 20, 2000.
COMPUTERIZED THERMAL IMAGING, INC.
23,427,338 SHARES OF COMMON STOCK
This Prospectus relates to the resale of our Common Stock by selling
stockholders listed on Page 53.
Our common stock trades on the over-the-counter Bulletin Board of the NASD,
also called the OTCBB, under the trading symbol: COII. On June 15, 2000, the
closing bid for our common stock as reported on the OTCBB was $9.625 per share.
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RISK FACTORS. OUR COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY READ AND CONSIDER OUR RISK FACTORS SECTION BEGINNING
ON PAGE 8 BEFORE MAKING AN INVESTMENT DECISION.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of the Prospectus. Any representation to the contrary is a
criminal offense.
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THE DATE OF THIS PROSPECTUS IS JUNE ___, 2000
<PAGE>
CAUTIONARY STATEMENT
You should rely only on the information contained in this Prospectus. We
have not authorized anyone to provide you with information different from that
contained in this Prospectus. The selling security holders are offering to sell,
and seeking offers to buy, shares of Common Stock only in jurisdictions where
offers and sales are permitted. The information contained in this Prospectus is
accurate only as of the date of this Prospectus, regardless of the time of
delivery of this Prospectus or of any sale of Common Stock.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information........................................................... 3
Glossary of Terms............................................................... 4
Summary of Information in the Prospectus........................................ 5
Risk Factors.................................................................... 8
Use of Proceeds................................................................. 14
Price Range of Our Common Stock................................................. 14
Our Dividend Policy............................................................. 14
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 15
Our Business.................................................................... 21
Our Management.................................................................. 36
Executive Compensation.......................................................... 38
Certain Relationships and Related Transactions.................................. 45
Security Ownership of Certain Beneficial Owners and Management.................. 46
Description of Securities....................................................... 47
Plan of Distribution............................................................ 52
Selling Stockholders............................................................ 53
Legal Proceedings............................................................... 58
Legal Matters................................................................... 60
Experts......................................................................... 61
Indemnification................................................................. 61
Changes in Registrant's Certifying Accountants.................................. 62
Index to Financial Statements................................................... F-1
</TABLE>
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AVAILABLE INFORMATION
We are subject to the reporting requirements of the Securities and Exchange
Commission (the "Commission"). We file periodic reports, proxy statements and
other information with the Commission under the Securities Exchange Act of 1934.
We will provide, without charge, to each person who receives a copy of this
Prospectus, upon written or oral request, a copy of any information that is
incorporated by reference in this Prospectus (not including exhibits to the
information that are incorporated by reference unless the exhibits are
themselves specifically incorporated by reference). Requests should be directed
to: Computerized Thermal Imaging, Inc., Attn: Kevin L. Packard, CFO, 476
Heritage Park Boulevard, Suite 210, Layton, Utah 84041, voice: (801) 776-4700,
fax: (801) 776-6440. Our Internet address is www.cti-net.com.
We have filed a Registration Statement on Form SB-2 under the Securities
Act of 1993 Act with the Commission in connection with the securities offered by
this Prospectus. This Prospectus does not contain all of the information that is
in the Registration Statement. For further information with respect to us and
the Registration Statement, you may inspect without charge, and copy our
filings, at the public reference room maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of this material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Information about the
public reference room is available from the Commission by calling
1-800-SEC-0330.
The Commission maintains a web site on the Internet that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of the site is www.sec.gov.
Visitors to the site may access such information by searching the EDGAR archives
on this web site.
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GLOSSARY OF TERMS
Each of the following short titles and terms are used throughout this
Prospectus. They are summarized here for convenience only.
Bales Bales Scientific, Inc., our wholly-owned subsidiary acquired
on April 18, 2000.
BATTELLE Battelle Memorial Institute, our principal systems engineer.
Beach Beach Boulevard, LLC, one of our primary financial
supporters.
Company Computerized Thermal Imaging, Inc. and Subsidiaries.
CT Computed Tomography.
CTICO Thermal Medical Imaging, Inc., an 88%-owned subsidiary.
CTII Computerized Thermal Imaging International, Inc., an entity
with which we have marketing agreements for deployment of
our Medical Imaging Systems
FDA US Food and Drug Administration.
HICFA The Health Insurance Care Financing Administration.
INFORMIX Informix Corporation, our principal software database
provider.
Medical Imaging Our Breast Imaging and General Use Systems.
Systems
MFG Manhattan Financial Group, one of our primary financial
supporters and advisors.
MR Magnetic Resonance.
NM Nuclear Medicine.
OTCBB Over-the-Counter Bulletin Board of the NASD.
PAC Picture Archiving and Communications System.
PET Positron Emission Tomography.
TRW TRW, Inc., our principal systems development vendor.
TII Thermal Imaging, Inc, an affiliate of David B. Johnston.
US Ultrasound.
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<PAGE>
SUMMARY OF INFORMATION IN THE PROSPECTUS
This Summary highlights selected information contained in this Prospectus.
To understand this offering fully, you should read the entire Prospectus
carefully, including the Risk Factors beginning on Page 8 and the Financial
Statements beginning on Page F-1.
We were incorporated on June 10, 1987 in the State of Nevada. In 1988 we
acquired substantially all of the assets of Thermal Imaging, Inc. that consisted
of certain intellectual property regarding thermal imaging technology. We are
presently a development stage company and have not yet had revenues from
operations or sales of any magnitude related to our medical imaging equipment.
Our Breast Imaging System is presently undergoing clinical trial testing that is
required for FDA approval. We recently acquired Bales Scientific, Inc., a
medical and industrial imaging equipment company, that had audited revenues of
$893,247 for the 12-month period ended January 31, 2000.
References to us in this Prospectus include our recently-acquired,
wholly-owned subsidiary Bales Scientific, Inc. ("Bales") and our 88%-owned
subsidiary, Thermal Medical Imaging, Inc. ("CTICO").
OUR PRODUCTS AND SERVICES
We integrate computer hardware, proprietary software, and sophisticated
heat sensing cameras to create systems that produce, interpret, and catalogue
computerized thermal images for medical applications. Unlike most other imaging
modalities, our computerized thermal imaging systems photograph how the body
functions, in contrast to how it is structured, allowing painless, noninvasive
detection of physiology-based disorders. Through Bales, we design, manufacture
and sell high resolution, dynamic, digital infrared Imaging Workstations and
related products for both medical and industrial applications. Specialized
cameras developed as part of these workstations are integral components of our
Breast Imaging and General Use Systems ("Medical Imaging Systems"). Our Breast
Imaging System will initially serve as a non-invasive, painless adjunct to
mammography. Our General Use System will function as a general diagnostic tool
to help healthcare payers identify and reduce fraudulent workers' compensation
claims. Our recently introduced Photonic Stimulators are used to increase blood
flow and circulation in the treatment of chronic 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.
Our revenue model offers our Medical Imaging Systems on a fee-per-use,
maintenance-included, basis to create strong adoption incentives for healthcare
providers burdened with large, often unexpected, maintenance costs and capital
budgets. Due to the recent occurrence of our acquisition of Bales, we have not
yet established a revenue model for our Photonic Stimulators and Imaging
Workstations or assessed the marketability of these products for industrial and
medical application. Such models and assessments are part of our plans for the
coming fiscal year.
TRW, Inc. ("TRW") is our primary systems development vendor, Battelle
Memorial Institute ("BATTELLE") is our principal systems engineer and Informix
Corporation ("INFORMIX") is our primary software database provider.
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We expect these significant strategic partners will help us meet our rapid
growth objectives.
OUR MEDICAL IMAGING SYSTEMS
Our Breast Imaging and General Use System each include: (1) a proprietary,
climate-controlled examination unit; (2) a proprietary, test administration
protocol; (3) infrared imaging and analysis hardware, including our
sophisticated heat-sensing camera designed and manufactured by Bales, and
high-speed computers; (4) our patent-pending thermal imaging software; and (5)
our picture-archiving and communications ("PAC") system that comprises patient
health cards holding 2,000 pages of information, a health card reader-writer and
a Web-based user interface connection to an off-site, central database that
catalogues all images and associated patient data from all of our sites.
OTHER IMAGING SYSTEMS HAVE LIMITATIONS
Established medical imaging modalities create anatomical snapshots, but do
not expose dynamic, functional disorders. For example, mammography only detects
the presence of a breast tumor; whether it functions as a cancer remains the
task of a biopsy. In workers' compensation cases, healthcare payers bear higher
costs because they lack the tools to economically and credibly challenge
fraudulent claims.
OUR SOLUTION: RECORD FUNCTION, NOT FORM
We believe that our computerized, thermal imaging technology can complement
other imaging modalities to reduce the number of benign biopsies and fraudulent
workers' compensation claims. The body's response to stress or disease often
stimulates caloric activity, generating heat that radiates through the skin. In
a controlled environment, our Medical Imaging Systems can dynamically record the
skin's response over time, compare it to a statistically valid model of "normal"
and "abnormal" responses, and reliably infer a problem with the performance (not
the structure) of an organ or body part. Our Medical Imaging Systems complement
standard structural images with functional images in order to generate new
insights into breast cancer activity and the progression of pain in the body. In
time, we intend to use our adaptable technology to become the perfect compliment
to the established imaging modalities and to create the first quantitative,
multi-modality medical imaging system.
FDA APPROVAL
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
Application ("PMA") 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.
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We do not believe that either of our Medical Imaging Systems requires us to
submit a PMA to the FDA for approval. Notwithstanding, we have chosen to pursue
FDA approval via the PMA process to gain market acceptance of our Breast Imaging
System. We believe that FDA approval of our Breast Imaging System will lend
credibility to all of our imaging systems and ease the task of introducing our
General Use System to the market, enable us to reference medical efficacy claims
in connection with marketing efforts, enhance physician acceptance of our
systems and obtain designation of insurance payment codes for particular
procedures.
The FDA is permitting us to submit our approval application in five
modules, thereby, accelerating the data submittal and review process. We have
already filed three modules and anticipate submitting the two remaining modules
in 2000.
CONTACTING US
Our web site is www.cti-net.com. However, the information contained on our
web site is not part of this Prospectus. Our principal executive offices are
located at: Computerized Thermal Imaging, Inc., 476 Heritage Park Boulevard,
Suite 210, Layton, Utah 84041, voice: (801) 776-4700, fax: (801) 776-6440.
THE OFFERING
<TABLE>
<S> <C>
Common stock outstanding............................... 80,188,899 shares. (1)
Common Stock to be offered
by our Selling Stockholders.......................... 23,427,338 shares. (2)
</TABLE>
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(1) Includes shares of our common stock outstanding as of June 15, 2000, but
does not include 15,748,555 shares underlying any of our outstanding
options and warrants.
(2) Includes: (i) 16,129,153 shares issued and outstanding, (ii) 6,381,963
shares underlying the Resale Warrants, and (iii) 916,222 shares underlying
the Resale Options.
THE MARKET FOR OUR COMMON STOCK
Our common stock trades on the Over-the-Counter Bulletin Board of the NASD
(the "OTCBB") under the trading symbol "COII". The market for our common stock
is highly volatile. We can provide no assurance that there will be a market in
the future for our common stock.
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<PAGE>
RISK FACTORS
Any investment in shares of our common stock involves a high degree of
risk. You should carefully consider the following information about these risks,
together with the other information contained in this Prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business would likely suffer, the market price of our common stock could
decline and you may lose all or part of the money you paid to buy our common
stock.
WE ARE A DEVELOPMENT STAGE COMPANY. WE HAVE NOT HAD REVENUES FROM
OPERATIONS. WE HAVE A LIMITED OPERATING HISTORY. WE MAY NEVER HAVE REVENUE
FROM OPERATIONS. WE MAY NEVER BE PROFITABLE.
We have been engaged primarily in research and development activities. We
have only recently begun product commercialization. The likelihood of our
success must be considered in view of all of the risks related to the
commercialization of our imaging systems, including whether or not there will be
medical market acceptance of our Medical Imaging Systems. With limited
exception, our products have not been used in commercial applications, other
than clinical testing. Our ability to achieve profitability will depend, in
part, on our ability to successfully develop clinical applications, obtain
regulatory approvals for our Medical Imaging Systems and develop the capacity to
manufacture and market our products. There is no assurance that we will be able
to successfully make the transition from research and development to
commercialization.
WE HAVE HAD, AND COULD HAVE, LOSSES, DEFICITS, AND DEFICIENCIES IN
LIQUIDITY THAT COULD IMPAIR OUR ABILITY TO GROW.
Our ability to achieve profitability depends on our ability to successfully
develop and market our Medical Imaging Systems. There is no assurance that we
will be able to accomplish this in a profitable manner. We are subject to all of
the risks inherent in a growing venture, including the need to develop marketing
expertise and produce significant revenue. We may incur losses, deficits and
deficiencies in liquidity for the foreseeable future due to the significant
costs associated with the commercialization of our Medical Imaging Systems.
For fiscal year 1999, we had a net loss of $(5,025,841), a deficit of
$(25,708,810) and stockholders' deficit of $(159,709). For fiscal year 1998, we
had a net loss of $(5,943,885), a deficit of $(20,682,969) and stockholders'
deficit of $(2,787,343). For the nine months ended March 31, 2000 (unaudited),
we had a net loss of $(5,339,391), a deficit of $(31,048,201) and stockholders'
equity of $45,713,398.
WE WILL NEED MORE FINANCING FOR GROWTH.
We have limited internal financial resources. Until our operating results
improve, we must obtain outside financing to fund the expansion of our business
and to meet our obligations as they become due. Any additional debt or equity
financing may be dilutive to our shareholders. Financing must be provided from
future operations, the sale of equity securities, borrowing, or other sources of
third-party financing. The sale of equity securities could dilute our existing
stockholders' interest, and borrowings from third parties could result in our
assets being pledged as collateral and loan terms that would increase our debt
service requirements and, thereby, could
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<PAGE>
restrict our operations. There is no assurance that capital will be available
from any of these sources, or, if available, upon terms and conditions
acceptable to us.
OUR INDEPENDENT ACCOUNTANTS HAVE EXPRESSED DOUBTS ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
The reports of our independent accountants for the fiscal years ended June
30, 1999 and 1998 include explanatory paragraphs that describes substantial
doubt concerning our ability to continue as a going concern without additional
capital. Although we have since raised additional capital through two private
placements, we may continue to incur losses in the foreseeable future due to the
significant costs associated with research and development and commercialization
of our products.
WE HAVE NEVER PAID A CASH DIVIDEND AND IT IS LIKELY THAT THE ONLY WAY YOU
WILL REALIZE A RETURN ON YOUR INVESTMENT IS BY SELLING YOUR SHARES.
We have never paid cash dividends on any of our securities. Our Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
We currently intend to retain future earnings to finance our growth. As a
result, your return on investment in our stock will likely depend on your
ability to sell our stock at a profit.
THERE IS LIMITED MARKET LIQUIDITY FOR OUR SECURITIES AND THERE ARE PENNY
STOCK SECURITIES LAW CONSIDERATIONS THAT COULD LIMIT YOUR ABILITY TO SELL
YOUR SHARES.
On June 15, 2000, the closing bid price of our common stock was $9.625 per
share. If our closing stock price were to fall below $5.00, our stock would be
considered "penny stock" and the sale of our stock would be subject to the
"penny stock rules" of the Securities and Exchange Commission. These rules
require broker-dealers to take steps before making any penny stock trades in
customer accounts including the requirement to advise a customer about the
lowest offer and highest bid for our stock, to state the broker dealer's
compensation on the trade, and to make a special written suitability
determination for the customer and receive the customer's prior written
agreement. If we were to become subject to the penny stock rules, there could be
delays in the trading of our stock. The market liquidity of our stock could be
adversely affected.
THE MARKET PRICE OF YOUR SHARES MAY BE VOLATILE.
The stock market price of medical equipment companies like us has been
volatile. Securities markets may experience price and volume volatility. The
market price of our stock may experience wide fluctuations, as it has in the
recent past, that could be unrelated to our financial and operating results.
WE COULD ISSUE PREFERRED STOCK AND THIS COULD HARM YOUR INTERESTS.
We presently have authorized 3,000,000 shares of preferred stock, par value
$.001 per share, none of which are outstanding. The shares of preferred stock,
when and if issued, could adversely affect the rights of the holders of common
stock and could prevent holders of common stock from receiving a premium for
their common stock. An issuance of preferred stock could result in a class of
securities outstanding that would have preferences
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<PAGE>
with respect to voting rights and dividends and in liquidation over the common
stock, and could (upon conversion or otherwise) enjoy all of the rights of
holders of common stock. Our Board's authority to issue preferred stock could
discourage potential takeover attempts and could delay or prevent a change in
control through merger, tender offer, proxy contest or otherwise by making such
attempts more difficult to achieve and more costly.
WE MAY SEEK BUSINESS COMBINATIONS WITH OTHER FIRMS AND ISSUE MORE
SECURITIES THAT COULD DILUTE YOUR INTERESTS AND PLACE MORE OF OUR SHARES
INTO THE MARKET.
We may enter into business combinations with other firms by exchanging our
stock. Doing so would enable us to acquire additional assets without spending
cash. However, it may result in dilution in per-share net tangible book value to
existing shareholders, and put more of our shares into the market.
WE MAY NOT BE ABLE TO COMPETE FOR BUSINESS AND THIS WOULD SUBSTANTIALLY
IMPAIR OUR GROWTH.
There are other companies that are engaged in the medical imaging business.
Many of our competitors are established companies with substantially greater
capital resources and substantially greater marketing capabilities. No
assurances can be given that we will be able to successfully compete with such
companies. We anticipate that the number of competitors will increase in the
future as the role of software in medical applications increases.
IF WE WERE UNSUCCESSFUL IN PREVENTING OTHERS FROM USING OUR INTELLECTUAL
PROPERTY, WE WOULD LOSE A COMPETITIVE ADVANTAGE.
We have common law rights to our intellectual property. We applied for
patents on some aspects of our Medical Imaging Systems and hold other patents in
connection with our Imaging Workstations and Photonic Stimulators. There can be
no assurance that the steps we have taken to protect our property will be
adequate to deter misappropriation. Any attempts that we make to defend our
intellectual property would be expensive and time consuming.
WE ARE SUBJECT TO GOVERNMENT REGULATION.
FDA APPROVAL
Our Breast Imaging System is presently undergoing clinical trial testing
for FDA approval. There is no assurance that we will ever receive FDA approval.
Failure to secure FDA approval would reduce the market for our products.
MEDICAL CARE PAYMENT SYSTEMS
Third party payers, such as Medicare or Medicaid, could reduce the
reimbursement rate for usage of equipment such as ours. This could reduce the
market for our products.
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<PAGE>
WE ARE DEPENDENT ON OUR PRESENT MANAGERS AND OUR ABILITY TO GROW COULD BE
IMPAIRED IF WE LOST THEIR SERVICES.
Our success is substantially dependent upon the time, talent, and
experience of David B. Johnston, David A. Packer and Richard V. Secord who are
several of our officers. Mr. Packer is our key product employee. Mr. Johnston
and General Secord are our key marketing employees. We have employment
agreements with each of these individuals. The loss of the services of any of
them could have a material adverse impact on us. No assurance can be given that
a replacement for any of them could be located. In order for us to expand, we
must continue to improve and expand the level of expertise of our personnel and
we must attract, train and manage qualified managers and employees to oversee
and manage our expanding operations. Demand for medical technology personnel is
high. There is no assurance that we will be in a position to offer competitive
compensation to attract or retain such personnel. You should not invest in us
unless you are willing to entrust all aspects of our management to our directors
and officers.
WE MAY NOT BE ABLE TO MANAGE GROWTH AND THIS COULD RESULT IN A WEAKENING OF
OUR FINANCIAL AND COMPETITIVE POSITION.
Our intention is to expand business operations by acquiring companies and
commercializing our imaging systems and related products. This expansion will
subject us to a variety of risks associated with rapidly growing companies. In
particular, our plans may place a significant strain on our day-to-day
operations. There can be no assurance that our plans, controls or personnel will
be sufficient to meet these demands. Inadequacies in these areas could have a
material adverse effect on our business, financial condition and results of
operations.
WE DO NOT HAVE PRODUCT LIABILITY INSURANCE.
The manufacture and sale of medical imaging information systems entail
significant risk of product liability claims. We do not believe that we need
product liability insurance now because our imaging systems are either in
development or operated by our subsidiary, which carries insurance for our
clinical trials. There can be no assurance that we can obtain insurance coverage
with limits adequate to protect us from any liability that might arise in
connection with the sale of our products. We anticipate obtaining product
liability coverage as our products are commercialized. However, this type of
insurance is expensive and may not be available at all.
YOU HAVE A RISK OF DILUTION.
As of June 16, 2000, we had outstanding a total of 15,748,555 options and
warrants to purchase our common stock at exercise prices ranging from $.60 to
$9.0625 per share, which are near or below current market prices. Of these,
2,271,083 options and warrants expire at various times through the year 2000,
1,215,000 options and warrants expire at various times through the year 2001,
1,900,000 options and warrants expire at various times through the year 2002,
8,262,472 options and warrants expire at various times through the year 2005 and
2,100,000 expire after 2005. If the exercise of 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 have a financing arrangement whereby Beach Boulevard, L.L.C. ("Beach")
is currently required to provide us with up to $4,000,000 in
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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. The issuance of shares to Beach may have a severe
dilutive effect.
If fundings with Beach occur, the actual number of shares of our common
stock that will be issuable to Beach is based upon fluctuations in the market
price of our common stock, cannot be determined until the time of the
transactions with Beach and is calculated by a formula in the Securities
Purchase Agreement. There is no limit on the number of shares that could be
issued to Beach upon further transactions pursuant to the Securities Purchase
Agreement. The actual number of shares of our common stock that may be issuable
and beneficially owned by Beach in connection with the transactions cannot be
determined at this time.
THE SALE OF OUR OUTSTANDING SHARES COULD RESULT IN A LOW MARKET PRICE FOR
YOUR COMMON STOCK. THERE IS A LIMITED PUBLIC FLOAT FOR OUR COMMON STOCK AND
YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT THE PRICE, OR IN THE VOLUME, YOU
DESIRE.
As of June 15, 2000, we had outstanding 80,188,899 shares of common stock,
out of which approximately 30.8 million shares are restricted securities.
Approximately 12.5 million shares of our restricted common stock has been held
for less than one year and cannot be traded without an effective registration
statement or acceptable opinion that such shares could be sold. Approximately
4.9 million shares of our restricted common stock has been held by our
shareholders for more than one year and less than two years and could be sold
into the market immediately with volume limits pursuant to Rule 144.
Approximately 13.4 million shares of our restricted common stock has been held
by our shareholders for more than two years, most of which is held by affiliates
and is subject to volume limits pursuant to Rule 144. In addition, if shares are
issued in the future to Beach and those shares are sold, the price of our common
stock may decrease due to these additional shares being sold into the market.
WE INDEMNIFY OUR DIRECTORS AND OFFICERS AND THIS REDUCES THE LIKELIHOOD OF
SHAREHOLDER LITIGATION.
Our Bylaws provide that our directors and officers are indemnified by us if
any are a party to a matter by reason of being a director or officer. These
provisions may discourage stockholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by our stockholders on our behalf against a director.
WE MAY NOT BE ABLE TO COMPETE FOR BUSINESS AND THIS WOULD SUBSTANTIALLY
IMPAIR OUR GROWTH.
There are many other firms that compete in the medical imaging and
diagnostic marketplace. We will have to compete with these firms when we
commercialize our products and services. Most of our competitors are more
established companies with substantially greater capital resources and marketing
capabilities. We anticipate that the number of competitors will increase in the
future. No assurance can be given that we will be able to successfully compete
with these companies.
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ANTI-TAKEOVER PROVISIONS.
Our Articles of Incorporation and Bylaws contain provisions that may have
the effect of discouraging certain transactions involving a change of control.
Our Board of Directors has the authority to issue up to 3,000,000 shares of
preferred stock. Our ability to issue shares of preferred stock could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to gain control of us, or otherwise could adversely
affect the market price of our common stock.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS.
This Prospectus 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:
- plans;
- objectives;
- goals;
- strategies;
- expectations for the future;
- future performance and events;
- underlying assumptions for all of the above; and
- 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:
- the results of our pre-clinical and clinical testing;
- the time and costs involved in obtaining regulatory approvals for our
systems and products;
- our ability to respond to changes in the medical technology
marketplace including our ability to develop or acquire new
technologies;
- competitive factors;
- the availability of financing on terms and conditions acceptable to
us;
- the availability of personnel with requisite skills; and
- 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.
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USE OF PROCEEDS
We will not receive any proceeds upon the sale of the Common Stock in this
offering. If all the warrants and options in this offering are exercised, the
net proceeds to us from the exercise of such, after the deduction of offering
expenses, will be approximately $33.27 million. We intend to use any proceeds
derived from the exercise of warrants and options for working capital and
general corporate purposes. We will pay for the cost of registering the shares
of Common Stock in this offering.
PRICE RANGE OF OUR COMMON STOCK
Our common stock trades on the OTCBB under the trading symbol COII. This
table summarizes the quarterly high and low bid prices per share for our common
stock. The bid prices reflect inter-dealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1998
-------------------------------
<S> <C> <C>
First Quarter $0.56 $1.69
Second Quarter $0.52 $1.06
Third Quarter $0.47 $0.81
Fourth Quarter $0.50 $1.11
FISCAL YEAR ENDED JUNE 30, 1999
-------------------------------
First Quarter $0.75 $2.13
Second Quarter $0.51 $0.76
Third Quarter $0.58 $1.75
Fourth Quarter $0.64 $1.06
FISCAL YEAR ENDED JUNE 30, 2000
-------------------------------
First Quarter $0.63 $1.45
Second Quarter $1.40 $5.03
Third Quarter $3.00 $20.63
Fourth Quarter $5.38 $13.75
(through June 15, 2000)
</TABLE>
On June 15, 2000, the closing bid price of our common stock as reported on
the OTCBB was $9.625 per share. On June 15, 2000, we had approximately 29,000
beneficial stockholders of our common stock and 80,188,899 shares of our common
stock outstanding.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Colonial Stock &
Transfer Company, 455 East 400 South, #100, Salt Lake City, Utah 84111.
OUR DIVIDEND POLICY
We have not paid, and do not intend to pay, cash dividends on our common
stock in the foreseeable future. Our current dividend policy is to retain all
earnings, if any, to provide funds for operation and expansion of our business.
Our declaration of dividends, if any, will be subject to the discretion of our
Board of Directors, who may consider, without limitation, factors such as our
results of operations, financial condition, capital needs, and acquisition
strategy.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TRENDS/UNCERTAINTIES AFFECTING CONTINUING OPERATIONS
The following discussion and analysis of the combined financial condition
and results of operations should be read in conjunction with our Consolidated
Financial Statements and Notes thereto contained in this Prospectus. Statements
contained in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which are not historical facts may be
forward-looking statements. Such information involves risks and uncertainties
that could cause actual results to differ materially from those projected.
(Refer to "RISK FACTORS" beginning on Page 8 of this Prospectus).
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 a development stage enterprise 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 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 will 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 reduce fraudulent workers' compensation claims.
Our recently introduced Photonic Stimulators are used to increase blood flow and
circulation in the treatment of chronic 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 contracts payments, professional fees to comply with securities
reporting requirements, cost of clinical trials and technical support, FDA
consulting expenses, acquisition of technology and expenses
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<PAGE>
associated with the private placement and registration of our securities. Our
capital resources are principally derived from the sale of our common stock and
warrants from series of private placements recently conducted, equity funding
pursuant to our agreement in effect with Beach Boulevard LLC, and the exercise
of common stock warrants and options by our current shareholders.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO
NINE MONTHS ENDED MARCH 31, 1999
During the nine-month period ended March 31, 2000, we recorded a net loss
of $5,339,391, a $1,865,954 increase over the same nine-month period loss in
1999 of $3,473,437. This increase was principally due to a $1,743,584 increase
in research and development expenses, a $646,906 increase in general and
administrative expenses, a $217,445 increase in depreciation expense; partially
offset by a $540,501 decrease in interest expense.
The increase in expenses for the nine months ended March 31, 2000 was
primarily related to escalated efforts during the second and third quarters of
the fiscal year to accelerate the FDA approval process and preliminary marketing
efforts towards acceptance of our Breast Imaging System in the medical community
and markets. Additional funding derived from the exercise of warrants and the
sale of our common stock and warrants provided the resources for this increase
in expenditures.
The increase in research and development expenses between the two
nine-month periods reflect large increases in TRW and patent work of $833,800
and of $593,000 in associated research and development expenses incurred through
BATTELLE. The increase in general and administrative expenses reflected above
primarily resulted from an increase in stockholder services costs of $826,400,
an increase in salary expense of $336,300, an overall increase in office
expenses of $267,700 and an increase in travel expenses of $69,200.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1998.
We incurred a loss of $5,025,841 for the year ended June 30 1999 compared
to a loss of $5,943,885 for the year ended June 30, 1998. The principal reason
for our reduction in losses was a decrease of approximately $540,000 in general
and administrative expenses; from $3,167,690 during the 1998 fiscal year to
$2,626,562 during the 1999 fiscal year. This reduction in general and
administrative expenses primarily resulted from a $153,000 reduction in
SEC-related legal and accounting fees and a temporary reduction in office
salaries of approximately $75,000. We incurred administrative charges of
$850,167 for incentive stock options issued to non-employees in our fiscal years
ended 1998 and 1999. We also incurred a $525,000 compensation expense in
eliminating a $525,000 subscription receivable from an unrelated third party.
During our fiscal year ended June 30, 1999, we spent $1,837,182 on research
and development expenses compared to $2,430,038 in 1998. The decrease occurred
despite higher clinical testing costs in 1999 ($659,091 in 1999 compared to
$438,530 in 1998) and FDA and consulting expenses of $134,651 in 1999, due to a
$750,632 decrease in TRW contract expenses, from $1,237,905 in 1998 to $485,273
in 1999. Shifting in contract objectives from product development and
enhancement to support of clinical testing caused the
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large decrease. We also incurred expenses of $54,484 for research equipment in
1998 compared to $155,826 in 1999. During our 1999 fiscal year and all prior
fiscal years, we expensed all costs associated with processes and systems,
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.
Interest expense increased to $568,221 from $415,101 largely due to the
realization of discounts on two third-party notes that were convertible, upon
maturity, into our common stock at a rate of fifty percent of market price.
Depreciation expense during the two comparable periods was slightly higher in
1999, $50,353 in 1999 versus $32,344 in 1998.
SOURCES OF LIQUIDITY - CAPITAL RESOURCES
NO REVENUES FROM OPERATIONS
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. (Refer to "RISK FACTORS" beginning on Page 8 of
this Prospectus). 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 our
recent private placements. Capital resources needed to meet our planned
expenditures are derived 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 warrants and options by our current
shareholders.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO
NINE MONTHS ENDED MARCH 31, 1999
We funded our losses during the nine months ended March 31, 2000 through
the issuance of our common stock aggregating $51,046,998 (net of offering
costs); $44,543,103 that came from the sale of common stock pursuant to two
private placements conducted during the quarter ended March 31, 2000 and
$6,503,895 that came from Beach Boulevard and warrant holders exercising
warrants. We also issued restricted common stock aggregating $417,343 to
compensate various individuals and entities for services rendered.
During the nine months ended March 31, 2000, we acquired an additional
10-percent interest in our majority-owned subsidiary, CTICO, for a combination
of $60,000 in cash and restricted common stock of $165,500. For the same period,
we incurred capital expenditures of $4,074,768 comprised of $236,768 in upgrades
of our computers and thermal imaging systems and a software license agreement to
establish our information database for $3,838,000. In conjunction with our
acquisition of the software license agreement, we entered into a one-year
maintenance agreement for $650,000. An initial payment of $1.6 million for the
software license and maintenance agreement was made in February 2000. The
balance owed on the software license and maintenance agreement of $2,888,000 was
paid in April 2000.
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<PAGE>
In comparison, we funded our losses during the nine months ended March 31,
1999 through issuances of our common stock, notes, and advances from one or more
of the parties that have consistently provided funding to us. In connection
therewith, we received funding of $2,263,200 from sales of our common stock
including a private placement with an officer/director for $200,000, the
exercise of certain warrants for $188,200, the completion of a private placement
for $1 million, and $875,000 pursuant to a stock purchase agreement with
Manhattan Financial Group ("MFG"). We further funded operations with common
stock for services and through non-interest bearing advances from affiliates
including the issuance of 3,936,150 common shares to certain affiliates as
repayment of advances aggregating $1,968,085.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1998.
We funded our losses during the fiscal years ended June 30, 1999 and 1998
through issuances of our common stock in exchange for cash contributions, notes,
and through advances from parties that have previously provided funding
including Thermal Imaging, Inc. ("TII"), an affiliate of Messr. Johnston; Doug
Holt doing business as PDH, Ltd.; and Daron Dillia doing business as MFG.
We received funding of $3,175,540 from sales of our stock during our fiscal
year ended June 30, 1999, including $200,000 from a private placement of our
stock with an officer/director; $188,200 from the exercise of warrants;
$1,912,340, net, from the completion of two private placements, and $875,000
pursuant to a stock purchase agreement with MFG. We also received $1,500,000
pursuant to an Investment Agreement with Beach Boulevard. We also funded
operations with stock for services and payment of non-interest bearing advances
from affiliates. These transactions included the issuance of 4,864,184 shares to
certain affiliates as repayment of advances; the issuance of 2,140,164 shares to
MFG in satisfaction of two notes payable totaling $1,244,638 and the issuance of
shares to relieve a $525,000 subscription receivable as compensation for
services rendered.
In comparison, we funded losses during our fiscal year ended June 30, 1998
by selling shares of common stock for cash in the amount $2,906,236. We also
received advances of $1,416,574 from shareholders, issued 521,478 shares as
compensation for services valued at $306,381 and issued warrants as compensation
for services with an aggregate value of $1,006,000.
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. The first two tranches were completed
prior to our fiscal year ended June 30, 1999. At the closing of the first of
these tranches on May 13, 1999, we issued 757,576 shares to Beach. At the
closing of the second of these tranches on June 15, 1999, we issued 862,069
shares to Beach. Gross proceeds from these two tranches totaled $1,000,000. The
third tranche closed on July 15, 1999 with 843,170 shares issued to Beach for
additional gross proceeds of $500,000. Beach elected to participate in a fourth
and fifth tranche on August 1, 1999 and September 13, 1999 with the issuance of
856,164 and 875,657 shares, respectively, and net proceeds to us of $978,458.
During our
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quarter ended December 31, 1999, Beach participated in a sixth tranche resulting
in net proceeds to us of $474,970. 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. Since January 1, 1997, we have been a
party to a Consulting Agreement with Manhattan Financial Group, a provider of
financial advisory services. The term of the Consulting Agreement is for one
year and automatically renews 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 additional 2 million shares at $.60 per share. The Consulting
Agreement remains in effect. Fees are negotiated on a case-by-case basis
depending on services to be provided.
On February 8, 1999, we entered into a stock purchase agreement with MFG
wherein it subsequently purchased 2,364,865 shares of our common stock for
$875,000 at 50% of our stock's low bid price as reported on the OTCBB for the
period from February 8 through March 15, 1999. In May 1999, we issued 2,140,164
additional shares to MFG in satisfaction of notes due to MFG totaling
$1,244,638. Prior to the conclusion of our fiscal year ended June 30, 1999, we
also eliminated a $525,000 subscription receivable for 525,000 shares issued to
MFG as a result of consulting services rendered to us. During the nine-months
ended March 31, 2000, we compensated Manhattan approximately $61,000 and granted
options to acquire 3,038 shares of our common stock at a strike price of $1.70
per share, for services rendered.
CAPITAL REQUIREMENTS/PLAN OF OPERATION
We are a development stage enterprise and, as such, are largely dependent
on the sale of our common stock 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 revenues from operations,
which is not likely until and unless pre-market approval 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 depends 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
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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 $14 million in cash to meet
our business plan and obligations for the 12-month period ending March 31, 2001
including approximately $5.2 million in research and development to complete our
clinical trials and test our systems in connection with other applications, $2.9
million for our software license and contract, $2.9 million for payment of
commissions earned in connection with our recent private placement, $2.4 million
for day-to-day operating expenses including lease payments on our facilities,
$2.0 million to cover salaries, and $600,000 for legal and accounting for SEC
compliance with reporting obligations. We currently have 30 employees and plan
to hire additional employees as we move further into the FDA approval process
and develop our marketing and distribution plan. The $14 million noted above
does not include approximately $5.6 million cash and $5.5 million of our common
stock used to acquire Bales on April 18, 2000, nor the operating and capital
expenditures that we expect to incur in connection with the newly acquired
subsidiary. The audited revenues and expenses of Bales for the 12-month period
ended January 31, 2000 were $893,247 and $900,222, respectively. We can provide
no assurances this prior activity is representative of Bales' future
contribution to our business.
Certain aspects, listed in order of priority, of our Plan of Operation for
the next twelve months include: 1) completion of pre-market approval on our
Breast Imaging System through clinical trials as well as associated 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) listing our shares on the NASDAQ
large cap market and registration of our shares; and 5) development of
relationships with potential marketing and/or support entities.
There currently exists approximately 15.75 million shares underlying
options and warrants that can be purchased upon conversion at exercise prices
ranging from $.60 to $9.0625. Additional proceeds of approximately $44 million
are available to us upon the exercise of these securities. The likelihood of
warrants and options being exercised remains high as long as the listing price
of our common stock remains above the respective strike prices of these
securities. Beach Boulevard LLC may also continue to be a limited source of
funding for us.
Based on the foregoing, we believe we will have sufficient capital to fund
our business plan over the next year. If, due to unforeseen events, funding
falls short, we will rely on affiliates to support us either through loans or
contributions to capital in exchange for restricted common stock.
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 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 on our Breast Imaging System,
(2) the development of a definitive
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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.
OUR BUSINESS
GENERAL
We were incorporated on June 10, 1987 in the State of Nevada as Business
Helper, Inc. In 1988, we acquired substantially all of the assets of Thermal
Imaging, Inc., which assets consisted of certain thermal imaging intellectual
property, proprietary ideas and technology. We amended our Articles of
Incorporation ("Articles") in August 1989 to effect a name change to DTI Dorex,
Ltd. and again in November 1989 to our current name. In April 1992, we further
amended our Articles to provide for a capital structure of 100,000,000 shares of
common, par value $0.001 per share, and 3,000,000 shares of preferred stock with
such designations, preferences and other features as may be required by our
Board of Directors. In March 1998, we further amended our Articles to describe
in more detail the authority of our Board of Directors with respect to shares of
our preferred stock and deny preemptive rights to all of our stockholders.
We are presently a development stage company and have not yet had revenues
from operations or sales of any magnitude related to our medical imaging
equipment. Over the course of several years prior to 1991, we developed a
dynamic imaging protocol for our Medical Imaging Systems. During 1991 though
1993, we developed a quantitative thermal assessment laboratory, completed a
round of marketing studies, and began developing our proprietary
software-imaging algorithm. From these efforts, we developed our Breast Imaging
and General Use Systems. In an effort to vertically integrate our technologies
with compatible technologies of other companies, we recently acquired all of the
assets of Bales. Bales designs, manufactures and sells high resolution, dynamic,
digital infrared Imaging Workstations and related products for both medical and
industrial application.
OUR PRODUCTS AND SERVICES
OVERVIEW. To date, we have developed the following significant technologies: (1)
climate-controlled examination units designed to enhance patient comfort and
facilitate reproducible tests; (2) a controlled, dynamic imaging protocol that
produces consistent results; (3) a statistical model that detects physiological
irregularities; and (4) our proprietary record management system. These
developments can be generally segregated into our two principal products, our
Breast Imaging and General Use Systems (jointly referred to herein as "Medical
Imaging Systems"). These systems are configured to address the premier
healthcare issue for women and the growing workers' compensation market,
respectively. Our Breast Imaging System serves as a non-invasive, painless
adjunct to mammography, whereas, our General Use System functions as a general
diagnostic tool to help healthcare payers identify and reduce fraudulent
workers' compensation claims. Each system integrates computer hardware,
proprietary software, and sophisticated heat-sensing cameras to create systems
that produce, interpret, and catalogue computerized thermal images for medical
applications. Each of our Medical Imaging Systems include: (1) a proprietary,
climate-controlled examination unit; (2) a proprietary, test administration
protocol; (3) infrared imaging and analysis hardware, including our
sophisticated heat-sensing camera, designed and manufactured by Bales, and
high-speed computers; (4) our
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patent-pending thermal imaging software; and (5) our picture and communications
("PAC") system that comprises patient health cards holding 2,000 pages of
information, a health card reader-writer and a Web-based user interface
connection to an off-site, central database that catalogues data from all of our
sites.
Our Medical Imaging Systems operate on the premise that every externally or
internally triggered physiological event causes an associated, measurable
caloric heat-releasing response. Medical science has sufficiently established
the body's thermatome or "temperature map" as a source for reliable
physiological clues. Abnormal caloric activity stimulates the body's temperature
and thermal regulating systems and creates a physiological response detectable
by sophisticated heat-sensing equipment. However, unlike most other imaging
modalities, our Medical Imaging Systems photograph how the body functions, in
contrast to how it is structured, thereby, allowing quantitative observation and
interpretation of irregularities in the body's thermal regulatory systems. In
the end, data generated by our Medical Imaging Systems allow physicians to find
and monitor the progress of many diseases, disorders, and injuries that may go
undetected through conventional dense tissue/skeletal imaging modalities such as
X-ray, Computed Tomography, Magnetic Resonance, and Ultrasound technologies.
Neither of our Medical Imaging Systems involves harmful radiation,
uncomfortable breast compression, electrical shocks or any other discomfort.
Furthermore, our Medical Imaging Systems have no contraindications, making them
uniquely suitable for post-surgical and post-therapeutic monitoring to track
recovery or potential tumor recurrence.
In addition to our Medical Imaging Systems and as a consequence of our
acquisition of Bales in April 2000, we also 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 Medical Imaging
Systems. Our recently introduced Photonic Stimulators are used to increase blood
flow and circulation in the treatment of chronic 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.
Since inception in 1987, we have spent nearly $10.23 million on research
and development ("R&D") of our Medical Imaging Systems and approximately $4.5
million in capitalized software and maintenance costs. We incurred a significant
portion of these expenses for software development by TRW, engineering studies
conducted by BATTELLE and clinical testing relating to our Breast Imaging
System. We have contracted out much of our R&D to third parties, but have
retained all rights related thereto. Doing so has enabled us to focus on product
design and effectiveness without the burden of R&D overhead. A material portion
of our other expenditures since inception (including salaries, rent and other
overhead) indirectly result from our R&D efforts over the past 12 years.
As we emerge from the product development stage, we anticipate using
available funds to shift from a primary reliance on trade secrets for
intellectual property protection to reliance on formal protection via patents.
To this end, we acquired, by assignment from TRW, a patent application on a
Functional Thermal Imaging Apparatus filed with the United States Patent and
Trademark Office. We also have pending a patent application with the United
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States Patent and Trademark Office for an algorithm used to analyze imaging data
collected through our Breast Imaging System. We expect that other technologies
or components of our Medical Imaging Systems will warrant patent protection in
the future.
CLIMATE-CONTROLLED EXAMINATION UNITS. Our climate-controlled examination unit
consists of sophisticated temperature controllers capable of precise temperature
management, imaging monitors, computers, a high-resolution printer and
proprietary software. The unit's software integrates and calibrates our entire
Breast Imaging System to provide analytical flexibility for physicians and
technicians. Our unit also represents the industry's first thermal imaging tool
capable of objective and consistent diagnostic assessments that feature multiple
thermal parameters including dynamic graphing of temperature distributions in
the inset domain and the use of temperature gradient profiles.
PATIENT POSITIONING TABLE. Our Breast Imaging System's patient positioning table
incorporates a local climate control system, affords the camera a comprehensive
view of the breast and most of the lymph nodes and eliminates the sometimes
painful breast compression common to mammograms. Compared to mammography plates,
we believe that the patient positioning table affords more viewing of the breast
tissue and surrounding regions. Further, our positioning system limits patient
movement during the examination to ensure consistent cooling, to enable the
application of localized thermal events and to accommodate residual breathing
movement. The examination unit permits testing one breast at a time in a center
cavity. Each breast scan requires a minimum of 3.5 minutes and yields
approximately 20 million data points.
QUANTITATIVE THERMAL ASSESSMENT LAB. Our modular Quantitative Thermal Assessment
Lab (or "room-within-a-room"), fills a standard two-bed hospital room, uses a
climate control system and requires about a day to setup. To improve queuing
times, we have designed our lab to permit thermal stabilization of one patient
while another patient is attended. While waiting, patients are afforded the
opportunity to educate themselves on the capabilities of each of our Medical
Imaging Systems.
PROPRIETARY MEDICAL PROTOCOLS. Proprietary medical protocols make up another
important element of our Medical Imaging Systems. Each employs a unique protocol
specifically suited to a diagnosis that results in reproducible images and
processes that minimize patient anxiety. Protocols include everything from the
precise thermal challenge to the simple patient-preparation procedure. We plan
to develop proprietary protocols that provide an important, competitive
advantage for every new computerized thermal imaging application.
IMAGING OPTICS AND HARDWARE. A highly responsive infrared camera and enabling
hardware makes up the heart of our Medical imaging optics package. A computer
system equipped with a specialized keyboard and high-density optical storage
controls the camera. In simple terms, the camera detects infrared heat given off
by the body and is capable of mapping 103 images during a single scan of 3.5
minutes duration. During the first 30 seconds of the scan, the camera captures
15 images in the target region prior to the start of the controlled thermal
challenge. During the remaining three minutes while the thermal challenge is in
process, the camera captures the remaining 88 images, yielding 35 megabytes of
total data.
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THERMAL IMAGING AND ANALYSIS ALGORITHMS. After capturing high-quality images,
our systems apply patent-pending algorithms to the digital image to
differentiate normal and abnormal heat patterns. The model then identifies and
displays suspicious areas to the physician to aid in patient diagnosis and in
the determination of subsequent patient care.
PICTURE-ARCHIVING AND COMMUNICATIONS SYSTEM. Our PAC system centrally stores and
makes available to physicians the thermal images taken by our Medical Imaging
Systems. The storage of these images provides physicians a model from which to
verify the presence and severity of anomalies detected. Another feature of our
PAC system is a "Health Card" that permits patients to create and maintain a
personal health card containing a record of their imaging results. During
subsequent visits to a different healthcare provider, the attending physician
can monitor progress and identify changes in a patient's condition by comparing
historical images against new ones.
ONLINE SUPPORT AND MAINTENANCE. Use of the Internet is a key feature in
servicing and maintaining our Medical Imaging Systems. We plan to interface each
of our locations with our central database facility and system support center
via the Internet. Images collected by our Medical Imaging Systems in the field
will be transmitted to our central database facility and support center where we
will be able to monitor operations, diagnose problems and upload software
enhancements.
SERVICES. We offer healthcare providers training and all-inclusive maintenance
services, and we offer the academic, medical, insurance, employer and government
communities access to the vast data set on our PAC system.
TRAINING. We plan to train technicians to use our Medical Imaging Systems and
physicians how to interpret the resulting thermal images. Analysis software
provided with our systems, and the capability to compare new images with old
ones, simplifies the task of training. Nonetheless, we plan to allot as much as
three days training per placement to ensure that users know how to operate our
systems and read the images.
OUR BUSINESS STRATEGY
OVERVIEW. Though FDA approved, thermal imaging has long failed to achieve its
great promise and commercial potential due to deficiencies in enabling
technologies. Further, in adopting emerging technologies, healthcare providers
must contend with restricted access to capital and excessive, often unexpected,
maintenance costs. Recent technological advances in high-speed computers and
sophisticated heat-sensing cameras have allowed us to tap these markets and
address healthcare provider concerns by offering valid and cost-effective
computerized thermal imaging. Our business strategy makes it easy for providers
to adopt our systems through our competitive, fee-per-use agreements.
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. We do not believe that either of our Medical Imaging Systems
requires us to submit a Pre-Market Application to the FDA for approval.
Notwithstanding, we have chosen to pursue FDA approval via the PMA process to
gain market acceptance of our Breast Imaging System. We believe that FDA
approval of our Breast Imaging System will lend credibility to all of our
imaging systems and ease the task of introducing our General Use System to
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the market, enable us to reference medical efficacy claims in connection with
marketing efforts, enhance physician acceptance of our systems and obtain
designation of insurance payment codes for particular procedures. For these
reasons, we intend to launch both Medical Imaging Systems upon obtaining FDA
approval for our Breast Imaging System.
INDUSTRY OVERVIEW. For 1998, the U.S. Health Care Financing Administration
("HCFA") reported that national health expenditures topped $1.1 trillion, rising
5.6 percent over 1997. In it annual report entitled NATIONAL HEALTH EXPENDITURES
PROJECTIONS, HCFA estimates that, for the period 1998 through 2008, national
healthcare expenditures will reach $2.2 trillion and account for 16.2% percent
of projected gross domestic product ("GDP"), after stabilizing in a range of
13.5% to 13.7% of GDP from 1993 through 1998. Healthcare spending increases have
primarily resulted from technological advances in the healthcare industry and an
aging population that consumes more healthcare resources on a per capita basis
($4,094 per capita in 1998).
Diagnostic imaging comprises a critical component of technologies available
to aid in diagnosing diseases, maladies and injuries. In addition to saving
human lives and alleviating suffering, early and accurate diagnosis of disease
and chronic conditions can help physicians provide optimal cost-effective
treatments, thereby eliminating unnecessary procedures and hospitalization.
Revenue growth of the medical device sector remains well above that of the
general U.S. economy. In their September 1999 Industry Survey, Standard and
Poor's views the Health Care Products and Supplies sector as one of the more
fundamentally attractive for the coming years, with projected annual revenue
growth of 12 percent over the coming five to seven years. On average, the
sector's revenues grew 15 percent during the second quarter of 1999. The bulk of
diagnostic imaging product sales remains conventional x-ray equipment,
ultrasound ("US"), magnetic resonance ("MRI"), radiation therapy, nuclear
medicine ("NM") and computed tomography ("CT").
INDUSTRY TRENDS. In the recent past, managed care focused almost entirely on
reducing hospital costs, physician costs, and pharmaceutical costs; costs that
comprise the largest sector of healthcare expenditures. Today, HMOs increasingly
seek ways to reduce and manage their costs, such as utilization of diagnostic
equipment. As a result of this intensified pressure from managed healthcare
providers to hold down costs and eliminate unnecessary diagnostic procedures,
both domestic and export shipments of electromedical equipment by U.S.
manufacturers have been relatively flat in recent years.
Despite the recent trend, the world market, according to Standard and
Poor's, should continue to grow in coming years. Key factors spurring this
business include (1) patients' insistence on quality healthcare regardless of
cost; (2) the aging population; (3) the recognition of the cost savings that
diagnostic products can provide and (4) the trend towards more advanced medical
technology, techniques and equipment. Despite the fact that the increased
presence of managed care providers has worked to suppress healthcare
expenditures, real growth (inflation adjusted) in health spending accelerated
from less than 3 percent each year in 1995 through 1997 to 4.5 percent in 1998.
Furthermore, recent data demonstrates that medical costs continue to outpace
overall inflation on the consumer levels. According to the Bureau of Labor
Statistics, the overall Consumer Price Index rose 2.0 percent for the 12 months
ended June 1999, while the overall price of medical care advanced 3.4 percent
during this same period.
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Co-sourcing, a recent business model emerging in the diagnostic imaging
market, is the operation by an independent provider of imaging equipment
permanently located in a hospital or facility. Pressure from Medicare and
managed care providers has forced hospitals to optimize their budgets so that
total costs do not exceed allowable reimbursements. Understating costs
associated with delivering a particular diagnostic service can eliminate a
healthcare provider's bottom line. Co-sourcing arrangements enable hospitals to
more efficiently manage and operate departments and, therefor, maintain their
profits.
OUR COMPETITION
MEDICAL IMAGING. The principal modalities for visualizing internal anatomy
continue to be: X-ray, Computed Tomography ("CT"), Ultrasound ("US") and
Magnetic Resonance ("MR"). A fifth technique, Nuclear Medicine ("NM"), is useful
for diagnosing biochemical functions. Physicians do not view these technologies
as substitutes one for another. Each modality contributes to a physician's
toolkit and each is uniquely suited to help diagnose a specific patient problem.
Consequently, diagnostic imaging modals primarily compete to address problems
for which they are not currently being used.
The companies that supply diagnostic imaging equipment range from large
manufacturers to smaller specialized companies. Large diversified manufacturers,
for which medical systems define only part of their total business include
General Electric, Siemens, Toshiba, Hitachi and Philips. Specialized companies
like Acuson Corp. and ADAC Laboratories concentrate on producing a single
product.
The medical imaging equipment business is international in scope. A number
of foreign suppliers hold a substantial share of the U.S. market and most U.S.
companies conduct significant business overseas. Many of the larger players
actively seek to consolidate the industry or gain positions in competing
products to improve profitability and market share.
X-RAY. X-ray imaging includes a variety of equipment including: (1) fluoroscopic
equipment designed for cardiac catheterization (visualizing the coronary
arteries) and angiography (visualizing other blood vessels); (2) mammography
(visualizing the breast to detect cancer); (3) radiography (static X-ray images
on film); (4) fluoroscopy (moving X-ray images); and (5) portable X-ray machines
used in hospitals when patients cannot be taken to the radiology department.
Although most X-ray suppliers offer equipment in all of these categories,
the market forces in each category can vary significantly. For example, demand
for catheterization lab equipment has been driven largely by the growth in
angioplasty and cardiac surgery, both of which are profitable procedures for
hospitals. On the other hand, demand for mammography equipment depends largely
on opinions regarding the wisdom of screening women for breast cancer. Cardiac
catheterization equipment is generally very expensive making it comparable to CT
and MR, while mammography equipment generally costs much less.
COMPUTED TOMOGRAPHY. Physicians use CT for a variety of examinations in the
head, spine, thorax and abdomen. Spiral CT enables CT angiography, where 3-D
representations allow doctors to evaluate the performance of blood vessels
throughout the body. Physicians can use CT for examinations of the head and
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spine, but CT is best used for other examinations, especially where speed is
required. Although CT systems range in price, they tend to be quite expensive.
ULTRASOUND. The Ultrasound market is more fragmented and is represented by a
relatively large number of competitors. The market is segmented according to the
medical specialists who use the equipment: radiologists, for examinations of
abdominal and pelvic organs, and accessible arteries like the carotid;
obstetricians and gynecologists, for examinations of the female reproductive
system; cardiologists, for examinations of the heart and blood vessels;
urologists, for examinations of the prostate and bladder; and surgeons, for
intra-operative visualization of hidden structures.
Ultrasound is not known to produce any harmful side effects. In addition,
Ultrasound equipment generally costs less than most other imaging equipment and
can be located almost anywhere, encouraging wide use in physician offices and
hospital departments.
MAGNETIC RESONANCE. MR grew steadily from its inception in 1983 until 1993, when
demand for MR procedures fell off because of the rise of managed care and other
developments (such as the ban on self-referral). MR sales in the U.S. declined
precipitously between 1992 and 1994 but has since recovered in large measure.
The long-term outlook for MR appears positive because of new contrast agents and
improved imaging performance. Many doctors tend to prefer MR for imaging the
brain, spine and certain joints, such as the knee and shoulder. MR angiography,
an established technique offering images of blood vessels without the need for
contrast agents, also generates significant use. Various medical sources predict
that continued MR improvements will allow MR examinations of abdominal organs
and the heart.
Many of the installed MR units are aging and many were manufactured by
companies no longer in the business. For this reason, the replacement market has
begun to grow because of falling prices and limited demand. MR equipment is
expensive, but prices have declined over the years.
NUCLEAR MEDICINE. NM produces images of radio-pharmaceuticals (carriers tagged
with radioactive tracers) whose distribution in the body provides diagnostic
information. The market potential of NM largely depends on the development of
improved radiopharmaceuticals rather than on improved equipment.
NEW TECHNOLOGIES. Examples of noteworthy new technologies reshaping the industry
include digital X-ray, positron emission tomography ("PET") and PAC systems.
Digital X-ray captures X-rays directly, promising several important
benefits: (1) better image quality, which will lead to more accurate and earlier
diagnoses; (2) faster access to images, allowing interpretation of emergency
room patients as well as remote consultation on difficult cases; and (3)
increased productivity, accompanied by savings in both labor and the processing
of radiographic film. Digital X-ray, however, will likely gain only gradual
acceptance from the medical community because the cost of a digital radiography
system will likely far exceed the cost of a film-cassette system.
PET, a non-invasive, diagnostic imaging technique for measuring the
metabolic activity of cells in the human body, may benefit patients suffering
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from certain types of cancer or certain conditions affecting the brain and the
heart. Many insurance carriers approve PET, but the technology is still
unfolding into clinical diagnostic medicine. PET, like computerized thermal
imaging, can diagnose some functional disorders, but it does so at the
biochemical level. Diseases can alter biochemical processes and PET can
visualize some of these changing processes. For example, PET can detect
diseases, such as Alzheimer's disease, which do not modify the anatomy.
PAC systems play an increasingly important role as complements to the
imaging equipment. A PAC system is a computer network designed to transmit,
store and retrieve digital medical images. It makes an electronic copy of
images. Users can magnify and enhance the images through brightness and contrast
controls, and multiple users can view the same image at the same time from
different stations. The electronic image greatly reduces film usage and cost.
OUR MARKETS
OVERVIEW. We plan to address the unique features and problems of domestic and
international healthcare providers in order to maximize profitability. While our
initial plans focus on the domestic market, we expect the international market
will ultimately dominate our revenue base.
DOMESTIC MARKET. Of the three segments in the domestic medical imaging market
(hospital-based, freestanding, and mobile), we designed our product offering
around the hospital-based segment for seven primary reasons: (1) the substantial
market size; (2) the central management structure affords the chance to maximize
selling economies and deployment momentum; (3) hospital inefficiencies create
opportunities for improvement; (4) our familiarity with hospitals through
clinical trials; (5) the potential to align ourselves and our products with
large and prestigious hospitals; (6) the hope that the visibility of hospitals
will induce freestanding and mobile medical diagnostic imaging centers to adopt
our Medical Imaging Systems; and (7) the substantial, on-going patient
management practices.
INEFFICIENT MARKET SEGMENT. We plan to capitalize on the opportunity for
improvement in hospitals to differentiate our business strategy our
competitors'. The trend towards outsourcing and growth of PAC systems are
examples of market forces shaping solutions to address inefficiencies in
hospital-based diagnostic imaging centers. Our product offering blends the
efficiency of outsourcing medical diagnostic imaging functions with the
convenience to physicians of in-hospital systems to create the industry's first
co-sourcing arrangement. By assuming responsibility for equipment performance
and for cataloging all relevant imaging data, we eliminate unexpected
maintenance costs, control imaging quality and reduce hospital record-keeping
overhead.
RELATIONSHIPS WITH TEACHING HOSPITALS; BRAND EQUITY. We plan to leverage our
positive relationship with the five prestigious teaching hospitals conducting
our clinical trials in order to establish a reputation for innovation. We plan
to publicize results from these institutions to associate our brand with
recognized symbols of innovation and patient care. We believe that our success
in hospitals will lend us credibility and valuable publicity that will lead the
remaining market (the freestanding and mobile diagnostic imaging centers) to
adopt our Medical Imaging Systems.
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PATIENT MANAGEMENT. Hospitals provide significant on-going patient management.
Because our thermal scans are harmless and non-invasive, physicians can use them
at any frequency deemed necessary. Our post-surgery diagnosis capability enables
doctors to better verify and track patient recovery. Our system's relevance to
pre- and post-procedural diagnoses also allows hospitals to improve bed turnover
by immediate observation of the effects of surgery and/or medication to
ameliorate the healing process.
COMMERCIALIZED PRODUCT WITH INTERNATIONAL APPEAL. On the international front, we
see many opportunities for growth. International growth will afford us the
following benefits: (1) different customer bases add diversity to our database
and enhance database depth and strength, and (2) the potential demand from
socialized governments requiring conformity and subsequent adoption of approved
products by many of their healthcare providers.
To date, we have deployed seven of our systems at various sites: five
Breast Imaging Systems in hospitals throughout the U.S. and two General Use
Systems in Asia. We use the Breast Imaging Systems for clinical trials at five
teaching hospitals noted for their activity in the fight against breast cancer.
We sold one General Use System to Orchard Hospital in Bangkok, Thailand in May
1996 and we placed a second unit with the Friendship Hospital in Beijing, China
for demonstration purposes. However, in 1997, we recovered this second unit to
use some of its components in one of our five Breast Imaging Systems. This
permitted us to focus available resources towards FDA approval.
DIVERSE CUSTOMER BASE. An international customer base allows us the opportunity
to capture a more diverse data set and train our classifiers to recognize a
wider range of maladies. The diverse demographic data associated with
international patient scans creates an unrivaled PAC system for data mining by
academic, medical and insurance communities.
HIGHER PATIENT VOLUME. The high patient volume associated with an international
presence adds to the depth and strength of our PAC system as well. A larger
database will allow us to make more accurate diagnosis which, in turn, may lead
to enhanced branding of our products and greater revenues.
CENTRALIZED HEALTHCARE CONTROLS. Many potential international customers have
centralized governments that exercise considerable control over the manner and
methods of treatment provided by healthcare facilities. Given their favorable
disposition towards thermography, foreign government acceptance of our Medical
Imaging Systems may lead to substantial international demand.
OUR SALES AND MARKETING STRATEGY
OVERVIEW. In the near term, we will focus on developing our domestic market with
the expectation that U.S. adoption of our systems will serve as our vehicle for
international acceptance. As opportunities arise, we will extend our reach into
foreign countries, many of which are generally receptive to thermography.
DOMESTIC STRATEGY. We designed our domestic sales and marketing strategy to
facilitate rapid deployment and maximize customer retention by adapting our
product offering to complement key structural elements in the healthcare
adoption cycle. Recognizing the need for an effective deployment strategy, we
have retained various marketing consultants and professionals over the past
years to assess the market for medical imaging equipment and recommend
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product placement strategies. We will introduce products that serve the needs of
healthcare providers with shrinking capital budgets and pressure to reduce
costs, and capitalize on the trend towards co-sourcing of healthcare services
and growth in broadband infrastructures. We also adapted our domestic marketing
strategy to accommodate two important structural elements of the sales cycle:
top-down, bureaucratic decision making and the Healthcare Financing
Administration's influence on billing codes.
Our resultant strategy includes: (1) outsourcing most of our marketing
functions and some sales functions; (2) adopting a simple, fee-per-use revenue
model; (3) targeting corporate level decision makers; (4) positioning new
products as adjunctive tests; (5) co-promoting products and services with
strategic partners; (6) leveraging FDA approvals across multiple products; and
(7) continuing to foster relationships with respected persons in domestic and
foreign markets.
MANAGE SALES INTERNALLY; SEGREGATE MARKETING. In order to accelerate product
deployment and more closely match our infrastructure growth with product
placements, we have chosen to segregate our marketing functions and focus
internally on sales. In addition to the public relations agreement that we have
with Chadwick Communications, we recently employed three individuals whose sole
time and effort is focused on the tasks of building our market, specifically
with respect to our Breast Imaging System.
FEE-PER-USE REVENUE MODEL TO ACCELERATE ADOPTION RATES. We plan to generate
revenue through usage agreements, removing two critical customer adoption
barriers: capital budget constraints and surprise maintenance fees. We install
our equipment, remotely monitor it and periodically service it. The customer
only bears the burden of paying for use of our systems. Our fee-per-use
agreement will include minimum usage requirements which, if not satisfied by the
customer, will give us the right to remove our systems and place them in more
profitable sites. The portability of our systems makes it practical for us to
enforce our removal provisions.
TARGET CENTRALIZED DECISION MAKERS. We plan to focus our sales effort to
persuade adoption of our technologies at the corporate level, thereby, enabling
us to maximize selling economies and reduce bureaucratic burdening. A healthcare
provider's corporate office often oversees many hospitals. This means that we
can place many systems following just one favorable sell at the corporate level.
Our strategy also accelerates the sales cycle by removing layers of decision
making. We may also address physicians directly to encourage grassroots
acceptance. We expect that the successful completion of the clinical trials of
our Breast Imaging System will offer compelling performance evidence to
physicians.
CROSS-PROMOTING PRODUCTS WITH STRATEGIC PARTNERS. We plan to cross-promote
products with our strategic partners to leverage their reputation into improved
consumer and healthcare provider awareness of our systems. Our clinical trial
sites present a unique opportunity for us to associate our products with the
prestige and patient care reputation associated with these institutions.
POSITION NEW PRODUCTS AS AUXILIARY MODALITIES. To reduce the burden associated
with FDA approval, we plan to initially position any of our systems designed for
a specific application as an adjunctive diagnostic. Though our systems do not
technically require FDA approval, we recognize lack of FDA approval as a
practical impediment to widespread use of our system.
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Once our system receives FDA approval as an adjunct for a specific application,
we can place more units and speed up the data collection process required for
FDA approval as a stand-alone diagnostic.
LEVERAGE FDA APPROVAL ACROSS MULTIPLE PRODUCTS. We plan to use FDA approval of
our Breast Imaging System to promote the benefits of computerized thermal
imaging in general and generate medical and consumer acceptance of our General
Use System. Healthcare providers can currently bill computerized thermal imaging
under legacy thermography codes. Accordingly, we plan to use FDA approvals to
distribute specific application products to decrease the time involved in
extensive data gathering of clinical trials.
INTERNATIONAL STRATEGY. On the international front, we will continue to foster
and nurture relationships in Mexico, Central and South and Latin America, the
Middle East, the Peoples' Republic of China, and India to prepare for the future
deployment of our Breast Imaging System. In connection therewith, we entered
into two letter Agreements on October 28, 1999 with Computerized Thermal Imaging
International, Inc. ("CTII"), whereby CTII received the exclusive right to
represent the expansion of our business into Central and South America, prepare
and implement a marketing strategy for deployment of our Breast Imaging System
in those areas of the world, have the right of first refusal on our Health Card
manufacturing worldwide, and right to sell a minimum of 100 of our Breast
Imaging Systems over a two-year period. The Agreements provide that we grant to
CTII, as compensation, options to purchase up to 5 million shares of our common
stock in 50,000 share increments based on their deployment of our Breast Imaging
System in the specified territories. Each option grants the holder thereof the
right to purchase 50,000 shares of our common stock at a strike price equal to a
15 percent discount to the bid price on the Effective Date of the Agreement, or
October 28,1999. Options expire two years from the date of grant.
On June 6, 2000, the Company entered into agreements for the sale of 10
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.
We will continue to seek opportunities to form joint ventures in foreign
countries and expect to generate revenue from product sales to these joint
ventures through fee-per-use agreements.
OPPORTUNITIES
MAINTENANCE. We maintain our systems on fee-per-use arrangements in order to
oversee their performance and help healthcare providers manage their budgets.
Cost containment pressure exerted by managed care providers makes it critical
for healthcare providers to manage their costs. We help in this process by
eliminating the risk of large, sometimes unexpected, maintenance fees. We can
easily and remotely monitor product performance through our PAC system
interface. In this way, we ensure the reliability of the data base and proper
functioning of our systems. Onsite repairs and maintenance can also be provided
by our engineering consultants.
Due to their cost-effectiveness relative to other imaging modalities, our
Medical Imaging Systems should compete very well in the industry's low-cost
environment. Because our planned commercialization strategy for the Breast
Imaging System is based on a fee-per-use arrangement, the effect on capital
budgets of expenditure-weary providers is minimized. Finally,
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because of the ability of our systems to non-invasively exclude the need for
other testing and disqualify many fraudulent insurance claims related to soft
tissue injuries, our systems should also appeal to healthcare and insurance
providers.
THIRD PARTY REIMBURSEMENT. Although physicians now permit use of our General Use
System and Breast Imaging System, the absence of FDA approval is a practical
impediment to widespread acceptance. Most physicians prescribe use of external
procedures and imaging modalities only when there are approved payment codes
acceptable for third party reimbursement (e.g., insurance, Medicare, etc). The
Health Insurance Care Finance Administration ("HICFA") establishes, for
Medicare/Medicaid, a payment code approval for certain imaging modalities as
used to detect particular suspected ailments. Generally, HICFA does not set
payment codes for use of new technology unless the technology has obtained FDA
approval. Most insurance companies establish payment codes for their insureds
based upon experience and, for new procedures or imaging modalities, HICFA's
determination. Therefore, unless covered by other general payment codes, we
intend to seek FDA approval for each specific use of our system designed to
detect specific ailments.
DATA MINING. The full breadth and depth of the information on our PAC system can
be accessed to address specific needs including: (1) government agencies wishing
to conduct longitudinal studies to infer progression of disease in a specific
region of the country; (2) insurance carriers seeking more reliable data upon
which to base workers' compensation premiums; (3) academicians searching for
cause and effect relationships between stress and various illnesses; (4)
employers looking to establish fitness standards for new employees; and (5)
courts and litigators attempting to confirm the validity of healthcare liability
claims. In future years, we expect our PAC system services will materially
contribute to our revenues.
FUTURE PRODUCT AND SERVICE PLANS. We will continue to invest in the
effectiveness of our proprietary application software and hardware. In addition,
we will continue to use the services of vendors who can improve the precision
and reliability of patient testing. We believe that the next quantum leap in
medical imaging will result from the integration of our imaging technology with
anatomical and other imaging data. For example, our Medical Imaging Systems data
would overlay on a CT, MR, X-ray or US scan to create an inter-modal composite.
We believe that it is both technically and economically feasible for our Medical
Imaging Systems to lead inter-modal imaging.
At present, some imaging modalities might be generally termed
non-quantifiable. In other words, even if computers digitize information from a
MRI, technicians and doctors must still interpret the image. To alleviate this
difficulty, we intend to build quantified data sets of tests by other imaging
modalities and develop the necessary interfaces to allow overlay. We can then,
with the combined data, offer computerized recognition of disorder patterns
using inter-modality images.
STRATEGIC ALLIANCES
OVERVIEW. Our business platform capitalizes on supplier and vendor strengths to
reduce our transition risk from system development to system deployment. By
keeping our overhead low and outsourcing component production, integration and
various elements of our research and development, we can focus our efforts and
resources on sales, cultivating our brand, and adapting our
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systems to new opportunities and evolving customer needs. To date, we have
significant strategic relationships with:
1. TRW Inc. to integrate, install and maintain our systems.
2. Battelle Memorial Institute and Quintiles Transnational Corp. to provide
technical analysis, clinical trial monitoring and FDA submittal preparation
support.
3. Bales Scientific Inc., our recently acquired subsidiary, to secure
high-speed infrared cameras.
4. Therma Corp. to supply climate control equipment.
5. Chadwick Communications, a specialist in launching and positioning
corporate and consumer brands, to handle marketing communications.
6. Lasercard Systems, Inc. to produce lasercards to store patient data.
7. Informix, to help us lay a strategic and adaptable Internet platform to
maximize the potential for vast amounts of patient data.
8. Computerized Thermal Imaging International, a Latin American consortium
established to place our systems in Latin America.
9. Pegaso PCS, S.A. de C.V. to provide system-wide telecommunications
connectivity across Latin America.
In addition to the foregoing strategic partners, we have enlisted five
prominent U.S. teaching hospitals to conduct the clinical trials necessary for
FDA approval including:
- Norris Comprehensive Cancer Center, Los Angeles;
- Mt. Sinai Hospital, Miami;
- St. Agnes Hospital, Baltimore;
- Lahey Clinic, Boston; and
- Providence Hospital, Washington, D.C.
We believe that the trial conducted by these prestigious facilities will
validate the effectiveness of our Breast Imaging System in detecting breast
cancer.
GOVERNMENT REGULATIONS
OVERVIEW. 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
Application ("PMA") 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 do not believe that either of our Medical Imaging Systems requires us to
submit a PMA to the FDA for approval. Notwithstanding, we have chosen to pursue
FDA approval via the PMA process to gain market acceptance of our Breast Imaging
System. We believe that FDA approval of our Breast Imaging System will lend
credibility to all of our imaging systems and ease the task of introducing our
General Use System to the market, enable us to reference
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medical efficacy claims in connection with marketing efforts, enhance physician
acceptance of our systems and obtain designation of insurance payment codes for
particular procedures.
The FDA is permitting us to submit our approval application in five
modules, thereby, accelerating the data submittal and review process. We have
already filed three modules and anticipate submitting the two remaining modules
in 2000.
FDA APPROVAL PROCESS. Following the design of our Breast Imaging System, we
initiated a series of discussions with the FDA. We presented pretrial data that
demonstrated a sufficient probability of success to warrant FDA consideration.
Our discussions fashioned a trial protocol that would produce data of sufficient
quantity and quality to allow a FDA review of our Breast Imaging System.
The trial protocol requires an initial data collection of thermal images by
our Breast Imaging System from approximately 700 qualified patients. In
response, we initiated a data collection process in five prestigious hospitals
including: (1) Norris Comprehensive Cancer Center, Los Angeles; (2) Mt. Sinai
Hospital, Miami; (3) St. Agnes Hospital, Baltimore; (4) Lahey Clinic, Boston;
and (5) Providence Hospital, Washington, D.C. Currently, we are executing the
approved protocol and collecting actual patient data in clinical trials underway
at the Hospitals. In a double-blind study, each participating hospital uses our
Breast Imaging System to collect the required patient information and
examination results and compare the collected Breast Imaging System data to
pathology findings. We engaged Quintiles, Inc., a consulting firm recognized by
the FDA, to oversee adherence to FDA requirements and examination procedures in
data collection. Following our completion of the data collection phase, we must,
in concert with our consultants, analyze the trial results and prepare an FDA
Approval submission.
FDA REVIEW. The FDA review of a pre-market approval application consists of four
steps: (1) administrative and limited scientific review by the FDA staff to
determine that the application is complete; (2) in-depth scientific and
regulatory review by the FDA compliance personnel; (3) review and recommendation
of the appropriate advisory committee (panel review); and (4) an FDA good
manufacturing practices inspection. Following review, the FDA will notify the
applicant by letter of its decision to approve or deny the application and will
publish a notice in the Federal Register.
RECENT EVENTS
PRIVATE PLACEMENTS. To accelerate the pre-market application process and provide
funding necessary to continue clinical testing, we raised approximately $45
million, net of placement costs, in two private placements of common stock and
warrants during the quarter ended March 31, 2000. Specifically, on March 31,
2000, we concluded a private placement (the "Offering") of our securities
pursuant to Regulation D, Rule 506, of the Securities Act of 1933. As a
consequence, we raised, net of offering costs, approximately $39,543,103. Total
common stock subscribed to as a result of subscriptions accepted equaled
11,148,766 shares. Warrants of equal quantity were issued and give participating
shareholders the right to acquire 5,574,316 shares of our common shares at $5.00
per share (subject to specified anti-dilution provisions). Common stock and
warrants subscribed to
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in the Offering are restricted and cannot be resold without registration under
applicable federal and state laws.
In addition to the foregoing, on March 30, 2000, we signed an agreement
with INFORMIX, Inc. providing for the sale of $5,000,000 of our common stock. In
connection therewith, INFORMIX subscribed to 510,204 shares of our common stock.
The shares were issued in reliance upon the exemption available under Section
4(2) of the Securities Act of 1933. Common stock shares subscribed to by
INFORMIX are restricted and cannot be resold without registration under
applicable federal and state laws.
BALES ACQUISITION. On April 18, 2000, we acquired Bales Scientific, Inc.
("Bales") for $5.6 million in cash and $5.5 million of our common stock. Bales,
founded in 1977, designs, manufactures, and sells high-resolution, dynamic,
digital infrared-imaging workstations and related products for both medical and
industrial applications. These workstations are integral components of our
Medical Imaging Systems. Medical applications for Bales' products include
imaging of circulatory, neurological and soft tissue abnormalities, including
work in the area of breast cancer. Its recently introduced Photonic Stimulators
are used to increase blood flow and circulation in the treatment of chronic
pain. Industrial applications 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. More information about Bales can be found at www.balesscientific.com.
In connection with the deal, Maurice Bales, previous majority-shareholder
of Bales and noted authority in thermal imaging technology, entered into a
three-year employment contract with us to provide expertise and services to
further develop our thermal imaging technology and integrate Bales' technology
with our Medical Imaging Systems. Mr. Bales is currently in charge of the
scientific development of our technologies.
CURRENT EMPLOYEES
As of the date hereof, we have 30 full-time employees, four of who are part
of our management team. None of our employees are represented by a union and we
consider our employee relations to be good.
OUR BUSINESS LOCATIONS
Our corporate offices are located at 476 Heritage Park Boulevard, Suite
210, Layton, Utah 84041, where we lease approximately 6,030 square feet of
office space for $9,521 per month. Our lease at this location expires November
30, 2002. We also lease, at $7,500 per month, 5,000 square feet of office space
in Walnut Creek, California to house our scientific development department. This
lease expires April 18, 2003. Finally, we lease, on a month-to-month basis,
minimal office space in Lake Oswego, Oregon for approximately $950 per month. We
believe that our offices are adequate for our present needs and that suitable
space will be available for our future needs.
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OUR MANAGEMENT
Following is a list of our executive officers and members of our Board of
Directors:
<TABLE>
<CAPTION>
Name Age Position
----------------------- --- ------------------------------------
<S> <C> <C>
David B. Johnston (1) 57 Chairman of the Board & Chief Executive Officer
Richard V. Secord (1) 67 Vice Chairman & Secretary
David A. Packer (1) 48 President, Chief Operating Officer, Treasurer & Director
Brent M. Pratley, MD (2) 64 Director
Milton R. Geilmann (2) 68 Director
Harry C. Aderholt (2) 80 Director
Kevin L. Packard 39 Chief Financial Officer
</TABLE>
-------------------
(1) Member of our Executive Committee
(2) Member of our Audit and Compensation Committees.
DAVID B. JOHNSTON, age 57, has served as our Chairman of the Board since
August 1987 and Chief Executive Officer, since July 1, 1997. He currently serves
as an officer and/or director of CTICO, our 88-percent owned subsidiary and of
Thermal Imaging, Inc., an affiliate of Mr. Johnston. 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., a specialized medical and computer high technology private
placement firm in Oregon. 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.
RICHARD V. SECORD, age 67, (Major General, United States Air Force,
Retired) was elected as a director effective February 1996 and has served as
Vice Chairman and Secretary since July 1, 1997. From February 1996 to April
1997, General Secord served as President. General Secord also previously served
as 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 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.
DAVID A. PACKER, 48, was elected President in April 1997 and appointed as a
director and Chief Operating Officer in December 1999. Effective July 1, 1997,
he was also elected to be Treasurer. In December 1998, Mr. Packer was appointed
to serve as President and Chief Operating Officer of CTICO. Before joining us,
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.
BRENT M. PRATLEY, M.D., age 64, was elected as a director in June 1994 and
served as Secretary from June 1994 to September 1997. Dr. Pratley is
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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, age 68, (Retired), was elected as a director 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
retired from Squibb in 1993. Mr. Geilmann received a Masters of Science degree
in Pharmacology in 1957 from State University of New York.
HARRY C. ADERHOLT, age 80, (Brigadier General, United States Air Force,
Retired) was elected as a director 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.
KEVIN L. PACKARD, age 39, was appointed Chief Financial Officer in March
2000. From 1999 through March 2000, Mr. Packard was a manager with
PricewaterhouseCoopers in Salt Lake City and from June 1987 through July 1992
was a manager with Deloitte + Touche in Seattle. From July 1992 through 1998,
Mr. Packard served in various capacities with Coeur d'Alene Mines Corporation
including Vice President, Treasurer and CFO. Mr. Packard is licensed as a
certified public accountant in Utah, Idaho and Washington and is a member of the
AICPA. Mr. Packard received a Masters of Professional Accountancy degree from
University of Utah in 1987.
Directors are elected by our stockholders at each annual meeting and serve
until the next annual meeting of stockholders or until their successors are duly
elected and qualified. Officers are elected to serve, subject to the discretion
of the Board of Directors, until their successors are appointed or their earlier
resignation or removal from office. David B. Johnston, David A. Packer and
Richard V. Secord are the only directors who are also officers.
We have an Executive Committee, an Audit Committee and a Compensation
Committee. The Executive Committee oversees our operations and all strategic
planning. The Audit Committee reviews and reports to the Board of Directors on
our financial results of operations and the results of the audit services
provided by our independent accountants. The Compensation Committee reviews
compensation paid to management, including administration of our 1997 Stock
Option and Restricted Stock Plan, and recommends to the Board of Directors
appropriate executive compensation.
Messrs. Johnston, Secord and Packer comprise our Executive Committee. The
members of our Audit and Compensation Committees are Messrs. Pratley, Geilmann
and Aderholt.
In March 2000, the Board adopted a Charter for the Audit Committee. The
Charter establishes the independence of our Audit Committee and sets forth the
scope of the Audit Committee's duties. Only independent Directors may serve on
the Audit Committee.
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The Purpose of the Audit Committee is to conduct continuing oversight of
our financial affairs. The Audit Committee conducts an ongoing review of our
financial reports and other financial information prior to their being filed
with the U.S. Securities and Exchange Commission, or otherwise provided to the
public. The Audit Committee also reviews our systems, methods and procedures of
internal controls in the areas of: financial reporting, audits, treasury
operations, corporate finance, managerial, financial and SEC accounting,
compliance with law, and ethical conduct. The Audit Committee is independent and
objective, and reviews and assesses the work of our independent accountants and
internal audit department. The Audit Committee consists of three or more Members
(the "Members") who are independent Directors. The Board of Directors shall
elect the Members annually. Members shall serve until their successors are duly
elected and qualified. Unless an Audit Committee Chairperson is elected by the
full Board, the Members of the Committee may designate a Chairperson by majority
vote of the all Members. Each member is free from any relationship that could
conflict with a Member's independent judgment. All Members must be able to read
and understand fundamental financial statements, including a balance sheet,
income statement, and cash flow statement. At least one Member must have past
employment experience in finance or accounting, requisite professional
certification in accounting, or other comparable experience or background,
including a current or past position as a chief executive or financial officer
or other senior officer with financial oversight responsibilities.
Inasmuch as the Charter for the Audit Committee was only recently adopted,
the Audit Committee has not yet reviewed and discussed our audited financial
statements with management or discussed with our independent auditors the
matters required by SAS 61. The Audit Committee has not yet received the written
disclosures and the letter from our independent accountants required by
Independence Standards Board No. 1, and the Audit Committee has not yet
discussed with our independent accountants the independent accountant's
independence. Each of these items will be properly addressed in forthcoming
months. The Audit Committee did not make any recommendation to our Board of
Directors that should be included in our audited financial statements included
in our Annual Report on Form 10-KSB for the last fiscal year.
There is no family relationship between or among any of our directors and
executive officers, except for the relationship between Mr. Johnston and Mr.
Packer, who are cousins by marriage.
EXECUTIVE COMPENSATION
All corporate decisions regarding employee compensation and stock option
awards during the last three-year period have been approved by our Board of
Directors. In January 1998, our Board of Directors created a Compensation
Committee composed of Dr. Pratley, Mr. Geilmann and General Aderholt, all
independent directors. The committee assumes all responsibility for reviewing
executive compensation matters and administering our 1997 Stock Option and
Restricted Stock Plan.
Following is a summary of compensation paid to each of our named executive
officers for each of the fiscal years ended June 30, 1997, 1998 and 1999. Mr.
Johnston, our Chief Executive Officer has not been paid a cash salary over the
past three years but instead has been paid by the in-kind issuance of our common
stock in the name of Thermal Imaging, Inc., an affiliate of Mr. Johnston. These
issuance are in settlement of both services
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provided to and expenses incurred on behalf of us by Mr. Johnston during 1997:
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 (2)
---------------------- ------ -------- ----- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David B. Johnston, 1999 $ 0 0 $ 0 0 0
Chairman of the Board & 1998 $ 0 0 $ 0 0 1,000,000
Chief Executive Officer 1997 $ 0 0 $152,498 0 0
Richard V. Secord, 1999 $175,000 0 $ 6,000 0 0
Vice Chairman of the 1998 $175,000 0 $ 6,000 0 1,250,000
Board & Secretary 1997 $198,486 0 $ 6,000 0 0
David A. Packer, 1999 $135,000 0 $ 6,000 0 0
President, Chief 1998 $135,000 0 $ 6,000 0 0
Operating Officer & 1997 $ 31,657 0 $ 1,000 0 500,000
Treasurer
</TABLE>
-------------------
(1) Certain of our officers routinely receive other benefits, including travel
reimbursement, the amounts of which are customary in the industry and do
not exceed the lessor of $50,000 or 10 percent of the total compensation
for the executive. These amounts have been omitted. Mr. Johnston has
foregone annual monetary compensation in favor of the issuance of
restricted shares of common stock. Included in "Other Annual Compensation"
for Mr. Johnston are reimbursements of travel expenses for himself and
other executives that were paid by TII, an affiliate. Mr. Johnston also has
the use of a Company vehicle. Mr. Secord and Mr. Packer each receive a
monthly automobile allowance of $500.
(2) As of June 16, 2000, 35,000 of the options granted to our officers have
been exercised. Of Mr. Johnston's options on 1,000,000 shares, 750,000
shares are vested as of the date hereof and have been conveyed to TII. Of
General Secord's options on 3,250,000 shares (2,000,000 of which were
granted in 1996), 35,000 have been exercised and 2,902,500 shares are
vested as of the date hereof. Of the 500,000 options granted to Mr. Packer,
500,000 are vested as of the date hereof.
EMPLOYMENT CONTRACTS
DAVID B. JOHNSTON has an employment agreement effective as of 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 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 our 1997 Stock Option and Restricted Stock Plan. At our cost, Mr. Johnston
has "piggyback" registration rights with respect to the shares of common stock
derived from the exercise of the options. As of June 15, 2000, 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 to leave our employment during the term of
the agreement or for two years after the termination thereof, and the duty not
to reveal any confidential information about our business.
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<PAGE>
RICHARD V. SECORD entered into an 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 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 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. 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 our 1997 Stock Option and Restricted
Stock Plan. At our cost, General Secord has "piggyback" registration rights with
respect to shares of common stock derived from the exercise of the options. As
of June 16, 2000, 35,000 of the options granted to General Secord under the
agreement have been exercised. The agreement subjects Mr. Secord to a two-year
non-compete restriction, the obligation not to induce any employee to leave our
employment during the term of the agreement or for two years after the
termination thereof, and the duty not to reveal any confidential information
about our business.
DAVID A. PACKER has 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 Common Stock
at an exercise price of $0.97 per share. One-third of the options vests 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 our cost, Mr. Packer
has "piggyback" registration rights with respect to the shares of Common Stock
derived from the exercise of the options. As of June 15, 2000, none of the
options granted to Mr. Packer under the agreement have been exercised. 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 our business. In
December 1999, our Board of Directors approved a $40,000 increase, $to $175,000,
in Mr. Packer's base annual salary. As of the date hereof, Mr. Packer's
employment agreement has expired. We are currently re-negotiating a new
employment agreement with Mr. Packer, an important element of which will consist
of long-term incentives to be granted under our 1997 Incentive and Restricted
Stock Plan. Due to the fact that we have issued or committed 100 percent of our
authorized common shares, no additional options or shares can be issued under
the Plan. Final negotiations with Mr. Packer are pending the outcome of a
shareholder vote to authorize additional common shares.
EXECUTIVE SEVERANCE AGREEMENTS
At its regular meeting in April 2000, our Board of Directors approved an
Executive Severance Agreement that provides Severance Benefits for certain of
our executive officers (the "Executive") in the event their employment is
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terminated subsequent to a "Change in Control" of the Company. The Agreement,
once executed, continues from year to year until terminated at the end of any
year by written notice from us, unless a Change in Control has occurred prior to
that date, in which event it shall continue in effect during the two-year period
immediately following such Change in Control.
For purpose of the Agreement, a Change in Control is determined to have
occurred if (a) any organization, group or person (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is,
or becomes, the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 35% or
more of the combined voting power of the then outstanding securities of the
Company; or (b) during any two-year period, a majority of the members of the
Board serving at the effective date of the Agreement is replaced by directors
who are not nominated and approved by the Board; or (c) a majority of the
members of the Board is represented by, appointed by, or affiliated with any
person whom the Board has determined is seeking to effect a Change in Control of
the Company, or (d) the Company is combined with or acquired by another company
and the Board determines, either before such event or thereafter, by resolution,
that a Change in Control will or has occurred.
If a Change in Control occurs, the Executive is entitled to Severance
Benefits upon the subsequent involuntary termination, whether actual or
constructive, of the employment of the Executive within the two-year period
immediately following such Change in Control, for any reason other than
termination for cause, disability, death, normal retirement or early retirement.
For purposes of the Agreement, "Constructive Involuntary Termination" means
voluntary termination of employment by Executive as a result of a significant
change in the duties, responsibilities, reporting relationship, job description,
compensation, perquisites, office or location of employment of Executive without
the written consent of the Executive.
If, following a Change of Ownership, the Executive's employment by the
Company is terminated other than for cause, disability or death, the Executive
shall, subject to the provisions of the Agreement be entitled to:
1) compensation at his or her full annual base salary at the rate in
effect immediately prior to the termination of the employment of the
Executive, and short-term and long-term bonuses at the target levels
pursuant to the Company's annual incentive plan, if any, for the
period of two years following actual involuntary termination or
Constructive Involuntary Termination (the "Salary Continuance
Period");
2) all medical and dental benefits and all long-term disability benefits
in which the Executive was entitled to participate immediately prior
to the date of termination, to the same extent as if the Executive had
continued to be an employee of the Company during the Salary
Continuance Period, provided that such continued participation is
feasible under the general terms and provisions of such plans and
programs;
3) an immediate vesting of all outstanding stock options, stock
appreciation rights, restricted stock, performance plan awards and
performance shares granted by the Company to the Executive;
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<PAGE>
4) continued credit for years of service under the benefit plan of the
Company from the date of termination through the Salary Continuance
Period, and any compensation paid to the Executive above shall be
treated as salary compensation for purposes of such plan;
5) an amount necessary to reimburse the Executive for all legal fees and
expenses incurred by the Executive as a result of the Change in
Control of the Company and such termination of employment, including
fees and expenses incurred in successfully contesting or disputing any
such termination or in seeking to obtain or enforce any right or
benefit provided by the Agreement.
If the Severance Benefits provided for under the Agreement, either alone or
together with other payments which the Executive would have the right to receive
from the Company, would constitute a "parachute payment" as defined in Section
280G(a) of the Internal Revenue Code in effect at the time of payment, such
payment shall, in good faith, be reduced to the largest amount as will result in
no portion being subject to the excise tax imposed by Section 4999 of the Code
or the disallowance of a deduction by Company pursuant to Section 280G of the
Code.
As of the date hereof, no Severance Agreements have been entered into with
any of our executives.
DIRECTOR COMPENSATION
By appropriate resolution of the Board of Directors, directors may be
reimbursed or advanced cash for expenses, relating to attendance at meetings of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board, or a stated salary as director. No payment precludes any
director from serving the Company in any other capacity and receiving
compensation. Members of special or standing committees may be allowed similar
reimbursement of expenses and compensation for attending committee meetings.
STOCK OPTION PLAN
In June 1995, the Board of Directors adopted our 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 our 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 that we may grant our employees (i) options to purchase shares of
our common stock, and (ii) shares of 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 5,250,000 shares of common stock may currently be
issued pursuant to the provisions of the Plan. As of the date hereof, we have
forwarded a proposal to our stockholders to increase to 10,000,000 the number of
shares of common stock that may be issued under the Plan. This proposal will be
voted upon at our Annual Shareholders' Meeting to be held on June 27, 2000. The
Plan is administered by the Board of Directors or by a committee of the Board
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composed solely of two or more non-employee directors (the "Administrator"). The
Administrator administers 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, has absolute and final authority to interpret the Plan. The Plan continues
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 our
stockholders in order to qualify for statutory treatment under the Code, but
such submission never occurred. Any of our employees who were awarded options
pursuant, or in reference, to our 1995 Stock Option Plan have ratified their
agreements to reflect that the plan was never submitted to our stockholders for
approval but that such options incorporate, as contractual terms, the terms and
conditions of the 1995 Stock Option Plan.
Pursuant to the Plan, the term of each option is 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 is 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 vest 20 percent each year over a five-year
period. Notwithstanding the foregoing, the Administrator has 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 employment with us. The exercise price
of options granted pursuant to the Plan is determined by the Administrator in
its sole discretion; provided, however, the exercise price cannot be less than
100 percent of the Fair Market Value of the shares of 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 means a person that owns more than 10 percent of the
total combined voting power of all classes of our outstanding stock, taking into
account the attribution rules set forth in Section 424 of the Code. Any shares
of common stock issued upon exercise of an option are 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 are treated as non-statutory options. For this purpose, "Fair
Market Value" is defined as the mean between the closing bid and asked prices of
the shares of common stock on the date in question (on the principal market in
which the shares are traded), or if the shares were not traded on such date, the
mean between closing bid and asked prices of the shares on the preceding trading
day during which the shares were traded.
The Administrator has the authority to grant shares of 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 are 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
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employee requires the employee to remain an employee of the Company for at least
six months from the date of grant. The Restricted Stock may 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 are 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 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 us, 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 is 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, us for any other reason, all grants of Restricted Stock
under the Plan are forfeited (subject to the terms of the Plan).
As of June 15, 2000, no shares of Restricted Stock have been granted under
the Plan. As of June 15, 2000, the following options were outstanding under the
Plan for executive officers and directors.
OPTION PLAN GRANT TABLE
<TABLE>
<CAPTION>
Number of
Shares Expiration
Name of Persons to Whom Options Under Date of Vesting Exercise
Were Granted Option Option Date Price
--------------------------------------- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
David B. Johnston, Chairman of the 250,000 09/18/02 (1) 09/18/97 (2) $.75/share
Board and Chief Executive Officer 250,000 09/18/02 (1) 09/18/98 (2) $.75/share
250,000 09/18/02 (1) 09/18/99 (2) $.75/share
250,000 09/18/02 (1) 09/18/00 (2) $.75/share
Richard V. Secord, Vice-Chairman of 277,500 09/18/02 (1) 09/18/97 (2) $.70/share
the Board and Secretary (3) 312,500 09/18/02 (1) 09/18/98 (2) $.70/share
312,500 09/18/02 (1) 09/18/99 (2) $.70/share
312,500 09/18/02 (1) 09/18/00 (2) $.70/share
David A. Packer, President, Chief 0 N/A N/A
Operating Officer and Treasurer (3)
</TABLE>
-------------------
(1) The option may terminate prior to this date upon the termination of
employee with "cause", as defined in the employee's Employment Agreement.
In addition, an option will automatically terminate and revert to us 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 us.
(3) These employees hold options granted prior to the adoption of our 1997
Stock Option and Restricted Stock Plan. The options were originally granted
pursuant to the terms of our 1995 Stock Option Plan that was never ratified
by the stockholders and formally terminated by our Board of Directors on
September 18, 1997. Options granted prior to the Plan were: 2,000,000 to
General Secord and 500,000 to Mr. Packer. The terms of the employee stock
option
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<PAGE>
agreements were amended to ratify and incorporate the terms of our 1995
Stock Option Plan into the respective stock option agreements as
contractual provisions.
There were no options granted in the last fiscal year to any of our named
executive officers or directors. The following table shows, as to the named
executive officers, information concerning aggregate option exercises and values
as of June 15, 2000.
AGGREGATED OPTION EXERCISES AND VALUES AS OF JUNE 15, 2000
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money
on Value Options at June 15, 2000 Options at June 15, 2000
Name of Officer Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
--------------------- -------- -------- ------------------------- -----------------------------
<S> <C> <C> <C> <C>
David B. Johnston, 0 $ 0 750,000/250,000 $6,656,250/$2,218,750
Chairman of the Board &
Chief Executive Officer (2)
Richard V. Secord, Vice 35,000 $300,000 2,902,500/312,500 $24,804,813/$2,789,063
Chairman of the Board &
Secretary (3)
David A. Packer, 0 $ 0 500,000/0 $4,327,500/$0
President, Chief
Operating Officer &
Treasurer (4)
</TABLE>
-------------------
(1) The value of the unexercised in-the-money options at June 15, 2000 was
determined by calculating the difference between the exercise price per
share of common stock, as set forth in the respective stock option
agreement, and the closing bid price per share of common stock on June 15,
2000, which was $9.625. The resulting amount is deemed to be the value of
the options/warrants for purposes of this table.
(2) The option granted to Mr. Johnston for 1,000,000 shares of common stock is
exercisable at $0.75 per share.
(3) The option granted to General Secord for 2,000,000 shares of common stock
has an exercise price of $1.25 per share; the option granted for 1,250,000
shares of common stock (35,000 of which have been exercised as of the date
hereof) has an exercise price of $0.70 per share.
(4) The option granted to David Packer for 500,000 shares has an exercise price
of $0.97 per share.
The Company has no long-term incentive plans or defined benefit plans.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all prior related-party transactions are on terms no less
favorable than what we could have obtained from unaffiliated third parties. Our
reasonable belief of fair values 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.
THERMAL IMAGING, INC., AN AFFILIATE OF DAVID B. JOHNSTON. For the year
ended June 30, 1999, we issued 4,514,507 shares of common stock to Thermal
Imaging, Inc. ("TII"), an affiliate of David B. Johnston, in satisfaction of
advances from TII of $2,273,436. For the year ended June 30, 1998, we sold
5,463,477 shares of our common stock to TII for $1,827,130.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information regarding the beneficial
ownership of all shares of common stock at June 15, 2000 for each of our
executive officers and/or directors and for each person known to us who owns
beneficially more than 5% of the outstanding shares of our common stock. The
percentage ownership is based on 80,188,899 common shares issued and outstanding
at June 15, 2000 and ownership by these persons of options or warrants
exercisable within 60 days of June 15, 2000. Unless otherwise indicated, each
person has sole voting and investment power over the shares.
<TABLE>
<CAPTION>
Number of Shares
Name and Address of Directors, Officers and More Than Of Common Stock
5% Beneficial Owners Owned Percent of Class
------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
David B. Johnston, 6105 Macadam, Portland, OR 97201 13,967,761 (1) 17.257%
Thermal Imaging, Inc., 6105 Macadam, Portland, OR 97201
13,217,761 16.483%
Daron C. Dillia dba Manhattan Financial Group, 1147 Manhattan
Avenue #134, Manhattan Beach, CA 90266 5,561,178 (2) 6.709%
Richard V. Secord, 515 Pocahontas Dr., Ft. Walton Beach, FL 52347
3,088,500 (3) 3.717%
David A. Packer, 476 Heritage Park Blvd, Suite 210, Layton, UT
84041 693,939 (4) 0.865%
Brent M. Pratley, 1055 North 300 West, Provo, UT 84604 750 0.000%
Milton R. Geilmann, 206 60 SW, Shoshone Drive Tualatin, OR 97062
15,000 0.019%
Harry C. Aderholt, 23 Miracle Strip Parkway N.E., Ft. Walton
Beach, FL 32548 143,500 0.179%
Kevin L. Packard, 476 Heritage Park Blvd, Suite 210, Layton, UT
84041 0 0.000%
---------- ------
DIRECTORS, OFFICERS AND GREATER THAN 5% BENEFICIAL OWNERS AS A
GROUP (EIGHT PERSONS) 23,819,128 28.746%
========== ======
</TABLE>
-------------------
(1) Includes 750,000 shares of common stock underlying options which are
immediately exercisable by Mr. Johnston and 13,217,761 shares of common
stock owned by Thermal Imaging, Inc., an affiliate of Mr. Johnston.
(2) Includes 2,858,140 shares of common stock owned by Manhattan Financial
Group and 2,703,038 warrants and/or options that are immediately
exercisable.
(3) Includes 1,000 shares in the name of Joanne Secord, 185,000 shares in the
name of General Secord and 2,902,500 shares of common stock underlying
options that are immediately exercisable.
(4) Includes 500,000 shares of common stock underlying options that are
immediately exercisable, 93,939 shares in the name of IRA FBO David A.
Packer and 100,000 shares in the name of David A. Packer.
As of the date hereof, we know of no arrangement or understanding that may,
at a subsequent date, result in a change of control.
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<PAGE>
DESCRIPTION OF SECURITIES
Under our Articles of Incorporation ("Articles"), 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 June 15,
2000, there were 80,188,899 shares of the Common Stock issued and outstanding.
As of the date of this Prospectus, we have submitted to a vote of our
shareholders a proposal to increase our authorized common shares to 200,000,000.
This proposal will be voted upon at our Annual Shareholders' Meeting to be held
on June 27, 2000. No shares of the Preferred Stock are issued or outstanding.
The following description of certain matters relating to the Common Stock,
the Preferred Stock, the Warrants and the Options is a summary and is qualified
in its entirety by the provisions of our 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 our stockholders. The holders of the Common Stock
have the sole right to vote, except as otherwise provided by law or by our
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 our dissolution,
liquidation or winding up, the holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of all our liabilities, subject to
the prior distribution rights of the holders of any shares of the Preferred
Stock that may be outstanding at that time.
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 our directors, officers or employees 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
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<PAGE>
shares. We were incorporated on June 10, 1987, and prior to March 16, 1998, our
Articles of Incorporation did not provide for any limitation with respect to
preemptive rights. In the various offerings of our securities, we did not offer
to our 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 our failure offer to our 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, we 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, we plan 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 us 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 us at a per share contribution less than the current market
value. We 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. As of the date of this Prospectus, we are not
aware of any stockholder who intends to make any claim with respect to our
failure to offer any such preemptive rights. On February 4, 1998, a majority of
our stockholders voted to amend the Articles of Incorporation 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.
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of the
Common Stock, to provide for the issuance of the Preferred Stock in one or more
series, to establish the number of shares to be included in each series and to
fix the designations, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof. This
includes, among other things, voting rights, conversion privileges, dividend
rates, redemption rights, sinking fund provisions and liquidation rights which
shall be superior to the Common Stock. The issuance of one or more series of the
Preferred Stock could adversely affect the voting power of the holders of the
Common Stock and could have the effect of discouraging or making more difficult
any attempt by a person or group to attain control of us. As of the date of this
Prospectus, there are no shares of the Preferred Stock issued and outstanding.
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<PAGE>
WARRANTS
2000 PRIVATE PLACEMENT WARRANTS. On March 31, 2000, we concluded a private
placement (the "Offering") of our securities pursuant to Regulation D, Rule 506,
of the Securities Act of 1933. As a consequence, we raised, net of offering
costs, approximately $39,543,103. Total common stock subscribed to as a result
of subscriptions accepted equaled 11,148,766 shares. Warrants of equal quantity
were issued and give participating shareholders the right to acquire 5,574,316
shares of our common shares at $5.00 per share (subject to specified
anti-dilution provisions). Common stock and warrants subscribed to in the
Offering are restricted and cannot be resold without registration under
applicable federal and state laws.
PIKE WARRANTS. As compensation for services rendered in connection with his
employment with us, we issued James Pike 170,000 warrants on May 2, 2000. Each
warrant, exercisable through May 2, 2005, entitles the holder thereof, upon
exercise, to one share of our common stock at $1.5625 per share.
SUTRO WARRANTS. As compensation for investment banking services, we issued
Sutro & Company 200,000 warrants on April 17, 2000. Each warrant, exercisable
through December 31, 2000, entitles the holder thereof, upon exercise, to one
share of our common stock at $1.70 per share.
SITRICK WARRANTS. As compensation for financial consulting services, we
issued Sitrick & Company 37,648 warrants during the first calendar quarter of
2000. Each warrant entitles the holder thereof, upon exercise, to one share of
our common stock at $0.9375 per share.
BRISTOL WARRANTS. In connection with our settlement of two alleged claims
filed in March 2000 against us, we issued 400,000 warrants to Bristol Asset
Management on June 16, 2000. Each warrant entitles the holder thereof, upon
exercise, to one share of common at an exercise price of $7.25 per share.
The resale of 5,574,315 shares of the Common Stock underlying the 2000
Private Placement Warrants, 200,000 shares of the Common Stock underlying the
Sutro Warrants, 170,000 shares of the Common Stock underlying the Pike Warrants,
37,648 shares of the Common Stock underlying the Sitrick Warrants, and 400,000
shares of the Common Stock underlying the Bristol Warrants (collectively, the
"Resale Warrants") are being registered hereby pursuant to registration rights
granted to the holders thereof.
OPTIONS
2000 PRIVATE PLACEMENT OPTIONS. In connection with the 2000 Private
Placement, we entered into commission agreements with various individuals and
entities (jointly referred herein to as "Advisors") to assist in the private
placement of our common stock and warrants in connection with the Placement.
Such agreements stipulated that we would compensate Advisors cash consideration
equal to seven percent of the final gross proceeds derived by the Advisors in
connection with the Offering, plus additional consideration in the form of stock
options, the number of which would be equal to ten percent of the final gross
proceeds derived by the Advisors in connection with the Offering divided by the
closing price of our common shares on February 29, 2000 as quoted on the OTC
Bulletin Board of the NASD. Options
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<PAGE>
granted pursuant to the agreements are exercisable at any time during the
three-year period from February 29, 2000 through February 28, 2003 at a strike
price of $1.70 per share. In consequence of the foregoing, we granted options to
acquire 380,508 shares of our common stock to the Advisors.
BALES OPTIONS. On April 17, 2000, in connection with his employment
agreement and our acquisition of Bales Scientific, Inc., we issued 100,000
options (exercisable through April 17, 2003) to Maurice Bales. Each option
entitles the holder thereof, upon exercise, to one share of common stock at an
exercise price $9.0625 per share.
DIRECTOR AND OFFICER OPTIONS. Mr. Richard V. Secord and David A. Packer are
two of our officers and directors. Each have been granted options pursuant to
our 1995 and/or 1997 Stock Option and Restricted Stock Plans. Although the
shares underlying such options have been registered pursuant to an effective
registration of our Stock Option and Restricted Stock Plans, Mr. Secord and Mr.
Packer may assign up to 435,714 options, and/or shares underlying such options,
for charitable purposes.
The resale of 380,508 shares of the Common Stock underlying the 2000
Private Placement Options, 100,000 shares of the Common Stock underlying the
Bales Options, and 435,714 shares of the Common Stock underlying the Director
and Officer Options (collectively, the "Resale Options") are being registered
hereby pursuant to registration rights granted to the holders thereof.
CERTAIN PROVISION OF THE ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
A number of provisions of our Articles of Incorporation ("Articles") and
Bylaws ("Bylaws") 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 our stockholders. 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 our interests and those of our stockholders.
MEETINGS OF STOCKHOLDERS
Our 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 our capital
stock entitled to vote at such a meeting unless otherwise required by
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<PAGE>
law. Our 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.
AMENDMENT OF BYLAWS
The Bylaws provide that the Bylaws may be altered, amended or repealed by
the Board of Directors or our stockholders. 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
One effect of having 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 us by means of a tender offer, proxy contest or otherwise, and
thereby protect the continuity of the our 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 our 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, our 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. 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.
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<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to the aggregate resale of 23,427,338 shares of the
Common Stock that may be sold by the Selling Stockholders. The shares of the
Common Stock to be resold include (i) 16,129,153 shares issued and outstanding;
(ii) 6,381,963 shares underlying outstanding warrants (the "Resale Warrants")
and (iii) 916,222 shares underlying outstanding options (the "Resale Options").
The selling stockholders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. There is no assurance that the selling stockholders will sell
any or all of the Common Stock in this offering. The selling stockholders may
use any one or more of the following methods when selling shares:
- Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
- Block trades in which the broker-dealer will attempt to sell the
shares as an agent but may position and resell a portion of the block
as principal to facilitate the transaction.
- Purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account.
- An exchange distribution following the rules of the applicable
exchange
- Privately negotiated transactions.
- Short sales or sales of shares not previously owned by the seller.
- Broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share.
- A combination of any such methods of sale.
- Any other lawful method.
The selling stockholders may also engage in:
- Short selling against the box, which is making a short sale when the
seller already owns the shares.
- Buying puts, which is a contract whereby the person buying the
contract may sell shares at a specified price by a specified date.
- Selling calls, which is a contract giving the person buying the
contract the right to buy shares at a specified price by a specified
date.
- Selling under Rule 144 under the Securities Act, if available, rather
than under this Prospectus.
- Other transactions in our securities, or in derivatives of our
securities, and the subsequent sale or delivery of shares by the
stockholder.
- Pledging shares to their brokers under the margin provisions of
customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive
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<PAGE>
commissions or discounts from the selling stockholders in amounts to be
negotiated.
If any broker-dealer acts as agent for the purchaser of shares, the
broker-dealer may receive commission from the purchaser in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be considered to be "underwriters" within the meaning
of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
considered to be underwriting commissions or discounts under the Securities Act.
We pay all fees and expenses incident to the registration of the shares in
this offering. However, we will not pay any commissions or any other fees in
connection with the resale of the Common Stock in this offering.
If we are notified by a selling stockholder that they have a material
arrangement with a broker-dealer for the resale of the Common Stock, then we
would be required to amend the registration statement of which this Prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the broker-dealer.
SELLING STOCKHOLDERS
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. We will not receive any proceeds from the resale of the Common Stock
by the Selling Stockholders. However, we will receive proceeds upon the exercise
of the Resale Warrants and the Resale Options.
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S") AND
SHARES UNDERLYING RESALE WARRANTS ("W") AND RESALE OPTIONS ("O")
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Before Amount Owned after
Stockholder Resale (1) Offered (2) Resale Percent (3)
----------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gene & Nahla Abdin (S)(W) 19,684 19,684 0 *
Abdul Wase Abdul Wali Al-Amri (S)(W) 19,684 19,684 0 *
Action Communications, Inc. Retirement Plan
(S)(W) 78,739 78,739 0 *
Adelman Revocable Family Trust dtd 8/89
(S)(W) 85,700 75,000 10,700 *
Harry Aderholt (S)(4) 143,500 142,500 1,000 *
Paul B. Ahlstrom (S)(W) 78,739 78,739 0 *
Ahmed Al-Aqeel (S)(W) 19,684 19,684 0 *
Salah S. Albuseri (S)(W) 19,684 19,684 0 *
Khaldoon Khalifa Alghunaim (S)(W) 57,375 57,375 0 *
Mohammed Ali Y. Al-Hindi (S)(W) 137,796 137,796 0 *
Jaafar Akbar Ali (S)(W) 19,678 19,678 0 *
Al-Mal Kuwati Company (S)(W) 1,673,205 1,673,205 0 *
Tareq Al-Mudhaf (S)(W) 137,796 137,796 0 *
Mazin Hamid Al Moumen/Nidal Douba Al Moumen
(S)(W) 39,370 39,370 0 *
Nabeel Al-Mulla (O) 93,559 93,559 0 *
Abdullah Yeslam Alnahdi (S)(W) 39,370 39,370 0 *
</TABLE>
-53-
<PAGE>
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S") AND
SHARES UNDERLYING RESALE WARRANTS ("W") AND RESALE OPTIONS ("O")
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Before Amount Owned after
Stockholder Resale (1) Offered (2) Resale Percent (3)
----------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Jon B. Alvord (S)(W) 412,701 393,700 19,001 *
American Pensions/FUB CF Randy
Darrohn IRA (S)(W) 19,684 19,684 0 *
Benjamin W. & Nancy L. Anderson (S)(W) 645,750 42,000 603,750 *
Jeremy B. Andrus (S)(W) 173,675 173,675 0 *
Vaughn Andrus (S)(W) 19,684 19,684 0 *
John Argoitia (S)(W) 19,684 19,684 0 *
Maurice J. Bales (0) 100,000 100,000 0 *
Maurice J. & Marianne J. Bales as Trustees
of the Maurice J. & Marianne J. Bales
Trust (S) 606,452 606,452 0 *
Omar S. Banagatah (S)(W) 39,370 39,370 0 *
Geoffrey D. Barnet (S)(W) 59,055 59,055 0 *
Harold A. Barnett (S)(W) 78,720 78,720 0 *
David A. & Cheryl K. Bartel as community
property (S)(W) 19,684 19,684 0 *
Mark & Angela Bazalgette (S)(W) 19,684 19,684 0 *
Hillard & Marlene Bear (S)(W) 69,058 59,058 10,000 *
Ronald D. Bishop (S) 50,000 50,000 0 *
Eric & Susanne Bledsoe - husband & wife and
Lee & Josette Bledsoe - husband & wife
(S)(W) 19,684 19,684 0 *
Barton J. Blinder (S) 5,000 5,000 0 *
Michael J. Bodell (S)(W) 25,591 25,591 0 *
Douglas Boucher (S)(W) 590,810 511,810 79,000 *
Julie Boucher Trust dtd 4/4/92 (S)(W) 90,115 59,055 31,060 *
Justin Boucher Trust dtd 4/4/92 (S)(W) 90,115 59,055 31,060 *
Ted & Shirley Boucher Revocable Trust dtd
4/19/91 (S)(W) 733,386 728,346 5,040 *
John Kimmel Bristol (S)(W) 19,684 19,684 0 *
Joseph Brodsky (S)(W) 39,370 39,370 0 *
James E. & Lindsay D. Brown, as community
property with rights of survivorship (S)(W) 63,984 19,684 44,300 *
Gene & Carol Bunnell (S)(W) 42,522 23,622 18,900 *
Busch Provo, L.C. (S)(W) 49,312 49,212 100 *
Jeffrey J. Butler (S)(W) 19,684 19,684 0 *
MJ & Pat Camberlango (S)(W) 72,880 39,370 33,510 *
Burch Cambers/Stacy Cambers (S)(W) 20,184 19,684 500 *
William M. Campbell III (S)(W) 59,055 59,055 0 *
Robert J. Cappelloni (S)(W) 64,104 59,054 5,050 *
William S. Carpenter, Trustee under Trust
dtd 4/20/94 (S)(W) 175,000 21,000 154,000 *
Robert Castellanos (S)(W) 39,370 39,370 0 *
Robert & Maria Castellanos (S)(W) 78,739 78,739 0 *
Abe Chitayat (S)(W) 98,413 98,413 0 *
Anwar Chitayat (S)(W) 157,480 157,480 0 *
Blayne Christensen (S)(W) 80,630 39,370 41,260 *
Gary H. Clunas (S)(W) 19,684 19,684 0 *
Christopher D. Cochrane (S)(W) 19,684 19,684 0 *
Computerized Thermal Imaging, Inc. 401K
Profit Sharing Plan (S) 11,348 11,348 0 *
Susan W. Coon (S)(W) 22,579 19,684 2,895 *
Thor Culverhouse (S)(W) 19,684 19,684 0 *
Lloyd & Susan Cymrot (S)(W) 78,739 78,739 0 *
Cherie S. Darrohn (S)(W) 21,684 19,684 2,000 *
Bruce G. Dayton (S)(W) 27,000 27,000 0 *
Drew C. Dayton/Seleste S. Dayton (S)(W) 86,501 36,501 50,000 *
James E. & Jean Deitz (S)(W) 19,684 19,684 0 *
</TABLE>
-54-
<PAGE>
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S") AND
SHARES UNDERLYING RESALE WARRANTS ("W") AND RESALE OPTIONS ("O")
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Before Amount Owned after
Stockholder Resale (1) Offered (2) Resale Percent (3)
----------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Nilesh & Sonai Desai (S)(W) 65,481 39,370 26,111 *
Determined Productions, Inc. (S)(W) 354,331 354,331 0 *
Clifford Dobson Family Limited Partnership
(S)(W) 39,370 39,370 0 *
Gerald J. Dobson & Kathryn H. Dobson Loving
Trust (S)(W) 25,245 25,245 0 *
Suresh J. Doshi (S)(W) 39,370 39,370 0 *
The Drucker Family Trust (S)(W) 261,999 101,299 160,700 *
Lisa Eccles (S)(W) 19,684 19,684 0 *
EG Investments, LLC (S)(W) 19,684 19,684 0 *
John G. Egbert (S)(W) 39,370 39,370 0 *
IRA FBO Eric D. Emanuel (S)(W) 59,055 59,055 0 *
Enterprise Events Group, Inc. (S)(W) 19,684 19,684 0 *
The Epstein Family Trust (S)(W) 19,684 19,684 0 *
E.S.K. Enterprises, LLC/Jill
Berlinger/Richard Berlinger (S)(W) 19,684 19,684 0 *
Timothy J. & Joy L. Feller (S)(W) 28,834 27,559 1,275 *
Financial Services Group, Inc (S)(W) 2,322,781 2,322,781 0 *
Carla A. Fisher (S)(W) 39,370 39,370 0 *
Hyman Jack Foreman (S)(W) 19,684 19,684 0 *
Ronald D. Foreman (S)(W) 93,739 78,739 15,000 *
Stuart Gary Friedman (S)(W) 29,627 29,527 100 *
Galaxy Global Investments Int'l., LLC (S)(W) 19,684 19,684 0 *
Gardner Growth Fund, LP (S)(W) 19,684 19,684 0 *
David L. Garrett (S)(W) 19,684 19,684 0 *
C. Robert & Patricia M. Gates (S)(W) 19,684 19,684 0 *
Fran Golden (S)(W) 19,684 19,684 0 *
Don Golden (S)(W) 59,055 59,055 0 *
Amanda Golden with Fran & Don Golden as
Custodians under the Uniform Gifts to
Minors Act (S)(W) 19,684 19,684 0 *
Lyndsay Golden with Fran & Don Golden as
Custodians under the Uniform Gifts to
Minors Act (S)(W) 19,684 19,684 0 *
Charles Goodman, Trustee of the C&B Goodman
Rev. Trust (S)(W) 39,370 39,370 0 *
Michael E. Gottlieb 1992 Trust (S)(W) 19,684 19,684 0 *
Michael E. Gottlieb 1992 Trust (S)(W) 19,684 19,684 0 *
Robert M. & Joyce S. Graham (JTWROS) (S)(W) 19,684 19,684 0 *
Jacob Green (S) 14,194 14,194 0 *
Hachma International, S.A. (S)(W) 118,110 118,110 0 *
Michael J. Hardesty, (S)(W) 48,364 39,370 8,994 *
Willard Harpster, Jr. (O) 83,090 79,276 3,814 *
The Harris Family Trust, Neal & SueAnn
Harris, Trustees (S)(W) 59,055 59,055 0 *
George D. Harris/Barbara F. Harris (S)(W) 39,370 39,370 0 *
Todd and/or Mary Jo Harris (S)(W) 40,370 39,370 1,000 *
Andrew M. Heiner (S)(W) 150,000 150,000 0 *
Craig Heiner/Debby Heiner (S)(W) 24,802 24,802 0 *
D. Craig Heiner Profit Sharing Plan (S)(W) 19,684 19,684 0 *
Jeffrey A. Heyser (S)(W) 19,686 19,686 0 *
Ingrid Von Mangoldt Hills (S)(W) 59,055 59,055 0 *
Jerry J. Hudson (S)(W) 54,186 54,186 0 *
Carl L. Humphreys Inc. Profit Sharing Plan,
Carl L. Humphreys, TTEE (S)(W) 20,699 19,684 1,015 *
Ron S. Hurwin/James Russell (S)(W) 19,684 19,684 0 *
</TABLE>
-55-
<PAGE>
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S") AND
SHARES UNDERLYING RESALE WARRANTS ("W") AND RESALE OPTIONS ("O")
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Before Amount Owned after
Stockholder Resale (1) Offered (2) Resale Percent (3)
----------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Ron S. Hurwin, TTEE of Ron & Duffy Hurwin
Rev. Trust (S)(W) 112,134 19,684 92,450 *
H. A. Husain (S)(W) 19,671 19,671 0 *
Informix Corporation (S) 510,204 510,204 0 *
Lawrence L. Jacobs (S) 15,000 15,000 0 *
Amna S. Jamhour (S)(W) 23,250 23,250 0 *
JenDav Investments (S)(W) 39,370 39,370 0 *
Rick L. Jensen (S)(W) 39,370 39,370 0 *
Sterling K. Jenson (S)(W) 83,250 83,250 0 *
Michael Kain (S)(W) 78,739 78,739 0 *
Bonnie L. Kaye (S)(W) 29,631 29,631 0 *
Billie R. and M. Virgina Keeler (S)(W) 24,184 19,684 4,500 *
Steven Keller (S)(W) 74,376 74,376 0 *
Paul Kessler (S)(W) 100,130 98,430 1,700 *
Norman G. Kosco/Barbara L. Kosco (S)(W) 76,555 59,055 17,500 *
Marlo J. & Elma N. Krogue, Trustees of the
Mayo J. Krogue Family Trust (S)(W) 19,684 19,684 0 *
TeKBanC (S)(W) 1,968,504 1,968,504 0 *
Kuwait Real Estate Company (S)(W) 196,851 196,851 0 *
Robert Yin Chin Lee (S)(W) 98,425 98,425 0 *
David W. Lewis (S)(W) 49,370 39,370 10,000 *
Vilma & Ben-Zion Levy (S)(W) 19,684 19,684 0 *
Robert Hsiang Lin Wu (S)(W) 98,425 98,425 0 *
Luxor, L.L.C. (S)(W) 120,750 120,750 0 *
Rick Majerus (S)(W) 19,684 19,684 0 *
Daron C. Dillia dba Manhattan Financial
Group (O)(S) 5,561,178 2,367,903 3,193,275 3.98%
George & Lucero Marcoux (S)(W) 25,791 19,684 6,107 *
Bruce M. & Elaine Mark JT Tenants (S)(W) 19,684 19,684 0 *
David & Carol Marks (S)(W) 27,300 27,300 0 *
Larry and/or Audree Martin (S)(W) 19,684 19,684 0 *
William L. Mazilly (S) 108,510 100,000 8,510 *
MBH Associates FBO Mark B. Hansen (S)(W) 24,384 19,684 4,700 *
Gary N. Miller (S)(W) 142,800 19,500 123,300 *
Larry W. Miller (S)(W) 42,234 19,684 22,550 *
Larry W. & Lindi Miller (S)(W) 19,684 19,684 0 *
Gary N. Miller, D.C. Money Purchase Pension
(Trust) Plan (S)(W) 98,055 98,055 0 *
Mitchell J. & Marilyn Pike (S)(W) 19,684 19,684 0 *
The Joann Mitchell Family Trust (S)(W) 19,684 19,684 0 *
Doris M. Mohan Trust (S)(W) 19,684 19,684 0 *
Todd Morgan (S)(W) 27,559 27,559 0 *
Dee Moses (S)(W) 19,684 19,684 0 *
Stephen Moses (S)(W) 78,739 78,739 0 *
John P. & Tracy M. Murphy, JT Tenants (S) 2,000 2,000 0 *
Nob Hill Capital Partners, LP (S)(W) 59,055 59,055 0 *
Nob Hill Capital Associates, LP (S)(W) 19,684 19,684 0 *
David Novick (S)(W) 21,000 21,000 0 *
Jerry E. Nutt (S)(W) 20,684 19,684 1,000 *
Nuwave Limited (S)(W) 1,023,622 1,023,622 0 *
James O'Brien (S) 36,800 36,800 0 *
Stephen A. Oliver Trust dtd 2/4/93 (S)(W) 19,684 19,684 0 *
Fredrick A. & Karilene B. Pack (S)(W) 19,684 19,684 0 *
</TABLE>
-56-
<PAGE>
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S") AND
SHARES UNDERLYING RESALE WARRANTS ("W") AND RESALE OPTIONS ("O")
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Before Amount Owned after
Stockholder Resale (1) Offered (2) Resale Percent (3)
----------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
David A. Packer or Assignee (O)(4) 693,939 7,143 686,796 *
Barbara Claire Parmeter (S)(W) 19,684 19,684 0 *
PDH, LTD. (S) 537,037 460,861 76,176 *
C. Matthew or Pauline B. Peterson (S)(W) 19,684 19,684 0 *
Glenn B. Pfeffer/Susan J. Friedland (S)(W) 19,684 19,684 0 *
Kenneth R. Phipps/Cherie K.C. Phipps (S)(W) 19,684 19,684 0 *
James D. Pike (O)(W)(5) 281,076 281,076 0 *
Kenneth H. Polk (S)(W) 19,684 19,684 0 *
Gary Post (S) 150,000 150,000 0 *
Mark Preslar (S)(W) 19,800 19,800 0 *
Amirali A. Rajwany (S) 107,625 100,000 7,625 *
Robert M. & JoAnn C. Randolph (S)(W) 75,870 39,370 36,500 *
Norman Ravich (S)(W) 21,000 21,000 0 *
W. Earl Richards (S)(W) 201,555 201,555 0 *
Janet W. Rigby (S)(W) 78,739 78,739 0 *
Alex Saenz (O) 94,669 93,559 1,110 *
Denise Salomon (S)(W) 19,684 19,684 0 *
Sanam Investment Co., Ltd. (S)(W) 19,684 19,684 0 *
Richard V. Secord or Assignee (O)(4) 3,401,000 428,571 2,972,429 3.71%
Steven C. Segal/Rick Trono (S)(W) 101,184 19,684 81,500 *
Carmel Shashua (S)(W) 39,370 39,370 0 *
Ronald J. & Violet A. Shivok (S)(W) 63,055 59,055 4,000 *
Sitrick & Company (W)(S) 101,153 101,153 0 *
Joseph Smyth (S)(W) 123,750 114,750 9,000 *
Peter R. Sobelton (S)(W) 19,684 19,684 0 *
Wayne B. Soldati (S)(W) 19,684 19,684 0 *
Southestern Neuroscience Institute Profit
Sharing Plan for Jacob Green (S) 56,774 56,774 0 *
Southgate Plaza, Inc. (S)(W) 22,500 22,500 0 *
David R. Spangenberg (S)(W) 110,039 78,739 31,300 *
Lowell N. Steele/Deanne D. Steele (S)(W) 19,684 19,684 0 *
David Duane Stewart (S)(W) 39,370 39,370 0 *
Constance Haber Stevenson (S) 32,258 32,258 0 *
James W. Stone/Joan E. Stone (JTWROS) (S)(W) 21,684 19,684 2,000 *
Charles D. Strang, Jr. as Trustee under the
Charles D. Strang, Jr. Trust Agreement dtd
10/29/85 (S)(W) 29,550 29,550 0 *
Sutro & Company (W) 200,000 200,000 0 *
Aubrey A. Swartz (S)(W) 39,920 39,370 550 *
Heather Sweeney (S)(W) 70,866 70,866 0 *
Helge Theiss-Nyland (S)(W) 19,684 19,684 0 *
David E. Thomas (S)(W) 19,684 19,684 0 *
TQ Advisors, LLC (S)(W) 39,370 39,370 0 *
Trans-Union Group, Inc. (S)(W) 19,684 19,684 0 *
Harley A. & Joanne E. Tucker (S)(W) 32,494 19,684 12,810 *
Le Tue (S)(W) 423,228 423,228 0 *
Alan & Glenda Virdinis (S)(W) 21,184 19,684 1,500 *
Virdinis, Inc. Retirement Trust (S)(W) 51,370 39,370 12,000 *
Loi Wang (S)(W) 19,684 19,684 0 *
Ann Wasserman (S)(W) 19,684 19,684 0 *
Harold Werth, Jr. (S) 31,875 31,875 0 *
Peter J. White (S)(W) 39,370 39,370 0 *
Tony D. Wicks (S)(W) 29,527 29,527 0 *
John L. and/or Evangeline H. Wilcox (S)(W) 87,008 71,508 15,500 *
</TABLE>
-57-
<PAGE>
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S") AND
SHARES UNDERLYING RESALE WARRANTS ("W") AND RESALE OPTIONS ("O")
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Before Amount Owned after
Stockholder Resale (1) Offered (2) Resale Percent (3)
----------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Jerry N. Williams (S)(W) 19,684 19,684 0 *
Jeffrey D. Wilson (S) 4,500 4,500 0 *
Margo H. Wilson (S) 4,500 4,500 0
Eugene M. Wolf (S)(W) 98,425 98,425 0 *
Annie Liu Wong/Gary C. Wong (S)(W) 19,684 19,684 0 *
Strauss Zelnick & Wendy Belzberg as
Co-Trustees of the Zelnick/Belzberg Living
Trust dtd 12/17/92 (S)(W) 19,684 19,684 0 *
Linda R. & Todd E. Zenger (S)(W) 39,370 39,370 0 *
Bristol Asset Management (W) 400,000 400,000 0 *
</TABLE>
-------------------
* Less than one percent.
(1) Shares Beneficially Owned Before Resale include shares of the Common Stock
underlying outstanding Resale Warrants ("W") and Resale Options ("O"). 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 May 15, 2000. For purposes of this table, ownership of Resale
Warrants ("W") and Resale Options ("O") is based on the actual number of
shares of the Common Stock underlying the referenced class of securities
owned by such person as of June 15, 2000.
(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") and Resale Options
("O").
(3) Percentage based on the number of shares of the Common Stock outstanding as
of June 15, 2000, without regard to beneficial ownership as may be
calculated under Rule 13d-3 of the Exchange Act.
(4) Denotes that Selling Shareholder is one of our officers and/or directors.
(5) Denotes that Selling Shareholder is one of our employees.
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.
LEGAL PROCEEDINGS
EXECUTIVE EMPLOYMENT AGREEMENT
We filed suit against Kenneth M. Dodd, on February 24, 1999 in the 8th
Judicial District Court, Clark County, Nevada, Case No. A399754, seeking to
enforce confidentiality agreements and certain terms in connection with Mr.
Dodd's employment contract and an unauthorized increase in options to acquire
500,000 shares of our common stock. Mr. Dodd resigned as CEO and President of
CTICO, our subsidiary, in December 1998. Options granted to Mr. Dodd were
granted pursuant to our 1995 Stock Option and Restricted Stock Plan that
provides him 90 days following the termination of his employment with us in
which to exercise any legal options in which he was vested. To date, no attempt
has been made by Mr. Dodd to exercise such options. Accordingly, we believe that
such options, if not relinquished upon termination of his
-58-
<PAGE>
employment with us, lapsed 90 days following his date of termination.
Accordingly, we do not consider such options to be issued and outstanding. We
believe that this suit will not materially prejudice our operations and results
and that we will ultimately prevail.
FINANCIAL ADVISORY SERVICES CLAIM
On March 29, 2000, Mr. Salah Al-Hasawi (the "Plaintiff"), a citizen and
resident of Kuwait, filed suit in the United States District Court for the
Southern District of New York, Docket No. 00CIV.2390, against us and Mr. David
Johnston, our Chairman and Chief Executive Officer, alleging violations of under
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Code
of Federal Regulations for commissions allegedly due to Plaintiff in connection
with our $45 million private placement. The Plaintiff is seeking specified
damages of $33,232,000, attorney fees and unspecified damages pursuant to five
separate causes of action. On April 12, 2000, Mr. Al-Hasawi filed a similar
complaint in the United States District Court for the District of Utah under
Case No. 2:00CV-0317K.
In connection with our private placement, we reached an understanding with
Plaintiff and other individuals to assist in the placement of our common stock
and warrants. The Plaintiff, in concert with two other individuals (the
"Participants"), successfully raised approximately $10.7 million in the
placement. By letter dated February 10, 2000, the Plaintiff informed us that
Plaintiff and Participants had reached an agreement to equally share commissions
attributable to the $10.7 million. Subsequently, we were notified that, during
the time that Plaintiff was engaged to provide services to us, Plaintiff was an
employee and/or agent of Financial Services Group, an investment company doing
business in Kuwait. Notwithstanding, the Plaintiff claims entitlement to 100
percent of the commissions attributable to the $10.7 million. We are awaiting a
resolution of the issues between Plaintiff and Financial Services Group.
We believe that the Plaintiff's claims are without merit and will
vigorously defend ourselves against any and all claims.
BRISTOL ASSET MANAGEMENT
On March 21, 2000, Bristol Asset Management, LLC (the "Plaintiff"), a
California Limited Liability Company, filed a complaint in the Superior Court of
the State of California for the County of Los Angeles, Case No. BC226822,
against the Company alleging breach of contract. The Plaintiff seeks specific
performance pursuant to a certain Investment Agreement dated January 20, 1998
(the "Agreement") between the Plaintiff and us wherein we were entitled (subject
to limitations), to sell up to $7 million worth of our common stock by the
issuance of "Put Notices" to the Plaintiff. The Agreement further provided that,
absent our delivery of Put Notices to the Plaintiff on specified dates and in
specified amounts, we were (subject to limitations) obligated to issue warrants
to Plaintiff equal to the maximum dollar amount of Put Notices which would have
been issued to Plaintiff had such Put Notices been delivered. The Agreement
provides that it may be terminated at any time upon the mutual consent of the
parties.
Pursuant to discussions and correspondence between Plaintiff and us during
late 1998 and early 1999, the Plaintiff advised us that they could not, for
various reasons, act under the Agreement. In consequence thereof, we believe we
mutually agreed to terminate the Agreement.
-59-
<PAGE>
In a separate and unrelated action, Bristol Asset Management, LLC filed a
second complaint against us and Manhattan Financial Group (jointly, the
"Defendants") on March 27, 2000 in the Superior Court of the State of California
for the County of Los Angeles, Case No. BC227158 alleging breach of contract
with respect to a certain Acquisition Agreement dated September 2, 1998 (the
"Agreement") between Plaintiff and Defendants, whereby, the Plaintiff was to
acquire 500,000 shares (subject to adjustment) of our common stock at a
specified price and we were, in turn, to issue warrants to Plaintiff to acquire
150,000 shares (subject to adjustment) of our common stock at a specified
exercise price (jointly, the "Shares"). Pursuant to the Agreement, MFG
covenanted to provide a legal opinion to Plaintiff, in substance, that the
Shares were transferable by Plaintiff on or after November 6, 1998.
The Defendants timely provided the requested legal opinion to Plaintiff in
form and place specified by the Agreement. The Plaintiff subsequently requested
the Defendants to issue a second legal opinion incorporating information
different from what was originally stipulated in the Agreement. The second legal
opinion was provided to Plaintiff on December 14, 1998.
The Plaintiff alleges that the Defendants did not provide the agreed legal
opinion until the later date of December 14, 1998 and as a result of a delay on
the exercise of its warrants, the Plaintiff suffered damages exceeding $6
million. We believe that we fulfilled our legal obligations in accordance with
the Agreement.
Notwithstanding, in order to defray defense costs and time spent in
discovery and litigation, the parties entered into a "no-fault" settlement
agreement on June 16, 2000 whereby we issued warrants, with a two-year term, to
Plaintiff to acquire 400,000 shares of our common stock at a strike price of
$7.25 per share for release of all claims made under the foregoing complaints.
STATE SECURITIES MATTERS
On May 22, 2000, the Alabama Securities Commission, without a hearing,
entered order No. CD-2000-0031 which sets forth that we cease and desist from
further sales of our securities in Alabama. The order reflects that no
commissions can be paid for soliciting except by a registered agent of a
broker-dealer. We have a right to both a formal and an informal hearing before
the order becomes final and on June 16, 2000, we requested an informal hearing.
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. We intend to respond to
this letter in a timely manner.
LEGAL MATTERS
Certain legal matters relating to the issuance and resale of shares hereby
will be passed upon for us by Axelrod, Smith & Kirshbaum.
-60-
<PAGE>
EXPERTS
The Consolidated Financial Statements and schedules for the year ended June
30, 1999 included in this Prospectus and in the Registration Statement to which
this Prospectus relates have been audited by Jones Jensen & Company (now known
as HJ & Associates, LLC), independent certified public accountants, to the
extent and for the periods set forth in their reports appearing elsewhere
herein. The Consolidated Financial Statements and schedules for the year ended
June 30, 1998 included in this Prospectus and in the Registration Statement to
which this Prospectus relates have been audited by Ham, Langston & Brezina,
independent certified public accountants, to the extent and for the periods set
forth in their reports appearing elsewhere herein. All such Statements and
Schedules are included in reliance upon such reports given upon the authority of
said firms as experts in auditing and accounting.
INDEMNIFICATION
Our Articles of Incorporation do not specifically address indemnification
of our 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". Nevada law permits 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 Nevada law, our Bylaws at Article VI
provides that any director or officer 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 us 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 our best interest, (ii) in all other cases, that his conduct was not
opposed to our best interests, 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 us 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 us. Any
indemnification (unless ordered by a court of competent jurisdiction) shall be
made by us 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.
Our Bylaws also provide that reasonable expenses, including court costs and
attorneys' fees, incurred by our officers and directors in connection with a
covered legal action shall be paid by us at reasonable intervals in advance of
the final disposition of such action, upon receipt by us 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 us if it is
ultimately determined that he is not entitled to be indemnified.
-61-
<PAGE>
Our Board of Directors may also authorize us to indemnify our employees or
agents, 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 our directors
and officers. As of the date of this Registration Statement, the Board of
Directors has not extended indemnification rights to persons other than
directors and officers.
Our Bylaws also provide that we have the power and authority to purchase
and maintain insurance or another arrangements on behalf of any director,
officer, employee, or agent of us or any affiliate of the Company on similar
terms.
The foregoing discussion of our Bylaws is not intended to be exhaustive and
is qualified in its entirety by our Bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 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 of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS
Ham, Langston & Brezina, L.L.P., Certified Public Accountants of Houston,
Texas, audited our consolidated balance sheet 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 on June
10, 1987 to June 30, 1998. These financial statements accompanied our Form SB-2
Registration Statement, as amended, filed with the Securities and Exchange
Commission, and declared effective January 8, 1999. The report of Ham, Langston
& Brezina on such financial statements, dated October 26, 1998, did not contain
any adverse opinion or disclaimer of opinion, and with the exception of a "going
concern" qualification because of our dependence on outside sources of financing
for continuation of operations, was not qualified or modified as to uncertainty,
audit scope or accounting principles. Ham, Langston & Brezina was dismissed on
or about August 17, 1999.
Jones, Jensen & Company L.L.C. (now known as HJ & Associates, LLC),
Certified Public Accountants of Salt Lake City, Utah, were engaged by us on
August 17, 1999, pursuant to a recommendation of our Board of Directors, to
audit the financial statements of our fiscal year ended June 30, 1999.
-62-
<PAGE>
There were no disagreements between us and Ham, Langston & Brezina, 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 them to make reference to the subject matter of the
disagreement in connection with their reports.
We have provided Ham, Langston & Brezina with a copy of the disclosure
provided under this caption of this Report, and Ham, Langston & Brezina has
provided us with a letter addressed to the Securities and Exchange Commission
pursuant to Regulation S-B Item 304.
-63-
<PAGE>
FINANCIAL STATEMENTS
The following comprise our audited consolidated financial statements for
years ended June 30, 1999 and 1998 and our unaudited consolidated interim
financial statements for the nine months ended March 31, 2000 and 1999.
C O N T E N T S
<TABLE>
<S> <C>
Independent Auditors' Reports F-2
Independent Accountants' Review Report F-4
Consolidated Balance Sheet as of March 31, 2000 and June 30, 1999 F-5
Consolidated Statement of Operations for the nine months ended March 31,
2000 and 1999; for the years ended June 30, 1999 and 1998 and for the F-6
period from inception on June 10, 1987 to March 31, 2000
Consolidated Statements of Stockholders' Deficit for the nine months ended March
31, 2000; for the years ended June 30, 1999 and 1998 and for the period from
inception on June 10, 1987 to March 31, 2000
F-7
Consolidated Statements of Cash Flows for the nine months ended March 31, 2000
and 1999; for the years ended June 30, 1999 and 1998 and for the period from
inception on June 10, 1987 to March 31, 2000 F-14
Notes to Consolidated Financial Statements
F-17
</TABLE>
F-1
<PAGE>
JONES, JENSEN & COMPANY, LLC
----------------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
Board of Directors
Computerized Thermal Imaging, Inc.
(A Development Stage Company)
Layton, Utah
We have audited the accompanying consolidated balance sheet of Computerized
Thermal Imaging, Inc. (a development stage company) as of June 30, 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Computerized Thermal Imaging, Inc. (a development stage company) as of June 30,
1999, and the consolidated results of their operations and their cash flows for
the year ended June 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements and discussed in Note 8, the Company has incurred
significant recurring losses from operations since inception, has negative
working capital and stockholders' equity (deficit) position at June 30, 1999,
and is dependent on outside sources of financing for continuation of its
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with regard to this matter are
also discussed in Note 8. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Jones, Jensen & Company
Jones, Jensen & Company
Salt Lake City, Utah
October 7, 1999
50 South Main Street Suite 1450
Salt Lake City, Utah 84144
Telephone (801) 328-4408 Facsimile (801) 328-4461
F-2
<PAGE>
Ham, Langston & Brezina, L.L.P.
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Computerized Thermal Imaging, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Computerized Thermal Imaging, Inc. (a
development stage company) for the year ended June 30, 1998 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 on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Computerized Thermal Imaging, Inc. for the year ended June 30, 1998 and for the
period from inception, June 10, 1987, to June 30, 1998 in conformity with
generally accepted accounting principles.
As described in Note 9, 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.
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 11, 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 11. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Ham, Langston & Brezina, LLP
----------------------------------
Ham, Langston & Brezina, L.L.P.
Houston, Texas
October 26, 1998
F-3
<PAGE>
HJ & Associates, L.L.C.
------------------------
Certified Public Accountants and Consultants
American Institute of Certified Public Accountants
Utah Association of Certified Public Accountants
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors
Computerized Thermal Imaging, Inc.
(A Development Stage Company)
Layton, Utah
We have reviewed the accompanying consolidated balance sheet of Computerized
Thermal Imaging, Inc. as of March 31, 2000, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
nine months ended March 31, 2000 and 1999. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our review 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
May 19, 2000
50 South Main Street Suite 1450
Salt Lake City, Utah 84144
Telephone (801) 328-4408 Facsimile (801) 328-4461
F-4
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
March 31, June 30,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 47,287,836 $ 137,162
Prepaid expenses 30,782 --
Software maintenance contract (Note 3) 471,918 --
------------ ------------
Total Current Assets 47,790,536 137,162
------------ ------------
PROPERTY AND EQUIPMENT, NET (Notes 1 and 2) 434,190 238,643
SOFTWARE LICENSES, NET (Notes 1 and 3) 3,627,814 --
GOODWILL 225,500 --
------------ ------------
TOTAL ASSETS $ 52,078,040 $ 375,805
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 229,872 $ 470,870
Commissions payable (Note 4) 2,646,976 --
Accrued employee costs 117,030 --
Accrued liabilities 436,971 64,644
Software license contract payable (Note 3) 2,888,000 --
------------ ------------
Total Current Liabilities 6,318,849 535,514
------------ ------------
BUILDING LEASE PAYABLE 45,793 --
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 5)
Convertible preferred stock, $5.00 par value, 100,000 shares authorized -- --
Common stock, $.001 par value, 100,000,000 shares authorized, 67,709,001
issued and outstanding and 11,735,220 and unissued on March 31, 2000; and
62,275,560 issued and outstanding on June 30, 1999 79,444 62,276
Additional paid in capital 76,682,155 25,486,825
Losses accumulated during the development stage (31,048,201) (25,708,810)
------------ ------------
Total Stockholders' Equity (Deficit) 45,713,398 (159,709)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 52,078,040 $ 375,805
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(UNAUDITED)
From
Inception on
(UNAUDITED) (AUDITED) June 10,
Nine Months Ended For the Years Ended 1987 through
March 31, June 30, March 31,
---------------------------------- ------------------------------- ------------
2000 1999 1999 1998 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income $ 268,833 $ 4,853 $ 6,124 $ 3,307 $ 294,840
Income from sale of prototypes -- -- -- -- 180,815
------------ ------------ ------------ ------------ ------------
Total Revenues 268,833 4,853 6,124 3,307 475,655
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES
Operating, general and
administrative expenses 2,097,676 1,450,770 2,626,562 3,167,690 18,238,677
Research and development costs 3,196,065 1,452,481 1,837,182 2,430,038 10,228,311
Interest expense 576 541,077 568,221 415,101 2,140,909
Depreciation and amortization
expense 251,407 33,962 -- -- 404,716
Litigation settlement 62,500 -- -- -- 576,880
------------ ------------ ------------ ------------ ------------
Total Costs and Expenses 5,608,224 3,478,290 5,031,965 6,012,829 31,589,493
------------ ------------ ------------ ------------ ------------
LOSS BEFORE
EXTRAORDINARY ITEM (5,339,391) (3,473,437) (5,025,841) (6,009,522) (31,113,838)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT -- -- -- 65,637 65,637
------------ ------------ ------------ ------------ ------------
NET LOSS $ (5,339,391) $ (3,473,437) $ (5,025,841) $ (5,943,885) $(31,048,201)
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 65,684,683 50,441,705 57,525,818 41,943,867
============ ============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.08) $ (0.07) $ (0.09) $ (0.14)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional During the
-------------------------- Paid-in Subscription Development
Shares Amount Capital Rec'ble Stage Total
---------- ------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception,
June 10, 1987 -- $ -- $ -- $ -- $ -- $ --
Stock issued for cash to
founders in 1987 at
$0.001 per share 5,000,000 5,000 -- -- -- 5,000
Stock issued for cash in
connection with public
offering in 1988 at
$0.004 per share 5,000,000 5,000 14,562 -- -- 19,562
Stock issued for cash in
connection with a
Regulation D offering in
1989 at $3.13 per share 80,000 80 249,930 -- -- 250,010
Stock issued for services
in 1990 at $0.51 per
share 500,000 500 254,500 -- -- 255,000
Stock issued for cash in
connection with a
Regulation D offering in
1991 at $0.50 per share 180,000 180 89,820 -- -- 90,000
Stock issued for services
in 1991 at $0.50 per
share 3,240,000 3,240 1,616,760 -- -- 1,620,000
Stock issued for services
in 1992 at $0.12 per
share 4,860,000 4,860 578,340 -- -- 583,200
Stock issued for services
in 1993 at $0.06 per
share 1,134,500 1,134 82,726 -- -- 83,860
Stock issued for extension
of debt agreement in
1993 at $0.08 per share 9,000 9 691 -- -- 700
Stock issued in connection
with claims of certain
stockholders in 1993 at
$0.06 per share 1,000 1 59 -- -- 60
Stock issued for cash in
1994 at $0.07 per share 387,000 387 25,613 -- -- 26,000
Stock issued for services
in 1994 at $0.10 per
share 1,485,660 1,486 149,148 -- -- 150,634
Stock issued for extension
of debt agreement in
1994 at $0.07 per share 9,000 9 591 -- -- 600
---------- ------- ---------- ---- ----- ----------
Balance Forward 21,886,160 21,886 3,062,740 -- -- 3,084,626
---------- ------- ---------- ---- ----- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional During the
------------------------- Paid-in Subscription Development
Shares Amount Capital Rec'ble Stage Total
---------- ------ --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 21,886,160 21,886 3,062,740 -- -- 3,084,626
Stock issued in connection
with claims by certain
stockholders in 1994 at
$0.12 per share 51,000 51 5,989 -- -- 6,040
Stock issued for cash in
1995 at $0.60 per share 679,202 680 407,995 -- -- 408,675
Stock issued for services
in 1995 at $0.87 per
share 3,506,461 3,506 3,049,200 -- -- 3,052,706
Stock issued to convert
notes payable in 1996 at
$0.17 per share 702,400 702 117,941 -- -- 118,643
Common stock issued upon
conversion of preferred
shares in 1995 at $1.69
per share 124,600 125 209,875 -- -- 210,000
Stock issued for cash in
connection with a
Regulation D offering in
1996 at $1.00 per share 1,462,600 1,463 1,461,137 -- -- 1,462,600
Stock issued for note
receivable in connection
with a Regulation D offering
in 1996 at $1.00 per share 525,000 525 524,475 (525,000) -- --
Stock issued in satisfaction of
offering costs in connection
with a Regulation D offering
in 1996 at $0.00 per share 53,650 53 (53) -- -- --
Stock issued in connection
with the settlement of a
note payable to an
individual in 1996 at
$0.98 per share 734,942 735 721,345 -- -- 722,080
Stock issued in connection
with the settlement of
claims by certain
stockholders in 1996 at
$0.88 per share 578,000 578 507,702 -- -- 508,280
---------- ---------- ---------- -------- --------- ---------
Balance Forward 30,340,015 10,068,346 (525,000) -- 9,573,650
---------- ---------- ---------- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional During the
------------------------- Paid-in Subscription Development
Shares Amount Capital Rec'ble Stage Total
---------- ------ ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 30,304,015 30,340 10,068,346 (525,000) -- 9,573,650
Common stock issued upon
conversion of preferred
shares in 1996 at $1.70
per share 14,700 14 24,986 -- -- 25,000
Stock issued in repayment
of notes
payable/interest expense
in 1996 at $1.05 per
share 146,590 147 153,060 -- -- 153,207
Stock issued for cash in
1996 at $0.68 per share 1,163,625 1,164 795,306 -- -- 796,470
Stock issued for services
in 1996 at $1.05 per
share 1,277,633 1,278 891,874 -- -- 893,152
Stock issued as a bonus to
investors in connection
with the Company's 1996
Regulation D offering at
$0.00 per share 211,900 212 (212) -- -- --
Conversion of debentures to
common stock at $0.65
per share 98,768 99 64,026 -- -- 64,125
Stock issued for cash at
$0.55 per share 1,833,152 1,833 1,008,376 -- -- 1,010,209
Stock issued for services
at $0.59 per share 687,266 687 404,811 -- -- 405,498
Losses accumulated during
the period from inception,
June 10, 1987 to June 30, 1997 -- -- -- -- (14,739,084) (3,349,614)
---------- ------ ---------- -------- ----------- ----------
Balance, June 30, 1997 35,737,649 35,738 13,410,573 (525,000) (14,739,084) (1,817,773)
Conversion of debentures to
common stock at $0.41
per share 2,403,838 2,404 977,951 -- -- 980,355
---------- ------ ---------- -------- ----------- ----------
Balance Forward 38,141,487 38,142 14,388,524 (525,000) (14,739,084) (837,418)
---------- ------ ---------- -------- ----------- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional During the
------------------------- Paid-in Subscription Development
Shares Amount Capital Rec'ble Stage Total
---------- ------ ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 38,141,487 38,142 14,388,524 (525,000) (14,739,084) (837,418)
Stock issued to convertible
debenture holders for
failure to complete
registration of the
underlying common stock
in a timely manner at
$0.42 per share 197,574 198 82,018 -- -- 82,216
Stock issued for cash at
$0.31 per share 9,476,418 9,476 2,896,760 -- -- 2,906,236
Stock issued for services
at $0.59 per share 521,478 521 305,860 -- -- 306,381
Warrants issued for services -- -- 1,006,000 -- -- 1,006,000
Stock subject to recission
offer (771,200) (771) (306,102) -- -- (306,873)
Net loss accumulated in 1998 -- -- -- -- (5,943,885) (5,943,885)
---------- ------- ---------- -------- ----------- ----------
Balance, June 30, 1998 47,565,757 47,566 18,373,060 (525,000) (20,682,969) (2,787,343)
Reclassification of stock
no longer subject to
recission offer at $0.40
per share 771,200 771 306,102 -- -- 306,873
Stock issued in a private
placement to a director
and a stockholder for
cash at $0.70 per share 285,000 285 199,715 -- -- 200,000
Stock issued for cash with 169,837
shares issued for a placement
fee to a third party at
$0.47 per share 2,133,862 2,134 997,866 -- -- 1,000,000
Stock issued in
satisfaction of cash
advances at $0.47 per
share 460,861 461 217,316 -- -- 217,777
Stock issued in
satisfaction of cash
advances from affiliate
at $0.48 per share 4,403,323 4,403 2,098,558 -- -- 2,102,961
---------- ------- ---------- -------- ----------- ----------
Balance Forward 55,620,003 55,620 22,192,617 (525,000) (20,682,969) 1,040,268
---------- ------- ---------- -------- ----------- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-10
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional Subscrip During the
--------------------- Paid-in -tion Development
Shares Amount Capital Rec'ble Stage Total
---------- -------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 55,620,003 55,620 22,192,617 (525,000) (20,682,969) 1,040,268
Stock issued upon conversion of
warrants at $0.71 per share,
net of placement fee of $2,000 264,166 264 187,936 -- -- 188,200
Stock issued for services at
$0.67 per share 45,800 46 30,640 -- -- 30,686
Stock issued in private placement
at $0.37 per share 2,364,865 2,365 872,635 -- -- 875,000
Stock issued for cash to redeem
two notes totaling $597,500,
accrued discount of $597,500,
accrued interest of $49,638,
for a total of $1,244,638 at
$0.37 per share 2,140,164 2,140 1,242,498 -- -- 1,244,638
Stock issued for cash at $0.55 per
share, net of offering costs
of $87,660 1,669,127 1,669 910,671 -- -- 912,340
Stock issued in satisfaction of
liability at $0.29 per share 171,435 172 49,828 -- -- 50,000
Net loss accumulated in 1999 -- -- -- 525,000 (5,025,841) (4,500,841)
---------- -------- ------------ ---------- ------------ ----------
Balance, June 30, 1999 (AUDITED) 62,275,560 62,276 25,486,825 0 (25,708,810) (159,709)
Stock issued for cash at $0.55 per
share 913,916 914 499,086 -- -- 500,000
Stock issued for cash, net of
offering expenses of $25,000,
at $0.54 per share 933,707 934 474,066 -- -- 475,000
Stock issued for cash, net of
offering expenses of $25,000,
at $0.60 per share 875,657 876 502,583 -- -- 503,459
Stock issued to corporation for
services at $0.94 per share 33,997 34 31,839 -- -- 31,873
---------- -------- ------------ ---------- ------------ ----------
Balance Forward 65,032,837 65,034 26,994,399 0 (25,708,810) 1,350,623
---------- -------- ------------ ---------- ------------ ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-11
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional Subscrip During the
--------------------- Paid-in -tion Development
Shares Amount Capital Rec'ble Stage Total
---------- ------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 65,032,837 65,034 26,994,399 0 (25,708,810) 1,350,623
Stock issued for cash, net
of offering expenses of
$25,000, at $1.25 per
share 400,641 401 474,569 - - 474,970
Warrants exercised for cash
at $0.46 per share 150,000 150 68,850 - - 69,000
Warrants exercised for cash
at $0.72 per share 108,957 109 78,340 - - 78,449
Warrants exercised for cash
at $1.19 per share 254,155 254 302,203 - - 302,457
Stock issued to two
individuals for services
at $1.20 per share 200,000 200 239,800 - - 240,000
Stock issued to individual
for shares of CTICO (a
subsidiary) at $1.20 per
share 15,000 15 17,985 - - 18,000
Stock issued to individual
for shares of CTICO (a
subsidiary) at $1.50 per
share 5,000 5 7,495 - - 7,500
Warrants exercised for cash
at $2.50 per share 656,700 657 1,641,093 - - 1,641,750
Stock issued to individual
for services at $2.80
per share 2,000 2 5,598 - - 5,600
Stock issued to individual
for shares of CTICO (a
subsidiary) at $2.80 per
share 50,000 50 139,950 - - 140,000
Stock issued to corporation
for services at $2.50
per share 18,521 18 46,284 - - 46,302
Warrants exercised for
services at $3.63 per
share 13,885 13 50,319 - - 50,332
Warrants exercised for
services at $3.72 per
share 15,623 16 58,083 - - 58,099
---------- ------- ----------- -------- ------------ -----------
Balance Forward 66,923,319 66,924 30,124,968 0 (25,708,810) 4,483,082
---------- ------- ----------- -------- ------------ -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-12
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Losses
Accumulated
Common Stock Additional Subscrip During the
--------------------- Paid-in -tion Development
Shares Amount Capital Rec'ble Stage Total
---------- ------- --------------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Forward 66,923,319 66,924 30,124,968 0 (25,708,810) 4,483,082
Warrants exercised for cash
at $2.50 per share 600,125 600 1,499,714 - - 1,500,314
Warrants exercised for cash
at $.72 per share 24,209 24 17,406 - - 17,430
Warrants exercised for cash
at $1.50 per share 50,000 50 74,950 - - 75,000
Warrants exercised for cash
at $2.00 per share 100,000 100 199,900 - - 200,000
Stock issued to Company's
401K plan at $3.81 per
share 11,348 11 43,225 - - 43,236
Net loss accumulated for
nine months ended March
31, 2000 - - - - (5,339,391) (5,339,391)
---------- -------- --------------- -------- ------------ -----------
Balance at March 31, 2000,
issued and outstanding
(UNAUDITED) 67,709,001 $67,709 $31,960,163 $ 0 $(31,048,201) $ 979,671
========== ======== =============== ======== ============ ===========
UNISSUED COMMON STOCK
---------------------
Warrants subscribed for
cash at $2.50 per share 76,250 76 190,548 - - 190,624
Stock subscribed to by
Informix Corporation for
cash at $9.80 per share 510,204 510 4,999,490 - - 5,000,000
Stock and warrants
subscribed for
cash, net of
offering expenses
of $2,933,793, at
$3.81 per share and
warrant in
connection with the
private placement 11,148,766 11,149 39,531,954 - - 39,543,103
---------- -------- --------------- -------- ------------ -----------
Balance at March 31, 2000,
unissued, (UNAUDITED) 11,735,220 11,735 44,721,992 - - 44,733,727
========== ======== =============== ======== ============ ===========
Balance at March 31, 2000,
(UNAUDITED) 79,444,221 $79,444 $76,682,155 $ 0 $(31,048,201) $45,713,398
========== ======== =============== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-13
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
From
(UNAUDITED) From Inception
Nine Months Ended (AUDITED) through
March 31, Years Ended June 30, March 31,
----------- ----------- ------------------------- ------------
2000 1999 1999 1998 2000
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(5,339,391) $(3,473,437) $(5,025,841) $(5,943,885) $(31,048,201)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 251,407 33,962 50,393 32,344 404,716
Amortization of debt issuance
costs and discounts on notes
payable - 475,368 597,500 287,051 937,969
Common stock, warrants, and
options issued as
compensation for services 432,206 30,686 555,686 1,311,860 9,343,802
Common stock issued for
interest expense - - - 155,831 423,596
Common stock issued to settle
litigation - - - - 514,380
Common stock issued for
failure to complete timely
registration - - - 82,216 82,216
Common stock issued to 401(k)
plan 43,226 - - - 43,226
Extraordinary gain on
extinguishment of debt - - - (65,637) (65,637)
Changes in operating assets
and liabilities:
Decrease in maintenance
contract (471,918) - - - (471,918)
Increase in receivables and
prepaids (30,782) - - - (30,782)
Decrease in deposits - - 2,204 - -
Increase (decrease) in
accounts payable and
accrued liabilities 5,783,335 62,273 (204,517) (401,535) 6,318,849
----------- ----------- ----------- ----------- ------------
Net Cash Used in Operating
Activities 668,083 (2,871,148) (4,024,575) (4,541,755) (13,547,784)
----------- ----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-14
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
(UNAUDITED)
From
(UNAUDITED) Inception
Nine Months Ended (AUDITED) through
March 31, Years Ended June 30, March 31,
----------- ----------- ------------------------- ------------
2000 1999 1999 1998 2000
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of assets - - 4,790 - 4,790
Capital expenditures (236,768) (11,575) (144,569) (66,066) (633,510)
Purchase of software license (3,838,000) - - - (3,838,000)
Acquisition of goodwill (225,500) - - - (225,500)
----------- ----------- ----------- ----------- ------------
Net Cash Used in Investing
Activities (4,300,268) (11,575) (139,779) (66,066) (4,692,220)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Common stock and warrants
issued for cash 53,745,859 2,263,200 3,175,540 2,906,236 63,771,161
Stock offering costs (3,008,793) - - - (3,008,793)
Advances from stockholders - 659,686 904,164 1,416,574 2,320,738
Proceeds from borrowings and
accrued interest 45,793 462,525 292,971 409,292 3,258,925
Legal fees and interest added
to note - 189,521 258,146 238,453 496,599
Payment of debt issuance costs - - - - (133,600)
Retirement of notes and
debentures - (450,000) (559,369) (326,522) (1,177,190)
----------- ----------- ----------- ----------- ------------
Net Cash Provided by Financing
Activities 50,782,859 3,124,932 4,071,452 4,644,033 65,527,840
----------- ----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 47,150,674 242,209 (92,902) 36,212 47,287,836
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 137,162 230,064 230,064 193,852 -
----------- ----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $47,287,836 $ 472,273 $ 137,162 $ 230,064 $ 47,287,836
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-15
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
(UNAUDITED)
From
(UNAUDITED) Inception
Nine Months Ended (AUDITED) through March
March 31, Years Ended June 30, March 31,
----------- ----------- ------------------------- ------------
2000 1999 1999 1998 2000
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest expense $ - $ - $ - $ 3,477 $ 8,770
Income taxes - - - - -
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING
ACTIVITIES
Common stock issued to
individuals to acquire goodwill $ 225,500 $ - $ - $ - $ 225,500
Common stock issued for advances
from shareholders - - 2,320,738 - 2,320,738
Common stock issued for notes
payable, accrued discount &
interest - - 1,244,638 980,355 2,224,953
Common stock issued for
convertible subordinated
debentures - - - 640,660 640,660
Common stock returned to equity,
recission offer declined - - 306,873 (306,873) -
Common stock issued for
liabilities - - 50,000 - 50,000
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-16
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Computerized Thermal Imaging, Inc. (the "Company") is a Nevada Corporation,
involved in the development of a thermal imaging system for applications in the
health care industry. The Company's system is based upon computer interpretation
of thermal photography using proprietary software developed by the Company. The
Company was originally incorporated as Business Helpers, Inc. on June 10, 1987
and subsequently adopted name changes to DTI Dorex, Ltd. and, finally, to
Computerized Thermal Imaging, Inc. The Company is considered a development stage
enterprise because it has not yet generated significant revenues from sale of
its products. Since its inception, the Company has devoted substantially all of
its efforts in three areas: 1) the development and improvement of systems 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.
Unaudited Financial Statements
------------------------------
Included in the accompanying consolidated financial statements are the Company's
interim consolidated balance sheets as of March 31, 2000 and related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the nine-month periods ended March 31, 2000 and 1999. These condensed,
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to Regulation S-B. 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 nine months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ended June
30, 2000.
Following is a summary of the Company's significant accounting policies:
a. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiary, Computerized Thermal Imaging Company ("CTICO"),
formerly known as Thermal Medical Imaging, Inc. All significant intercompany
transactions and accounts have been eliminated in consolidation.
b. Significant Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
F-17
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
c. Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with an original
maturity of three months or less when purchased to be cash equivalents.
d. Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets, which range
from 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.
e. Software Licenses
Software licenses are recorded at cost. Amortization is provided on the
straight-line method over the estimated useful lives of the licenses, which is
three years. The cost and related accumulated amortization of licenses sold or
otherwise disposed of are removed from the accounts, and any gain or loss is
included in operations.
f. 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 therefrom.
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.
F-18
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
g. Research and Development Expenses
Research and development costs are expensed as incurred. These costs consist of
direct and indirect costs associated with the development of the Company's
software and hardware associated with its thermal imaging systems.
h. 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".
i. Basic Loss Per Share
Basic loss per share is computed on the basis of the weighted average number of
shares of common stock outstanding during each period. Common equivalent shares
from common stock options and warrants are excluded from the computation as
their effect would dilute the loss per share for all periods presented.
j. Reclassification
Certain amounts for the nine months ended March 31, 2000 and 1999, and the year
ended June 30, 1998, have been reclassified to conform with the presentation
used at June 30, 1999. The reclassifications have no effect on net income for
the nine months ended March 31, 2000 and 1999, or the year ended June 30, 1998.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2000 and June 30, 1999 consists of the
following:
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
March 31, June 20
2000 1999 Life
----------- ---------- ---------
<S> <C> <C> <C>
Office furniture, fixtures and equipment $ 616,381 $ 379,613 5-7 years
Less accumulated depreciation (182,191) (140,970)
----------- ----------
Net property and equipment $ 434,190 $ 238,643
=========== ==========
</TABLE>
Depreciation expense during the nine months ended March 31, 2000 and 1999 was
$41,221 and $33,962, respectively. Depreciation expense during the years ended
June 30, 1999 and 1998 was $50,393 and $32,344, respectively.
F-19
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 3 - SOFTWARE MAINTENANCE CONTRACT/SOFTWARE LICENSES
On December 22, 1999, the Company acquired various software licenses and a
12-month software maintenance contract from Informix Software, Inc. The
Company's agreement with Informix provides for a total purchase price of
$4,488,000 for the software licenses and maintenance contract to be paid in
installments as follows:
<TABLE>
<S> <C>
January 15, 2000 $1,600,000
June 15, 2000 1,925,000
December 15, 2000 963,000
----------
Total installments 4,488,000
Less installment payments (1,600,000)
----------
Software license contract
payable at March 31, 2000 $2,888,000
==========
</TABLE>
The amount of the purchase price attributable to the software maintenance
agreement was $650,000. The maintenance agreement is effective December 22, 1999
and expires on December 21, 2000. As of March 31, 2000, the Company has recorded
a current asset of $471,918 relating to the unexpired element of the maintenance
agreement.
Software licenses at March 31, 2000 consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
March 31,
2000 Life
-------------- -------
<S> <C> <C>
Software licenses $ 3,838,000 3 years
Less accumulated amortization (210,186)
--------------
Net software licenses $ 3,627,814
==============
</TABLE>
Amortization expense during the nine months ended March 31, 2000 was $210,186.
NOTE 4 - COMMISSIONS PAYABLE
On March 31, 2000, the Company concluded a private placement (the
"Offering") of its securities pursuant to Regulation D, Rule 506, of the
Securities Act of 1933. In connection therewith, the Company raised, net of
offering costs, approximately $39,543,103. In connection with the Offering, the
Company entered into commission agreements with various individuals and entities
(jointly referred hereinto as "Advisors") to assist with the Offering. Such
agreements stipulate that the Company will compensate Advisors cash
consideration equal to seven percent of the final gross proceeds derived by the
Advisors in connection with the Offering, plus additional consideration in the
form of common stock options of the Company, the number of which will be equal
to ten percent of the final gross proceeds derived by the Advisors in connection
with the Offering divided by the closing price of the Company's common shares on
February 29, 2000 as quoted
F-20
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 4 - COMMMISSIONS PAYABLE (CONTINUED)
on the OTC Bulletin Board of the NASD. Options granted pursuant to the
agreements are exercisable at any time during the three-year period from
February 29, 2000 through February 28, 2003 at a strike price of $1.70 per
share. Based on the foregoing, cash commissions of approximately $2.9 million
and options to acquire approximately 419,000 shares of the Company's common
stock will be paid or granted to the Advisors in April 2000. As of March 31,
2000, $233,000 has been paid to the Advisors. At March 31, 2000, the balance of
the cash commissions owed to the Advisers was $2,646,976.
NOTE 5 - STOCKHOLDERS' EQUITY
Preferred Shares
The Company has one class of preferred shares authorized pursuant to an
amendment to its Articles of Incorporation in April of 1992 with the power to
designate the rights and preferences of the Preferred Shares or any class or
series within the preferred shares vested in Board of Directors. The Board of
Director has the authority without further stockholder action, to issue up to
3,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
and the number of shares constituting any series or designation of such series.
The Company has no preferred shares outstanding as of its fiscal year ended June
30, 1999 and interim period ended March 31, 2000.
Subscription Receivable
The Company treated as compensation the subscription note receivable in the
amount of $525,000 to Manhattan Financial Group ("MFG") in the fiscal year end
June 30, 1999. The subscription receivable had originally been issued in
exchange for a note from MFG in the amount of $525,000 for 525,000 shares of the
Company's common stock sold during the year ended June 30, 1996.
Unissued Common Stock and Warrants
During March 2000, the Company concluded a private placement for principal
amount of $45 million. Proceeds from the $45 million placement, net of costs of
$2,933,793, totaled $39,543,103. In connection therewith, 11,148,766 shares of
the Company's common stock and 11,148,766 warrants were subscribed at an agreed
price of $2.81 per share and $1.00 per warrant. Warrants subscribed to are
convertible into common shares of the Company at a rate of 50 percent of the
initial number of shares purchased at $5.00 per share (subject to specified
anti-dilution provisions) and terminate on the fifth year following the close of
the placement. Common stock shares and warrants of the Company subscribed to in
the placements are restricted and cannot be resold without registration under
applicable federal and state laws. As of March 31, 2000, the common stock shares
and warrants subscribed were not
F-21
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
issued. The Company's Board of Directors approved issuance of 11,148,766 shares
of the Company's common stock, and an equal number of warrants, to Subscribers
at a Special Meeting held in April 2000. The common stock and warrants were
issued shortly thereafter.
On March 30, 2000, the Company signed an agreement with Informix Software,
Inc. ("Informix"), providing for the sale of $5,000,000 of the Company's
common stock at a purchase price per share equal to 80 percent of the closing
bid price per share, as quoted on the OTC Bulletin Board of the NASD, on the
day previous to execution of the agreement. In connection therewith, Informix
subscribed to 510,204 shares of the Company's common stock. The shares were
issued in reliance upon the exemption available under Section 4(2) of the
Securities Act of 1933, as amended, as a "transaction not involving a public
offering." Gross proceeds from shares subscribed were received by the Company
on March 31, 2000. Common stock shares of the Company subscribed to by
Informix are restricted and cannot be resold without registration under
applicable federal and state laws. The Company's Board of Directors approved
issuance of 510,204 shares of the Company's common stock to Informix at a
Special Meeting held in April 2000. The common stock was issued shortly
thereafter.
Prior to March 31, 2000, various individuals exercised warrants subscribing to
76,250 shares of the Company's common stock at an exercise price of $2.50 per
share. The Company's Board of Directors approved issuance of 76,250 shares of
the Company's common stock to applicable warrant holders at a Special Meeting
held in April 2000. The common stock was issued shortly thereafter.
Common Stock Subject to Recission Offers
During 1998, the Company issued a total of 8,876,418 shares of common stock
to the Affiliates (See Note 6) 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
F-22
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
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 were reclassified as no
longer subject to recission at June 30, 1999.
NOTE 6 - INCOME TAX
The composition of deferred tax assets and the related tax effects at
March 31, 2000 and June 30, 1999 are as follows:
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
March 31, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Benefit from carryforward of net
operating losses $ 7,115,000 $ 5,300,000
Less valuation allowance (7,115,000) (5,300,000)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
The difference between the income tax benefit in the accompanying statements 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:
F-23
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 6 - INCOME TAX (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
March 31, June 30,
----------------------------------------- --------------------------------------------
2000 1999 1999 1998
------------------ ------------------ ------------------- ------------------
% of % of % of % of
Pre-Tax Pre-Tax Pre-Tax Pre-Tax
Amount Loss Amount Loss Amount Loss Amount Loss
---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Benefit for income
tax at federal
statutory rate $1,815,000 34.0% $1,181,000 34.0% $1,500,000 34.0% $2,021,000 34.0%
Non-deductible
expenses - 0% - 0% (25,000) (1.7%) (446,000) (7.5%)
Increase in
valuation
allowance (1,815,000) (34.0%) (1,181,000) (34.0%) (1,475,000) (32.3%) (1,575,000) (26.5%)
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total $ - 0% $ - 0% $ - 0% $ - 0%
========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
The non-deductible expenses shown above related primarily to the issuance of
common stock for services using different valuation methods for financial and
tax reporting purposes.
At June 30, 1999, for federal income tax and alternative minimum tax reporting
purposes, the Company has approximately $14.6 million of unused net operating
losses available for carryforward to future years. The benefit from carryforward
of such net operating losses will expire in various years between 2002 and 2014
and could be subject to severe limitations if significant ownership changes
occur in the Company.
NOTE 7. STOCK WARRANTS AND OPTIONS
Warrants
During the nine months ended March 31, 2000, warrants were exercised for the
purchase of 1,719,499 common stock shares of the Company for proceeds of
$3,690,374. Subsequent to the period ended, an additional 76,250 shares were
issued for $190,624 pursuant to the exercise of warrants occurring prior the
period ended. The warrants were exercised at prices ranging from $0.46 to $3.72
per common share. Furthermore, in connection with the Company's private
placement of 11,658,970 shares of common stock during the quarter ended March
31, 1999, the Company issued 11,658,970 warrants entitling holders thereof, for
a period of five years, to purchase 5,574,450 shares of the Company's common
stock at $5 per share. Although subscribed to, these warrants were not issued
until April 2000.
During 1999, as an inducement to exercise certain warrants (the underlying
shares of which were registered in the Company's Prospectus) the Company
F-24
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 7 - STOCK WARRANTS AND OPTIONS (CONTINUED)
issued an aggregate of 264,166 warrants to three parties. The parties were
the beneficial owners of certain of those warrants discussed in the Company's
Prospectus and in the record name of Ambient Capital. The Company received
$188,200 net of a $2,000 fee, from the exercise of the warrants, and issued
264,166 common shares in connection with the exercise. The same number of new
warrants were issued to the three parties in denominations of 104,066
warrants, 150,000 warrants and 10,000 warrants. Each warrant is convertible
into one common share of the Company's common stock at an exercise price of
$1.19 per share and must be exercised on or before February 1, 2002.
During the year ended June 30, 1998, the Company, in order to attract additional
investment, revised the terms and increased the number of shares covered by
warrants issued in connection with a 1996 Regulation D offering of the Company's
common stock. The revised warrants include a 50 percent increase in shares (from
2,199,500 to 3,299,250), a reduction in the exercise price (from $5.00 to $2.50
per share) and an extension of the expiration date to December 31, 1999. In
December 1999, the expiration date was further extended to December 31, 2000.
During the year ended June 30, 1998, the Company also issued 83,333 shares of
its common stock and issued warrants for an additional 416,655 shares at $0.72
per share to a consulting firm that provides public relations and certain other
advisory services. In connection with this transaction, the Company recognized
consulting expense of approximately $200,000.
A summary of warrant activity for the period from July, 1 1997 through March 31,
2000 is as follow:
<TABLE>
<CAPTION>
Number of
Shares Exercise Price
---------- -----------------
<S> <C> <C>
Balance at June 30, 1997 2,349,500 $1.50 - $5.00
Warrants issued in connection with
a consulting agreement 416,665 $ 0.72
Warrants reissued to participants
in 1996 Regulation D offering 3,299,250 $ 2.50
Warrants canceled for reissuance (2,199,500) $ 5.00
------------
Balance at June 30, 1998 3,865,515 $0.72 - $2.50
Warrants exercised ( 264,166) $ 0.72
New warrants issued to three parties 264,166 $ 1.19
------------
Balance at June 30, 1999 3,865,515 $0.46 - $3.72
Warrants exercised (1,756,784) $0.46 - $3.72
New warrants subscribed 5,574,316 $ 5.00
------------
Balance at March 31, 2000 7,683,047 $0.72 - $5.00
============
</TABLE>
F-25
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 7 - STOCK WARRANTS AND OPTIONS (CONTINUED)
Options
Periodically the Company issues incentive stock options to employees, officers
and directors as well as outside consultants to promote the success of the
Company and enhance its ability to attract and retain the services of qualified
persons. The issuance of such options are approved by the Board of Directors.
Options are usually granted under the Company's 1997 Stock Option and Restricted
Stock Plan (the "Plan").
On May 24, 1999, the Company granted an option to purchase 100,000 shares of the
Company's common stock to one non-executive employee under its Plan. The options
vest at one-third each, starting from the first, anniversary date of employee at
an exercise price of $0.76 per share and will expire five years from the grant
date.
The Company considers two options grants forfeited: one to a consultant for
275,000 shares due to termination of the consulting agreement in November of
1998, and an option to purchase 500,000 commons shares granted to one executive
of the Company which were forfeited upon termination of his employment contract.
The Company has granted the following stock options during the period July 1,
1996 through June 30, 1999. No options were granted during the nine months ended
March 31, 2000:
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------
Employee Non-Employee Total Exercise Price
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Options outstanding, July 1, 1996 2,500,000 - 2,500,000 $ 1.25
Options granted 500,000 - 500,000 $ 0.97
------------ ------------ ------------
Options outstanding, July 1, 1997 3,000,000 - 3,000,000 $0.97 - 1.25
Options granted 2,250,000 2,275,000 4,525,000 $0.60 - 0.75
------------ ------------ ------------
Options outstanding, July 1, 1998 5,250,000 2,275,000 7,525,000 $0.60 - 1.25
Options granted 100,000 - 100,000 $ 0.76
Options forfeited during 1999 (500,000) (275,000) (775,000) $0.75 - 1.25
------------ ------------ ------------
Balance at June 30, 1999 and
March 31, 2000 4,850,000 2,000,000 6,850,000 $0.60 - 1.25
============ ============ ============
</TABLE>
Following is a summary of outstanding options at March 31, 2000:
<TABLE>
<CAPTION>
Number of Shares Vested Expiration Date Exercise Price
-------------------- ---------- --------------- --------------
<S> <C> <C> <C>
1,250,000 937,500 August, 2001 $ 0.70
500,000 333,333 April, 2002 $ 0.97
1,000,000 750,000 September, 2002 $ 0.75
2,000,000 2,000,000 November, 2002 $ 0.60
2,000,000 2,000,000 June, 2005 $ 1.25
100,000 0 May 24, 2004 $ .76
------------------- ---------
6,850,000 6,020,833
=================== =========
</TABLE>
F-26
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 7 - STOCK WARRANTS AND OPTIONS (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation', requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options is
greater than or equals the market price of the underlying stock on the date of
grant, no compensation expense has been recognized.
Proforma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using Black-Scholes
option pricing model with the following weighted-average assumptions for 1999
and 1998: risk-free interest rate of 4.5%; no dividend yield; weighted average
volatility factor of the expected market price of the Company's common stock of
0.70 and a weighted-average expected life of the options of 3 years.
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>
(Unaudited) (Audited)
Nine Months Ended Year Ended
March 31, June 30,
--------------------------- ---------------------------
2000 1999 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss available to common
stockholders $(5,339,391) $(3,473,437) $(4,500,841) $(5,943,885)
Proforma net loss available to
common stockholders $(5,339,391) $(3,473,437) $(4,538,841) $(6,967,195)
Proforma basic and dilutive
loss per share $ (0.08) $ (0.07) $ (0.08) $ (0.17)
</TABLE>
F-27
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 8. 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
our in exchange for shares of The Company's common stock. However, in certain
instances in years prior to 1996, one such Affiliate deposited directly to its
account, cash collected on behalf of the Company. Such cash was raised through
issuance of notes payable and common stock of the Company for which a complete
accounting for the proceeds was not made by the Affiliate. In this circumstance
the difference has been charged to compensation expense and reflected as
operating, general and administrative expenses in the accompanying financial
statements. Following is an analysis of transactions involving the Affiliates
during the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Affiliate 1 Affiliate 2 Affiliate 3
------------------------- ------------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended June 30, 1999
---------------------
Balance of debt and cash
advances at June 30, 1998 - $1,192,854 - $ 223,720 - $ 354,167
Funding included in notes
payable - - - - - 347,750
Non-interest bearing
advances to fund current
operations,
uncollateralized - 1,080,582 - 122,094 2,140,164 (1,244,638)
Payments via stock and
cash, cash of $62,300 4,514,507 (2,273,436) 440,851 (345,814) - -
Interest accrued and
accretion of discount on
notes - - - - - 542,721
---------- ---------- ---------- ---------- ---------- ----------
Total balance of debt and
cash advances at June
30, 1999 4,514,507 $ - 440,861 $ - 2,140,164 $ -
========== ========== ========== ========== ========== ==========
</TABLE>
F-28
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 8. RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
Affiliate 1 Affiliate 2 Affiliate 3
----------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30, 1998
---------------------
Warrants issued as
compensation - $ - - $ - - $ 740,000
Shares of common stock
issued as compensation
at $0.76 per share - - - - 100,000 76,000
Cash investment 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 included in notes
payable - $ - - $ - - $ 354,167
Non-interest bearing
advances to fund current
operations,
uncollateralized - 1,192,854 - 223,720 - -
--------- ---------- ------- ---------- ---------- ----------
Total debt to
Affiliates - 1998
- $1,192,854 - $ 223,720 - $ 354,167
========= ========== ======= ========== ========== ==========
Interest expense recognized
on note - $ - - $ - - $ 104,167
--------- ---------- ------- ---------- ---------- ----------
Total interest to
Affiliates - 1998 - $ - - $ - - $ 104,167
========= ========== ======= ========== ========== ==========
</TABLE>
The Company has been involved in certain stockholder disputes concerning its
technology and has generally been successful in settling such disputes primarily
through issuances of common stock. Affiliate 1 has agreed to indemnify the
Company should additional stockholder disputes regarding the Company's
technology arise.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Litigation
At March 31, 2000 and June 30, 1999, the Company was not involved in any pending
or threatened legal dispute that the Company believes would have a material
adverse impact on the Company's financial statements.
F-29
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingencies
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.
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.
Operating Leases
As of June 30, 1999, the Company had two existing lease agreements for office
space which is accounted for as an operating leases. One of the leases expired
in August of 1999 and the Company continued to occupy the space on a
month-to-month basis at a monthly rental fee $1750 per month. The Company
entered into a new lease on the premises prior to the quarter ended December 31,
1999. At June 30, 1999, the future minimum payments required under the
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended
June 30, Portland, OR Layton, UT
---------- ------------- ------------
<S> <C> <C>
2000 $ 3,500 $ 37,119
2001 38,604
2002 40,148
2003 17,001
------------- ------------
Total 3,500 $ 132,872
============= ============
</TABLE>
F-30
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 10 - MATERIAL SUBSEQUENT EVENT, BALES ACQUISITION
On April 4, 2000, the Company signed a Memorandum of Agreement to acquire up to
100 percent of the outstanding common stock of Bales Scientific, Inc. ("Bales"),
a leading supplier of high-speed, high-resolution thermal imaging equipment, for
a total purchase price of $11.1 million. The deal was closed on April 18, 2000
wherein the Company acquired 100% of Bales including inventory, equipment, order
backlog and all intellectual property and rights. Pursuant to the deal, the
total purchase price of $11.1 million comprised a $500,000 nonrefundable
commitment fee, $5.1 million cash, and $5.5 million of the Company's common
stock as determined from the listed bid price on the last business day prior to
closing, or 709,677 shares at a price of $7.75 per share. The purchase price is
subject to a working capital adjustment to be determined within 30 days of
closing. Cashed needed to consummate the deal was provided by funds derived from
the Company's recently concluded private placements.
In connection with the deal, Maurice Bales, previous majority-shareholder of
Bales and noted authority in thermal imaging technology, entered into a
three-year employment contract with the Company as the Company's senior officer
in charge of scientific development. In addition to his normal compensation, Mr.
Bales will be granted options to acquire 100,000 shares of the Company's common
stock during each year of his employment at a purchase price equal to the listed
bid price of such shares on the business day immediately preceding the granting
of such options. The first 100,000 options were granted upon closing the deal
and each additional 100,000 options will be granted upon each subsequent
anniversary date of his employment. In connection with the Employment Agreement,
the Company is required to pay Mr. Bales royalties of $250 upon the sales of
some of its specified products. The Company believes that this royalty burden
will not exceed 4 percent for any specific sale and could be less. In connection
with the acquisition, the Company also entered into a three-year office lease
agreement with Mr. Bales that provides for monthly lease payments to him,
subject to annual cost-of-living adjustments, of $7,500.
Due to the fact that Bales was closely-held, audited and proforma financial
statements are not yet available for presentation herein.
NOTE 11 - GOING CONCERN
Since its inception as a development stage enterprise, the Company has not
generated significant revenue and has been dependent on debt and equity raised
from individual investors to sustain its operations. The Company has conserved
cash by issuing its common stock to satisfy obligations, to compensate
individuals and vendors and to settle disputes that have arisen. However, during
the years ended June 30, 1999 and 1998, the Company incurred net losses of
$5,025,841 and $5,943,885 respectively, and negative cash flows from operations
of $(4,024,575) and $(4,541,755), respectively. These factors, along with a
$(398,352) negative working capital position at June 30, 1999, raised
substantial doubt about the Company's ability to continue as a going concern.
F-31
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999 and 1998
NOTE 11 - GOING CONCERN (CONTINUED)
During the nine months ended March 31, 2000, the Company took specific steps to
address its financial situation. First, the Company completed two private
placements of its common stock and warrants raising net proceeds of
approximately $44.5 million. Second, the Company elected to participate in its
financing arrangement with Beach Boulevard, LLC under which 3,123,921 shares of
the Company's common stock were sold for net proceeds of approximately $2.0
million. The Company also received approximately $4.0 million from the exercise
of warrants. In total, the Company raised approximately $51.2 million, net of
placement costs, during the nine months ended March 31, 2000.
Furthermore, at March 31, 2000, there are approximately 14.53 million shares
underlying the Company's outstanding options and warrants that can be purchased
upon conversion at exercise prices ranging from $.60 to $5.00. Additional net
proceeds of approximately $38.9 million are available to the Company upon the
exercise of these securities.
Based on the foregoing, the Company believes that it has adequate liquid
resources to meet its obligations and business plan for the foreseeable future.
In the long-term, the Company believes that cash flows from commercialization of
its thermal imaging systems will provide the resources for continued operations.
However, there can be no assurance 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:
* The Company's ability to obtain adequate sources of debt or equity funding
to meet commitments and fund the commercialization of its thermal imaging
systems.
* The Company's ability to obtain positive test results of its thermal
imaging systems in clinical trials currently in progress.
* The Company's ability to ultimately achieve adequate profitability and cash
flows to sustain its operations.
F-32
<PAGE>
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
Our Articles of Incorporation do not specifically address
indemnification of our 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 Section 78.751 of the Nevada
Revised Statutes, Article VI of our Bylaws, included in Exhibit 3.2 hereto and
incorporated herein by reference, provides, in general, that any director or
officer 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 our 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 our best interest,
(ii) in all other cases, that his conduct was not opposed to our best interests,
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 us 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 us. Any indemnification (unless ordered by a court of competent
jurisdiction) shall be made by us 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.
Our Bylaws also provide that reasonable expenses, including court costs
and attorneys' fees, incurred by our officers and directors in connection with a
covered legal action shall be paid by us at reasonable intervals in advance of
the final disposition of such action, upon receipt by us 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 us if it is
ultimately determined that he is not entitled to be indemnified.
Our Board of Directors may also authorize us to indemnify our employees
or agents, 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 our directors
and officers. As of the date of this Registration Statement, the Board of
Directors has not extended indemnification rights to persons other than
directors and officers.
II-1
<PAGE>
Our Bylaws also provide that we have the power and authority to
purchase and maintain insurance or another arrangements on behalf of any
director, officer, employee, or agent of our or any affiliate of the Company on
similar terms as those described in Section 78.752 of the Nevada Revised
Statutes. Our Articles of Incorporation relieve our 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.
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.............. $ 58,756 *
Printing and Engraving Expenses... $ 5,000 *
Legal Fees and Expenses........... $ 45,000 *
Accounting Fees and Expenses...... $ 5,000 *
Blue Sky Fees and Expenses........ $ 5,000 *
Transfer Agent Fees............... 500 *
Miscellaneous..................... 1,000 *
---------
Total........................... $120,256 *
=========
* Estimated.
</TABLE>
Item 26. Recent Sales of Unregistered Securities
During the past three years, the following transactions were effected
by us in reliance upon exemptions from registration under the Securities Act of
1933 as amended (the "Act"). Unless stated otherwise, we believe that:
1. Each of the persons who received these unregistered securities had
knowledge and experience in financial and business matters which allowed
them to evaluate the merits and risk of the receipt of these securities,
and that they were knowledgeable about our operations and financial
condition.
2. Unless otherwise indicated, no underwriter participated in, nor did we pay
any commissions or fees to any underwriter in connection with the
transactions.
3. These transactions did not involve any public offerings.
4. Each certificate issued for these unregistered securities contained a
Legend stating that the securities have not been registered under the Act
and setting forth the restrictions on the transferability and the sale of
the securities.
In April 1997, we issued our 12% Series A Senior Subordinated
Convertible Redeemable Debentures (aggregate face value of $662,500), through
Select Capital Advisors, Inc., to various investors for a cash contribution of
$530,000. This transaction was a private placement made in reliance on Section
4(2) of the Act.
II-2
<PAGE>
From April through June 1997, we issued warrants covering 3,299,250
shares of the Common Stock to warrant holders who were subscribers to the
Private Placement Memorandum dated November 13, 1995. The Warrants were issued
as a settlement with subscribers in the private placement concerning our
obligation to register the shares of the Common Stock in the private placement.
The terms of the settlement provided that subscribers would turn in the warrants
held for new warrants entitling the holder to purchase 1.5 times the number of
original shares of Common Stock at $2.50 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
In July 1997, we issued 50,000 shares of the Common Stock to an
individual for services valued at $50,000. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In July 1997, we issued 500,000 shares of the Common Stock to Manhattan
Financial Group for contributions of $150,000. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In July 1997, we issued 322,545 shares of the Common Stock to Cameron
Capital, Ltd. in connection with the conversion of $150,000 of our 6%
Convertible Debentures. The shares of the Common Stock issued in exchange for
the securities surrendered are exempt from registration pursuant to Section
3(a)(9) of the Act.
In July 1997, we issued 138,000 shares of the Common Stock to an
individual for services valued at $42,780. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In July 1997, we issued 740,656 shares of the Common Stock to Thermal
Imaging, Inc. for cash contributions of $339,000. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In September 1997, we issued 666,666 shares of the Common Stock to PDH,
Ltd. for a cash contribution of $250,000. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In September 1997, we issued 941,176 shares of the Common Stock to
Thermal Imaging, Inc. for a cash contribution of $320,000. This transaction was
a private placement made in reliance on Section 4(2) of the Act.
In November 1997, we issued 551,429 shares of the Common Stock to
Thermal Imaging, Inc. for a cash contribution of $193,000. This transaction was
a private placement made in reliance on Section 4(2) of the Act.
In November 1997, we issued 478,894 shares of the Common Stock to
Cameron Capital, Ltd. in connection with the conversion of $200,000 of our 6%
Convertible Debentures. The shares of the Common Stock issued in exchange for
the securities surrendered were exempt from registration pursuant to Section
3(a)(9) of the Act.
During October and November 1997, we issued 83,333 shares of the Common
Stock to Ambient Capital Group, Inc. for services valued at $29,167. In
addition, we issued 83,333 warrants to Ambient Capital Group, Inc., at an
exercise price of $0.72 per share. This transaction was a private placement made
in reliance on Section 4(2) of the Act.
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<PAGE>
In January 1998, we issued 100,000 shares of the Common Stock to
Manhattan Financial Group for services valued at $30,000. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
In January and February 1998, we issued 3,230,216 shares of the Common
Stock to Thermal Imaging, Inc. for cash contributions of $975,130. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
In January 1998, we issued 102,752 shares of the Common Stock to two
individuals for legal services valued at $64,220. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
During January and February 1998, we issued 603,489 shares of the
Common Stock to Cameron Capital, Ltd. in connection with the conversion of
$200,000 of our 6% Convertible Debentures and payment of penalties. The shares
of the Common Stock issued in exchange for the securities surrendered were
exempt from registration pursuant to Section 3(a)(9) of the Act.
In March 1998, we issued 600,000 shares of our Common Stock to two
individuals for cash contributions of $140,000. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In March 1998, we issued 2,098,550 shares to Manhattan Financial Group
for cash contributions of $539,106. This transaction was a private placement
made in reliance on Section 4(2) of the Act.
In April 1998, we issued 216,598 shares of the Common Stock to Cameron Capital,
Ltd. in connection with the conversion of $62,500, 8% Convertible Debenture and
payment of penalties. The shares of the Common Stock issued in exchange for the
securities surrendered were exempt from registration pursuant to Section 3(a)(9)
of the Act.
In June 1998, we issued 978,000 shares of the Common Stock to Lynch,
Rowin, Novack, Burnbaum & Crystal P.C. FBO Y. L. Hirsch and Lockwood Resources
on conversion of our 12% Convertible Debentures and in settlement of all claims
between us and Y. L. Hirsch and Lockwood Resources. The shares issued had a
value of $415,000. The shares of the Common Stock issued in exchange for the
securities surrendered were exempt from registration pursuant to Section 3(a)(9)
of the Act.
In October 1998, we issued 208,261 shares of the Common Stock to
Cameron Capital, Ltd. in connection with the conversion of $62,500, 8%
Convertible Debentures and payment of penalties. The shares of the Common Stock
issued in exchange for the securities surrendered were exempt from registration
pursuant to Section 3(a)(9) of the Act.
During October and November 1998, we issued 142,500 common shares to an
individual for $0.70 per share. This transaction was a private placement made in
reliance on Section 4(2) of the Act.
On November 3, 1998, we issued 142,500 common shares to Harry Aderholt,
one of our Directors, for $0.70 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
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<PAGE>
During November, December and January 1998, we issued 1,964,025 common
shares to Southwest Securities for $0.47 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
During November, December and January 1998, we issued 169,837 common
shares to National Investment Resources valued at $0.47 per share. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
On January 20, 1999, we issued 355,350 common shares to PHD, Ltd. in
satisfaction of cash advances valued at $0.47 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
On January 20, 1999, we issued 3,580,800 common shares to Thermal
Imaging, Inc. in satisfaction of cash advances valued at $0.48 per share. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
On June 30, 1999, we issued 105,511 common shares to PHD, Ltd. in
satisfaction of cash advances valued at $0.47 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
On June 30, 1999, we issued 822,523 common shares to Thermal Imaging,
Inc. in satisfaction of cash advances valued at $0.48 per share. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
On February 7, 1999, we issued 264,166 common shares to Bristol Asset
Management upon conversion of warrants at $0.71 per share. This transaction was
a private placement made in reliance on Section 4(2) of the Act.
On February 8, 1999, we issued 2,364,865 shares to Manhattan Financial
Group for $0.37 per share. This transaction was a private placement made in
reliance on Section 4(2) of the Act.
On March 31, 1999, we issued 45,800 common shares to two individuals as
consideration for services rendered valued at $0.67 per share. This transaction
was a private placement made in reliance on Section 4(2) of the Act.
On May 6, 1999, we issued 2,140,164 common shares to Thermal Imaging,
Inc. to redeem two notes totaling $1,244,638 at $0.37 per share. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
During May, June, July and August 1999, we issued 2,583,043 common
shares to Beach Boulevard for $0.55 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
During August 1999, we issued 933,707 common shares to Beach Boulevard
for $0.54 per share. This transaction was a private placement made in reliance
on Section 4(2) of the Act.
On September 9, 1999, we issued 875,657 common shares to Beach
Boulevard for $0.60 per share. This transaction was a private placement made in
reliance on Section 4(2) of the Act.
II-5
<PAGE>
In October 1999, we issued 33,997 common shares to Sitrick & Company as
compensation for services at $0.94 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
On October 21, 1999, we issued 400,641 common shares to Beach Boulevard
for $1.25 per share. This transaction was a private placement made in reliance
on Section 4(2) of the Act.
On October 13, 1999, we issued 150,000 common shares to Anslie
Investments and Gisborne Capital upon conversion of warrants at $0.46 per share.
This transaction was a private placement made in reliance on Section 4(2) of the
Act.
On October 13, 1999, we issued 104,155 common shares to Bristol Asset
Management upon conversion of warrants at $1.19 per share. This transaction was
a private placement made in reliance on Section 4(2) of the Act.
From November 12 through December 14, we issued 108,957 common shares
to five individuals upon conversion of warrants at $0.72 per share. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
On November 24, 1999, we issued 150,000 common shares to an individual
upon conversion of warrants at $1.19 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
In December 1999, we issued 200,000 common shares to two individuals
for services valued at $1.20 per share. This transaction was a private placement
made in reliance on Section 4(2) of the Act.
In December 1999, we issued 15,000 common shares to an individual in
exchange for shares of CTICO (a subsidiary) at $1.20 per share. This transaction
was a private placement made in reliance on Section 4(2) of the Act.
In December 1999, we issued 5,000 common shares to an individual in
exchange for shares of CTICO (a subsidiary) at $1.50 per share. This transaction
was a private placement made in reliance on Section 4(2) of the Act.
In November and December 1999, we issued 656,700 common shares to 12
individuals upon conversion of warrants at $2.50 per share. This transaction was
a private placement made in reliance on Section 4(2) of the Act.
In December 1999, we issued 2000 common shares to an employee for
services at $2.80 per share. This transaction was a private placement made in
reliance on Section 4(2) of the Act.
On December 14, 1999, we issued 13,885 common shares to Sitrick &
Company upon conversion of warrants at $3.63 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
In December 1999, we issued 50,000 common shares to an individual in
exchange for shares of CTICO (a subsidiary) at $2.80 per share. This transaction
was a private placement made in reliance on Section 4(2) of the Act.
II-6
<PAGE>
On February 1, 2000, we issued 28,810 warrants to Sitrick & Company for
services. Each warrant entitles the holder thereof, upon exercise, to one share
of common stock at an exercise price $0.9375 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
On February 1, 2000, we issued 11,348 common shares to our 401K
profit-sharing plan as a contribution to the plan for the year ended December
31, 1999. This transaction was a private placement made in reliance on Section
4(2) of the Act.
On February 3, 2000, we issued 15,623 common shares to Sitrick &
Company upon conversion of warrants at $3.72 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
On March 14, 2000, we issued 24,209 common shares to two individuals
upon conversion of warrants at $0.72 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
On March 14, 2000, we issued 50,000 common shares to Cameron Capital
upon conversion of warrants at $1.50 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
On March 14, 2000, we issued 100,000 common shares to Cameron Capital
upon conversion of warrants at $2.00 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
During January through March 2000, we issued 676,375 common shares to
fourteen individuals upon conversion of warrants at $2.50 per share. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
On April 10, 2000, we issued 510,204 common shares to Informix
Corporation for $9.80 per share. This transaction was a private placement made
in reliance on Section 4(2) of the Act.
On April 17, 2000, we issued 200,000 warrants to Sutro & Company for
services. Each warrant entitles the holder thereof, upon exercise, to one share
of common stock at an exercise price $1.70 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
On April 17, 2000, we issued 11,148,766 common shares and 11,148,766
warrants to certain private investors for $2.18 per share and $1.00 per warrant.
Each warrant entitles the holder thereof, upon exercise, to one-half share of
common stock at an exercise price $5.00 per share. This was a private placement
made in reliance on Regulation D, Rule 506, of the Act. Approximately $2.9
million was paid and options to acquire approximately 419,000 shares of our
common stock at a strike price of $1.70 per share were granted to certain
individuals as commissions on this private placement.
On April 17, 2000, we issued 100,000 options to an employee. Each
option entitles the holder thereof, upon exercise, to one share of common stock
at an exercise price $9.0625 per share. This transaction was a private placement
made in reliance on Section 4(2) of the Act.
On April 17, 2000, we issued 269,432 options to four consultants for
services. Each option entitles the holder thereof, upon exercise, to one
II-7
<PAGE>
share of common stock at an exercise price $1.70 per share. This transaction was
a private placement made in reliance on Section 4(2) of the Act.
On April 17, 2000, we issued 111,076 options to an employee for
services. Each option entitles the holder thereof, upon exercise, to one share
of common stock at an exercise price $1.70 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
On April 20, 2000, we issued 8,838 warrants to Sitrick & Company for
services. Each warrant entitles the holder thereof, upon exercise, to one share
of common stock at an exercise price $0.9375 per share. This transaction was a
private placement made in reliance on Section 4(2) of the Act.
On May 1, 2000, we issued 677,420 common shares, valued at $7.75 per
share, to three persons in exchange for common stock of Bales Scientific, Inc.
This transaction was a private placement made in reliance on Section 4(2) of the
Act.
On May 1, 2000, we issued 32,258 common shares, valued at $7.75 per
share, to an individual in exchange for release of certain intellectual property
rights in connection with our acquisition of Bales Scientific, Inc. This
transaction was a private placement made in reliance on Section 4(2) of the Act.
On May 2, 2000, we issued 170,000 warrants to an employee for services.
Each warrant entitles the holder thereof, upon exercise, to one share of common
stock at an exercise price $1.5625 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
On June 15, 2000, we issued 35,000 shares to an officer and director
upon exercise of options at $.70 per share. This transaction was a private
placement made in reliance on Section 4(2) of the Act.
On June 16, 2000, we issued 400,000 warrants to Bristol Asset
Management in settlement of various alleged claims. Each warrant entitles the
holder thereof, upon exercise, to one share of common stock at an exercise price
of $7.25 per share. This transaction was a private placement made in reliance on
Section 4(2) of the Act.
Item 27. Exhibits
INDEX
The following exhibits are filed, or were previously filed, as part of
this Registration Statement:
* Incorporated herewith by reference to Registration Statement Form
SB-2 filed March 3, 1998, as subsequently amended.
** Filed herewith.
*** Incorporated by reference as noted.
--------------------------------------------------------------------------
Exhibit No. Identification of Exhibit
---------- -----------------------------------
3(a)* Articles of Incorporation.
3(b)* Amendment to Articles of
Incorporation.
II-8
<PAGE>
3(c)* Amendment to Articles of
Incorporation.
3(d)* Amendment to Articles of
Incorporation.
3(e)* Amendment to Articles of
Incorporation.
3(f)* Amendment to Articles of
Incorporation.
3(g)* Bylaws, as Amended.
4* Common Stock Specimen.
5** Legal Opinion of Axelrod, Smith and
Kirshbaum regarding Legality.
10(e)* Consulting Agreement dated November
5, 1997 between the Company and
Daron Dillia doing business as
Manhattan Financial Group.
10(m)* Employment Agreement dated April
30, 1997 between the Company and
David A. Packer.
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(t)* License Agreement dated June 8,
1996 between the Company and
Thermal Imaging, Inc.
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.
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<PAGE>
10(aa)* Computerized Thermal Imaging, Inc.
Employee Stock Option Agreement
dated June 12, 1995 between the
Company and Richard V. Secord.
10(ee)* Amendment to Employee Stock Option
Agreement dated January 26, 1998
between the Company and David
Packer.
10(gg)* Amendment to Employee Stock Option
Agreement dated January 26, 1998
between the Company and Richard V.
Secord.
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(kk)* Computerized Thermal Imaging, Inc.
1995 Stock Option Plan.
10(ll)* Computerized Thermal Imaging, Inc.
1997 Stock Option and Restricted
Stock Plan.
10(pp)* Contract between TRW Systems
Integration Group and Computerized
Thermal Imaging, Inc. dated October
29, 1996. [Articles VI, XXIV,
XXXII, and Appendix A have been
omitted pursuant to a Request for
Confidential Treatment.
Accordingly, the material has been
filed separately with the SEC.]
10(qq)* Clinical Trial Agreement dated
September 16, 1997 between Thermal
Medical Imaging, Inc. and Health
Research Association.
10(rr)* Contract between TRW Systems
Integration Group and Thermal
Medical Imaging, Inc. dated June
19, 1997. [Articles VI, XXIV,
XXXII, and Appendix A have been
omitted pursuant to a Request for
Confidential Treatment.
Accordingly, the material has been
filed separately with the SEC.]
10(ss)* Clinical Trial Agreement dated
November 7, 1997 between Thermal
Medical Imaging, Inc. and the
University of Southern California.
II-10
<PAGE>
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(ccc)* Marketing Agreement dated November
19, 1998 between the Company and
T.S.E.T., Inc.
10(eee)* Beach Boulevard L.L.C. Securities
Purchase Agreement.
10(fff)* Executive Severance Agreement.
10(ggg)*** Bales Scientific, Inc Acquisition
documents incorporated by reference
to Form 8-K dated April 18, 2000
and filed April 27, 2000 and Form
8-K/A dated April 18, 2000 and
filed June 16, 2000.
10(hhh)*** Letter Agreements dated October 28,
1999 with Computerized Thermal
Imaging International incorporated
by reference to Form 10-QSB dated
December 31, 1999 and filed
February 18, 2000
16(a)*** Letter from Ham, Langston & Brezina
dated August 23, 1999 and included
in Form 8-K/A dated August 17, 1999
and filed August 25, 1999
consenting to the statements
contained in the registration
statement.
21** Subsidiaries of the Registrant.
23(a)** Consent of Counsel (included in
Exhibit 5).
II-11
<PAGE>
23(b)** Consent of HJ & Associates, LLC
(formerly known as Jones, Jensen &
Company).
23(c)** Consent of Ham, Langston & Brezina,
LLP.
24(1)* Powers of Attorney.
27(1)* Financial Data Schedules.
99* Audit Committee Charter.
________________________
* Incorporated herewith by reference to Registration Statement Form
SB-2 filed March 3, 1998, as subsequently amended.
** Filed herewith.
*** Incorporated by reference as noted.
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
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<PAGE>
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.
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 June 20, 2000.
COMPUTERIZED THERMAL IMAGING,
INC.
/s/ David A. Packer
-------------------------------
David A. Packer, President
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:
/s/David B. Johnston June 20, 2000
-------------------------------
DAVID B. JOHNSTON
Chairman of the Board and Chief Executive
Officer
/s/Richard V. Secord June 20, 2000
-------------------------------
RICHARD V. SECORD
Vice Chairman of the Board and Secretary
/s/David A. Packer June 20, 2000
-------------------------------
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<PAGE>
DAVID A. PACKER
Director, President, Chief Operating Officer
and Treasurer
/s/Brent M. Pratley, M.D. June 20, 2000
-------------------------------
BRENT M. PRATLEY, M.D.
Director
/s/Milton R. Geilmann June 20, 2000
-------------------------------
MILTON R. GEILMANN
Director
/s/Harry C. Aderholt June 20, 2000
-------------------------------
HARRY C. ADERHOLT
Director
/s/Kevin L. Packard June 20, 2000
-------------------------------
KEVIN L. PACKARD
Chief Financial Officer
/s/David A. Packer June 20, 2000
-------------------------------
David A. Packer
Attorney in Fact
--------------------------------------------------------------------------------
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