U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-23955
COMPUTERIZED THERMAL IMAGING, INC.
---------------------------------------------------------
(Name of small business issuer as specified in its charter)
NEVADA 87-0458721
--------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
476 Heritage Park Blvd., Layton, UT 84041
-------------------------------------- ----------------
(Address of principal executive offices) (Zip Code
Issuer's telephone number: (801) 776-4700
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common
------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ]
No [ ]
<PAGE>
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $329,283
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days: $338,904,325 as of August 30, 2000.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 80,459,734 shares of common
stock were outstanding as of August 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents incorporated by reference and the Part of
the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933.
-----------------------------------------------------------------------------
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [ X ]
2
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
FORM 10-KSB
ANNUAL REPORT
TABLE OF CONTENTS
Available Information.....................................................4
Glossary of Terms.........................................................5
Part I
ITEM 1. Our Business.....................................................6
ITEM 2. Description of Our Properties...................................34
ITEM 3. Legal Proceedings ..............................................35
ITEM 4. Submission of Matters to a Vote of Security Holders ............39
Part II
ITEM 5. Market for Our Common Equity and Related Stockholder Matters....39
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Plan of Operation...............................................42
ITEM 7. Financial Statements.......................................... F-1
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................49
Part III
ITEM 9. Our Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Act...............49
ITEM 10. Executive Compensation .........................................54
ITEM 11. Security Ownership of Certain Beneficial Owners and Management..61
ITEM 12. Certain Relationships and Related Transactions..................62
ITEM 13. Exhibits and Reports on Form 8-K ...............................62
(a) Exhibits Required by Item 601
(b) Information pertaining to any 8-K reports filed
during the last quarter, listing of the items
reported, any financial statements filed and the
dates of such reports.
3
<PAGE>
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 filing, upon written or oral request, a copy of any
information that is incorporated by reference herein (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.
However, the information contained on our web site is not part of this document.
For further information with respect to us, 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 statements and other information regarding issuers that file
electronically with the Commission. The Internet 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.
4
<PAGE>
GLOSSARY OF TERMS
-----------------
Each of the following short titles and terms are used throughout this
document. They are summarized here for convenience only.
Act Securities and Exchange Act of 1934.
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 during the past fiscal year.
Company, us, we Computerized Thermal Imaging, Inc. and Subsidiaries
including Computerized Thermal Imaging Company and
Bales Scientific, Inc.
CT Computed Tomography.
CTICO Computerized Thermal Imaging Company, formerly Thermal
Medical Imaging, Inc., our 97.9%-owned subsidiary.
CTII Computerized Thermal Imaging International, Inc., an
entity in which we own 15%.
FDA US Food and Drug Administration.
HICFA Health Insurance Care Financing Administration.
INFORMIX Informix Corporation, our principal software database
provider.
Medical Imaging
Systems Our Breast Imaging and General Use Systems.
MFG Manhattan Financial Group.
MR Magnetic Resonance.
NM Nuclear Medicine.
OTC.BB Over-the-Counter Bulletin Board of the NASD.
PAC Picture Archiving and Communications System.
PET Positron Emission Tomography.
PRC People's Republic of China.
QTA Quantitative Thermal Assessment Lab.
SEC (Commission) Securities and Exchange Commission.
5
<PAGE>
GLOSSARY OF TERMS, CONTINUED
----------------------------
TII Thermal Imaging, Inc., an affiliate of David B.
Johnston, our Chairman and Chief Executive Officer.
TRW TRW, Inc., our principal systems development vendor.
US Ultrasound.
-----------------------------------------------------------------------------
PART I
ITEM 1. OUR BUSINESS.
This document contains numerous forward-looking statements about our
business and future. The United States Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for certain forward-looking statements.
Our forward-looking statements are expressed in good faith and we believe that
there is a reasonable basis for us to make them. However, readers are
cautioned not to place undue reliance on such statements. This document
should be read in conjunction with our audited financial statements included
in Part II herein, and in consideration of our forward-looking disclaimer
paragraph in Part II, Item 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION" and our "RISK FACTORS" below.
Introduction
------------
We were incorporated on June 10, 1987 in the State of Nevada as Business
Helpers, Inc. In 1988, we acquired substantially all of the assets of Thermal
Imaging, Inc., which assets consisted of certain 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 amended our
Articles to provide for a capital structure of 100 million shares of common,
par value $0.001 per share, and 3 million shares of preferred stock with such
designations, preferences, and other features as may be required by our Board
of Directors. In March 1998, we 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. On
June 27, 2000, we further amended our Articles to increase the number of our
authorized common stock shares to 200 million.
We are presently a development stage company and have had only limited
revenues from operations and essentially no sales of any magnitude related to
our medical imaging equipment. In June 2000, we reported the sale of 10 of
our Breast Imaging systems for a total of $5 million to Computerized Thermal
Imaging International, Inc., an entity in which we own 15 percent. The $1.75
million down payment already received by us on this sale is recorded as
deferred revenues until such time as we deliver the systems and such systems
6
<PAGE>
are placed into commercial use. (See Part I, Item 1, "OUR BUSINESS, OUR SALES
AND MARKETING STRATEGY, INTERNATIONAL STRATEGY").
Over the course of several years prior to 1991, we developed a dynamic
imaging protocol for our Medical Imaging Systems. During 1991 through 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, we acquired all of the assets of Bales Scientific,
Inc. ("Bales") on April 18, 2000. Bales designs, manufactures and sells high
resolution, dynamic, digital infrared imaging workstations and related
products for both medical and industrial application. (Refer to Part I, Item
1, "OUR BUSINESS, RECENT EVENTS" for a discussion of our acquisition of
Bales).
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 its 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 stemmed 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 pain, 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 its 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 pressure to hold down costs and eliminate
unnecessary diagnostic procedures, both domestic and export
7
<PAGE>
shipments of electro-medical equipment by U.S. manufacturers have been
relatively flat in recent years.
Despite this 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 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.
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 encouraged hospitals to optimize their budgets so
that total costs do not exceed allowable reimbursements. Understating costs
associated with delivering a particular diagnostic service can depress a
healthcare provider's bottom line. Co-sourcing arrangements enable hospitals
to more efficiently manage and operate departments and, therefore, maintain
their profits.
Our Products and Services
-------------------------
Overview. The American Cancer Society estimates that in 2000 about
182,800 new cases of invasive breast cancer will be diagnosed among women in
the United States and an estimated 1,400 cases will be diagnosed among men.
In 2000, there will be about 41,200 deaths from breast cancer in the United
States (40,800 among women and 400 among men) thereby confirming breast cancer
as the second leading cause of death from malignancy and the most common
cancer among women, excluding non-melanoma skin cancer. Most breast lumps are
benign and not life threatening. During 1997, over 800,000 breast biopsies
were performed with approximately 180,000 yielding a diagnosis of cancer.
Hence, approximately 77 percent of all breast biopsies during 1997 yielded
benign results.
Established medical imaging modalities, such as mammography, create
anatomical snapshots, but do not expose dynamic, functional disorders.
Mammography may detect the presence of a breast tumor, but whether it
functions as a cancer remains the task of a biopsy. We believe that our
computerized, thermal imaging technology can complement other diagnostic
modalities to reduce the number of benign biopsies.
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
8
<PAGE>
most other imaging modalities, our Medical Imaging Systems record indications
of 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 a controlled environment, we believe
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.
To date, we have developed the following significant technologies: (1)
our proprietary climate-controlled examination unit designed to enhance
patient comfort and facilitate reproducible tests; (2) our controlled, dynamic
imaging protocol that produces consistent results; (3) our patent-pending
statistical model (algorithms) that detects physiological irregularities; and
(4) our infrared imaging and analysis hardware, including our sophisticated
heat-sensing camera, designed and manufactured by Bales. 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 assist in the diagnosis and treatment of musculo-skeletal
disorders and 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.
In the end, we believe 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 suited to 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, 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 Medical Imaging Systems.
Our recently introduced Photonic Stimulators are used to improve vascularity
and increase blood flow circulation in the treatment of pain. Industrial
application of our imaging systems include non-destructive inspection of aging
aircraft, electronics, composites, metals and other advanced materials, as
well as breakthroughs in the inspection of turbine blades of large
power-generation equipment.
Since inception in 1987, we have spent nearly $12.2 million on research
and development ("R&D") of our Medical Imaging Systems and approximately
9
<PAGE>
$19.7 million in general and administrative expenses. We incurred a
significant portion of these R&D expenses for software development by TRW,
engineering studies conducted by BATTELLE and clinical testing relating to our
Breast Imaging System. Although we have contracted out much of our R&D to
third parties, we 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 general and administrative expenses
incurred since inception (including salaries, rent and other overhead)
supported our R&D efforts.
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 (Serial
No. 60/105147 dated October 4, 1998) on a Functional Thermal Imaging Apparatus
(our Patient Positioning Table) filed with the United States Patent and
Trademark Office ("USPTO"). On December 7, 1999, the USPTO granted us a
patent in connection with this application. We also have pending a patent
application (Serial No. 60/105,147 dated October 21, 1998) 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.
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 eliminates the sometimes-painful
breast compression common to mammograms. Compared to mammography plates, we
believe that our 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.
Quantitative Thermal Assessment Lab. Our modular Quantitative Thermal
Assessment Lab uses a climate control system and is designed to permit thermal
stabilization of one patient while another patient is attended.
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.
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 statistical model then
10
<PAGE>
identifies and displays suspicious areas to the physician to aid in patient
diagnosis and in the determination of subsequent patient care.
Online Support and Maintenance. Use of the Internet and or modem
connections will be a key feature in servicing and maintaining our Medical
Imaging Systems. We plan to interface each of our locations with a central
database facility and system support center via the Internet. Images
collected by our Medical Imaging Systems in the field will be transmitted to
this facility where we will be able to monitor operations, diagnose problems
and download software enhancements.
Services. We plan to offer healthcare providers training and maintenance
services, and, in due course, we plan to offer the academic, medical,
insurance, employer and government sectors access to our vast database of
information.
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, will simplify 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 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. Technological advances in high-speed computers and sophisticated
heat-sensing cameras have allowed us to address healthcare provider concerns
by offering valid and cost-effective computerized thermal imaging. We believe
our business strategy will make 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 ("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: 1) enable us to
reference medical efficacy claims in connection with the marketing of our
Breast Imaging System, 2) lend credibility to all of our imaging systems, 3)
ease the task of introducing our General Use System to the market, 4) enhance
physician acceptance of our systems, and 5) permit us to obtain designation of
insurance payment codes for particular medical procedures.
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.
11
<PAGE>
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 larger prestigious hospitals; (6) the hope that the
visibility in 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.
Co-sourcing Arrangement. We plan to capitalize on the opportunity for
improvement in hospitals to differentiate our business strategy from 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 a co-sourcing
arrangement. By assuming responsibility for equipment performance and for
cataloging all relevant imaging data, we believe we will eliminate unexpected
maintenance costs, control image quality, and reduce hospital record-keeping
overhead.
Relationships with Hospitals; Brand Equity. We plan to leverage our
positive relationship with the five prestigious 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
encourage the remaining market (the freestanding and mobile diagnostic imaging
centers) to adopt our Medical Imaging Systems.
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. We believe our
post-surgical diagnosis capability will enable doctors to better verify and
track patient recovery. Our system's relevance to pre- and post-procedural
diagnoses may also allow 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 opportunities for growth. 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. 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.
Diverse Customer Base. An international customer base allows us the
opportunity to capture a more diverse data set and train our classifiers to
12
<PAGE>
recognize a wider range of maladies. A diverse demographic data associated
with international patient scans will create an unrivaled PAC system for data
mining by academic, medical and insurance communities.
Higher Patient Volume. A high patient volume associated with an
international presence adds to the depth and strength of our future PAC system
as well. A larger database will allow us to make more accurate diagnosis
that, in turn, may lead to enhance branding of our products and greater
revenues.
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 limited range of products.
The medical imaging equipment business is international in scope. A
number of foreign suppliers hold a substantial share of the U.S. market and
many 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 gain market share.
X-ray. X-ray imaging entails 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 many X-ray suppliers offer equipment in most 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
13
<PAGE>
head and 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 United States declined precipitously between 1992 and 1994 but have 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) faster access to images, allowing interpretation of emergency
room patients as well as remote consultation on difficult cases; and (2)
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
from certain types of cancer or certain conditions affecting the brain and
14
<PAGE>
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 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. Use of electronic images greatly reduces film usage and
cost.
Our Sales and Marketing Strategy
--------------------------------
Overview. In the near term, we plan to 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 believe our domestic sales and marketing strategy
will 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 product
placement strategies. We plan to introduce our products to 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 plan to adapt 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) co-promoting
products and services with strategic partners; (5) leveraging FDA approvals
across multiple products; and (6) 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.
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 plan to install our equipment, remotely monitor it and periodically service
it. Hence, the customer should only bear the burden of paying for use of our
systems. Our fee-per-use agreement is anticipated to include minimum usage
requirements which, if not satisfied by the customer, will give
15
<PAGE>
us the right to remove our systems and place them in more profitable sites.
The portability of our systems should make it practical and economical 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 one favorable sell at the
corporate level. Our strategy should accelerate 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 alliances. We plan to
cross-promote products with our strategic alliances 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.
Leverage FDA approval across multiple products. We plan to use FDA
approval of our Breast Imaging System to promote the overall benefits of
computerized thermal imaging and generate medical and consumer acceptance of
our General Use System.
International Strategy. We have not yet begun a substantive
international marketing campaign although we did initiate certain
relationships with both the People's Republic of China ("PRC") and Thailand
where thermography is an accepted modality for medical usage. In connection
therewith, 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 used in our current clinical trials. This permitted us to
focus available resources towards FDA approval.
Further, on April 25, 1995, we entered into our Golden Health
Telemedicine and related contracts ("GHT Contracts") with a company formed by
the Ministry of Public Health in the PRC in furtherance of our marketing goals
in Asia. The GHT Contracts provided for the installation of 16' x 20'
Quantitative Thermal Assessment ("QTA") labs in approximately 6,000 hospitals
in China to conduct thermal assessments of patients. Pursuant to the
contracts, delivery of the labs was expected to begin December 1, 1995 and
continue through May 1, 1998.
Doing business in the PRC, as well as in other developing countries, has
risks not prevalent in the United States. Foreign laws and regulations can
change in ways not familiar to domestic companies, including the extreme
measure of nationalization of assets. Accordingly, in order to protect us
from sovereign risk, our GHT Contracts require letters of credit, enforceable
outside the PRC, to be issued to us as a precondition of our performance under
the contracts.
In October 1996, we initiated a relationship with TRW Systems Integration
Group to design a plan for systems integration to implement the
16
<PAGE>
GRT Contracts. However, to date, the requisite letters of credit have not
been issued, the PRC has not funded the purchase of the QTA labs and no labs
have been delivered. We have deferred any further expenditure toward the
contracts until the Ministry of Public Health causes its hospitals to issue
the letters of credit as provided for in the contracts. Furthermore, judicial
remedies for enforcement of contracts in the PRC are not reliable. Even
though we have inserted arbitration clauses in our GHT Contracts, reliance
upon arbitration creates risk because an arbitration holding is not subject to
appeal, regardless of any error in the application of law. We do not know if,
or when, the PRC will perform under the contracts. Due to the current status
of Chinese relations with the United States, we do not believe that we would
be successful in an attempt to enforce the contracts. We currently consider
the GHT contracts to be virtually unenforceable and we believe that we will
never receive any sales from these contracts.
In connection with Latin America markets, we entered into two letter
Agreements on October 28, 1999 with Computerized Thermal Imaging
International, Inc. ("CTII"), an entity in which we own 15 percent, whereby
CTII received 1) the exclusive right to represent the expansion of our
business into Central and South America, 2) the right to prepare and implement
a marketing strategy for deployment of our Breast Imaging System in those
areas of the world, 3) the right of first refusal on our Health Card
manufacturing worldwide, and 4) the right to sell a minimum of 100 of our
Breast Imaging Systems over a two-year period in the target territories. The
Agreements provide that we will grant to CTII, as compensation, options to
purchase up to 5 million shares of our common stock in 50,000 share increments
contingent on their placement of each Breast Imaging System into commercial
use in the specified territories. Each 50,000 block of options grants the
holder thereof the right to purchase 50,000 shares of our common stock at a
strike price equal to $1.6745, a 15 percent discount to the bid price at
October 28, 1999, the Effective Date of the Agreement. Options expire two
years from the date of grant.
On June 6, 2000, the Company entered into agreements for the sale of 10
Breast Imaging Systems to CTII for $5 million. In connection therewith, we
received a down payment of $1.75 million with the remaining $3.25 million to
be received upon delivery of the systems. We expect to deliver the 10 systems
to CTII on, or about, mid-October, 2000. We expect to issue 500,000 options
upon the delivery and placement of such systems into commercial use. As of
the date hereof, we have not issued any options to CTII.
We will continue to seek opportunities to generate revenue from product
sales to foreign markets.
Collateral Opportunities
------------------------
Maintenance. We plan to maintain our systems on fee-per-use arrangements
in order to oversee their performance and help healthcare providers manage
their budgets. Cost containment pressures exerted by managed care providers
make it critical for healthcare providers to manage their costs. We plan to
help in this process by eliminating the risk of large, sometimes unexpected,
maintenance fees. We believe we will be able remotely monitor product
performance through our system interface. In this way, we believe we will
ensure the reliability of our data base and proper functioning of our systems.
Our engineering consultants can also provide onsite repairs and maintenance.
17
<PAGE>
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, because of the
ability of our systems to non-invasively exclude the need for other testing
and potentially expose many fraudulent insurance claims related to soft tissue
injuries, our systems should 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. We anticipate that the full breadth and depth of the
information accumulated from the future use of our systems will eventually be
accessed via a PAC system 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 litigates attempting to confirm the validity
of healthcare liability claims.
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.
18
<PAGE>
Service Providers and Contractor Relationships
----------------------------------------------
Overview. Our business platform draws on contractor, 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
systems to new opportunities and evolving customer needs. To date, we have
established relationships with:
1. TRW Inc. to integrate, install and maintain our systems.
2. Battelle Memorial Institute to provide technical analysis.
3. Quintiles Corp. to provide clinical trial monitoring and FDA submittal
preparation support.
4. Bales Scientific Inc., our recently acquired subsidiary, to secure
high-speed infrared cameras.
5. Therma Corp. to build our QTA labs and supply climate control equipment.
6. Fleishmann-Hillard and Chadwick Communications, specialists in launching
and positioning corporate and consumer brands, to handle public relations
and communications.
7. Informix Corporation, to help us manage data and to lay a strategic and
adaptable Internet platform to maximize the potential for vast amounts of
patient data.
8. Computerized Thermal Imaging International, Inc., a Latin American
consortium established to place our systems in Latin America.
9. Peak Industries, to help build our Breast Imaging Systems.
10. Paragon, an FDA consulting firm, to review Module materials submitted in
connection with our FDA Pre-Market Application.
TRW Relationship. We entered into cooperation and support agreements with
TRW on June 19, 1996. This contract was closed out on May 5, 1999 with
delivery to us of all intellectual property and items produced on the
contract, including items used in the production and documentation of our
property. We signed a follow-on letter agreement with TRW on May 7, 1999 to
continue the efforts of the previous contract through July 1, 1999. Since
that time, we have entered into extension agreements, the latest of which is
dated June 29, 2000 and extends our agreement with TRW through September 30,
2000. We anticipate that we will continue to utilize extension agreements to
maintain our relationship with TRW.
Battelle Relationship. We signed an agreement with Battelle Memorial
Institute ("Battelle") on March 19, 1999, to provide us with technical
consulting services and to aid in the submittal of regulatory information to
the FDA. The initial period for the technical consultation services to be
provided was five months. We renewed our contract with Battelle in August
1999 and executed a three-month extension. Since that time, we have entered
into extension agreements, the latest of which is dated July 27, 2000 and
extends our agreement with Battelle through approximately October 31, 2000.
We anticipate that we will maintain our relationship with Battelle via the use
of extension agreements. Under the Battelle Agreements, Battelle provides (1)
support for algorithm development, (2) organization of design files, (3)
statistical consultation for interaction with the FDA, and (4) manufacturing
review.
Quintiles Relationship. We have also established a relationship with
Quintiles, Inc. ("Quintiles"), an independent consulting firm authorized by
19
<PAGE>
the FDA to verify clinical examination results, provide clinical trial
monitoring and FDA submittal preparation support. We utilize Quintiles'
services on a time and materials basis. Use of Quintiles' services varies
from month to month.
Bales Scientific, Inc. Relationship. Our strategic relationship with
Bales continued to strengthen over time and, on April 18, 2000, we acquired
100 percent of the outstanding common stock of that company. Our acquisition
of Bales has permitted us to vertically integrate technologies and virtually
secure manufacturing capabilities of our thermal imaging cameras. Our
acquisition of Bales is disclosed in our 8-K dated April 18, 2000 and filed
April 27, 2000 and 8-K/A dated April 18, 2000 and filed June 19, 2000 with the
SEC.
Therma Corp Relationship. We have engaged Therma Corp. ("Therma"), on a
time and materials basis, to build our QTA labs and provide climate-control
equipment.
Fleishmann-Hillard and Chadwick Communications, LLC. Relationships. We
currently have agreements in place with Fleishmann-Hillard and Chadwick
Communications, LLC to provide public relations services to us. We maintain
these agreements on a time and materials basis and on a month-to-month basis.
Informix Software, Inc. Relationship. On December 22, 1999, we entered
into a software license and maintenance agreement with Informix Software, Inc.
("Informix"). The license and maintenance agreement grants us an unlimited
User/CPU license of Informix Internet Foundation 2000 software (the
"Foundation 2000 Software") and a one-year maintenance contract beginning
December 22, 1999. The Foundation 2000 Software is an integral part of our
information database and retrieval system. On March 30, 2000, Informix
purchased, in a private placement, 510,204 shares of our common stock for
$5,000,000.
Peak Industries Relationship. We have engaged Peak Industries, on a time
and materials basis, to build our Thermal Imaging Systems. We have also
recently discussed their involvement in building our Photonic Stimulators.
Paragon Relationship. We have engaged Paragon, on a time and materials
basis, to review various Module submissions in connection with our FDA
Pre-Market Application.
Computerized Thermal Imaging, Inc. International Relationship. On
October 28, 1999, we entered into two letter Agreements with Computerized
Thermal Imaging International, Inc. ("CTII"), an entity in which we own 15
percent. Details concerning these Agreements are noted herein at Part I, Item
1, "OUR BUSINESS, OUR SALES AND MARKETING STRATEGY, INTERNATIONAL STRATEGY".
In addition to the foregoing, we have enlisted five prominent U.S.
hospitals to conduct the clinical trials necessary for FDA approval including:
- USC/Norris Comprehensive Cancer Center, Los Angeles;
- Mt. Sinai Hospital, Miami;
- St. Agnes Hospital, Baltimore;
- Lahey Clinic, Boston; and
- Providence Hospital, Washington, D.C.
20
<PAGE>
We have entered into the following agreements with each of the foregoing
respective hospitals. The first two agreements (the USC Agreement and the HRA
Agreement) are related to our clinical study at the USC/Norris Cancer Center:
USC Agreement. We entered into a clinical trial agreement with University
of Southern California ("U.S.C."), (the "U.S.C. Agreement") on May 5, 1997.
Under the terms of this agreement, U.S.C. is to perform a clinical study of
the screening of breasts for identification of suspicious tissue using
clinical examination and mammography with and without the use of our Breast
Imaging System. The goal of this study is to establish a specific confidence
interval for the detection of breast cancer associated with the use of our
system. The U.S.C. Agreement provides that the study will be conducted in
accordance with our protocol. The estimated period of performance for the
U.S.C. Agreement was undetermined at the time of its execution. All rights,
title, and interest in any intellectual property that is the direct and
specific result of the performance of the protocol shall belong to us. All
rights, title, and interest in any intellectual property that are conceived or
made jointly by one or more of our employees and U.S.C. shall belong jointly
to U.S.C and us. All rights, title, and interest in any other intellectual
property developed or conceived under the study shall be considered property
of U.S.C. In addition, U.S.C. agrees not to disclose certain confidential
information exchanged in connection with the agreement and agrees to prevent
disclosures of such information to all third parties.
HRA Agreement. We entered into a clinical trial agreement with the Health
Research Association, a California nonprofit educational institution
affiliated with the University of Southern California Medical Center, (the
"HRA Agreement") on September 16, 1997 with the same purpose, goals,
protocols, terms and conditions as the U.S.C. Agreement. Medical trials of the
our Breast Imaging System pursuant to this agreement are being conducted at
University of Southern California's Norris Cancer Center. The estimated
period of performance of the initial HRA Agreement was from September 1, 1997
through 1, 1998. On March 24, 1999, we entered into an agreement with HRA
extending the period of performance to March 15, 2000. Although the HRA
Agreement has not been formally renewed, HRA continues to perform clinical
trials under the same terms and conditions as set forth in the original
agreement. We have provided HRA with a copy of our proposed renewal agreement
that provides for an estimated period of performance through March 15, 2001.
We are awaiting HRA's review and execution of the proposed agreement. The HRA
Agreement has virtually the same provisions regarding rights, title and
interest in intellectual property and non-disclosure as the U.S.C. Agreement.
Providence Hospital Agreement. We entered into a clinical trial agreement
with Providence Hospital (the "Providence Hospital Agreement") on February 14,
1998 with the same purpose, goals, protocols, terms and conditions as the
U.S.C. Agreement. The estimated period of performance of the initial
Providence Hospital Agreement was from February 15, 1998 to February 15, 1999.
Although the Providence Hospital Agreement has not been formally renewed,
Providence Hospital continues to perform clinical trials under the same terms
and conditions as set forth in the original agreement. We have provided
Providence Hospital with a copy of our proposed renewal agreement that
provides for an estimated period of performance through February 15, 2001. We
are awaiting Providence Hospital's review and execution of the proposed
agreement. The Providence Agreement has the same
21
<PAGE>
provisions regarding rights, title and interest in intellectual property and
non-disclosure as the U.S.C. Agreement.
Mt. Sinai Medical Center Agreement. We entered into clinical trial
agreements with Mt. Sinai Medical Center, (the "Mt. Sinai Agreements") on June
4, 1998 and again on August 8, 2000 with virtually the same purpose, goals and
protocol as the U.S.C. Agreement. The estimated period of performance of the
Mt. Sinai Agreements is from June 1, 1998 to December 31, 2000. The Mt. Sinai
Agreements have virtually the same provisions regarding rights, title and
interest in intellectual property and non-disclosure as the U.S.C. Agreement.
St. Agnes Healthcare, Inc. Agreement. We entered into clinical trial
agreements with St. Agnes HealthCare, Inc., (the "St. Agnes Agreements") on
March 8, 1999 and again on April 14, 2000 with virtually the same purpose,
goals, protocols, terms and conditions as the U.S.C. Agreement. The estimated
period of performance of the St. Agnes Agreements is from March 1, 1999 to
March 1, 2001. The St. Agnes Agreements have virtually the same provisions
regarding rights, title and interest in intellectual property and
non-disclosure as the U.S.C. Agreement.
Lahey Clinic Agreement. We entered into clinical trial agreements with
Lahey Clinic, (the "Lahey Clinic Agreements") on May 18, 1999 and again on
July 20, 2000 with virtually the same purpose, goals, protocols, terms and
conditions as the U.S.C. Agreement. The estimated period of performance of the
Lahey Clinic Agreements is from May 1, 1999 to April 30, 2001. The Lahey
Clinic Agreements have virtually the same provisions regarding rights, title
and interest in intellectual property and non-disclosure as the U.S.C.
Agreement.
We believe that the trials conducted by these prestigious facilities will
validate the effectiveness of our Breast Imaging System in detecting breast
tumors and characterizing lesions between benign and malignant.
Status of Publicly Announced New Products or Services
-----------------------------------------------------
We do not have any new publicly announced products or services other than
what has been discussed above.
Material Contracts
------------------
TRW, Battelle and Informix Contracts. During the past several years, we
have entered into various contracts with TRW, Battelle and Informix.
Information concerning each of these contracts can be found in Part I, Item 1,
"OUR BUSINESS, SERVICE PROVIDERS AND CONTRACTOR RELATIONSHIPS."
Clinical Trial Agreements. As previously noted, we have entered into
agreements with five prestigious facilities to conduct clinical trials in
connection with our FDA application. Information concerning each of these
agreements is summarized in Part I, Item 1, "OUR BUSINESS, SERVICE PROVIDERS
AND CONTRACTOR RELATIONSHIPS".
Golden Health Telemedicine Contracts. On April 25, 1995, we executed our
Golden Health Telemedicine and related contracts ("GHT Contracts") with a
company formed by the Ministry of Public Health in the Peoples Republic of
22
<PAGE>
China ("PRC"). Additional information concerning these contracts and their
status is contained in Part I, Item 1, "OUR BUSINESS, OUR SALES AND MARKETING
STRATEGY, INTERNATIONAL STRATEGY".
Computerized Thermal Imaging, Inc., International ("CTII") Agreements. On
October 28, 1999, we entered into two letter Agreements with Computerized
Thermal Imaging International, Inc. ("CTII"), an entity in which we own 15
percent. Details concerning these Agreements are noted herein at Part I, Item
1, "Our Business, Our Sales and Marketing Strategy - International Strategy".
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.
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. (See Part II, Item 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION, SOURCES OF LIQUIDITY" for a full discussion of our agreement with
Beach).
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
was for one year and automatically renewed for annual periods thereafter
unless terminated upon proper notification. As of the date hereof, the
Consulting Agreement remains in effect. Fees are negotiated on a case-by-case
basis depending on services to be provided. (See Part II, Item 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION, SOURCES OF LIQUIDITY" for a broader discussion of our relationship
with Manhattan Financial Group).
Government Regulation
---------------------
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
23
<PAGE>
System will 1) enable us to reference medical efficacy claims in connection
with the marketing of our Breast Imaging System, 2) lend credibility to all of
our imaging systems, 3) ease the task of introducing our General Use System to
the market, 4) enhance physician acceptance of our systems, and 5) permit us
to obtain designation of insurance payment codes for particular medical
procedures.
The FDA is permitting us to submit our PMA in five modules, thereby,
accelerating the data submittal process. In part, Module 1: a) introduces the
use of thermography, its safety and effectiveness; b) summarizes the
indications for use of thermography; c) summarizes the incidence, diagnosis
and prognosis of breast cancer; d) describes current modalities for detecting
breast cancer; e) describes our Breast Imaging System including major
components and the population for which our device has clinical utility; f)
describes our clinical study and the population in the study; and g) provides
a statement of marketing of our device for its intended use. Module 2 is the
most technically complex of all modules and, in part, provides: a) a detailed
description of our Breast Imaging System and its component parts; b) a
detailed discussion of the clinical evaluation system required to analyze and
interpret the clinical data obtained through the clinical study; and c)
documentation of all software used in our Breast Imaging System including
software used in the development of our system and the acquisition of data in
our clinical study. Module 3, in part, provides: a) manufacturing information
concerning our Breast Imaging System including a detailed discussion of the
facilities, personnel, equipment, and controls used in the manufacture of our
system; b) information concerning the distribution and installation of our
system; and c) a description of the procedures and record keeping associated
with the manufacture, testing and installation of our devise. Module 4, in
part, revisits the safety of our system including all non-clinical testing of
the structural and functional components of our device. Module 4 also
considers the safety of all materials used in the manufacturing of our device
including biocompatibility, electrical safety, electromagnetic compatibility,
reliability, durability and environmental impact. Finally, Module 5
essentially evaluates the results of our clinical studies including the
accumulation and analysis of all the clinical study data.
To date, we have submitted Modules 1 through 4 and anticipate submitting
our final module (Module 5) prior to December 31, 2000. Recruiting patients
as part of our clinical trials and obtaining reliable data there from are
important elements to our submission of Module 5 to the FDA for review in
accordance with our plan. Although we anticipate that we will be able to
obtain and assemble the data necessary to timely submit Module 5, any delay or
difficulties experienced in the recruitment of patients or the assembly and
verification of patient data could delay our submission of Module 5 beyond
December 31, 2000. On September 15, 1999, we submitted Module 1 and, in
connection therewith, received FDA acceptance on December 17, 1999. On
February 9, 2000, we submitted Module 2 and, in connection therewith, received
FDA acceptance on June 27, 2000. On May 2, 2000, we submitted Module 3 and on
September 5, 2000, we submitted Module 4. We are awaiting FDA review and
acceptance of Modules 3 and 4. We cannot determine if, or when, we will
ultimately obtain FDA approval of our Pre-Market Application.
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
24
<PAGE>
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.
Clinical Trials Procedure. Our trial protocol requires an initial
collection of digital thermal image data by our Breast Imaging System. In
response, we initiated a data collection process in five prestigious hospitals
as noted in the previous section entitled "OUR BUSINESS, SERVICE PROVIDERS AND
CONTRACTOR RELATIONSHIPS". Currently, we are executing the approved protocol
and collecting actual patient data in clinical trials underway at the
hospitals. We have engaged Quintiles, Inc. to oversee adherence to FDA
requirements and examination procedures in data collection. During the
collection phase, we are blinded to the results. Following our completion of
the data collection phase, we must, in concert with our FDA consultants,
unvault and analyze the trial results and prepare an FDA Approval submission.
Each patient participating in our clinical study is recruited following
discovery of a breast lesion and after a determination that such patient would
be undergoing a biopsy. Informed consent is obtained prior to the study in
accordance with the policies of each research facility. Thereafter, each
patient undergoes testing with our Breast Imaging System wherefrom digital
infrared images ("IR") are collected prior to biopsy. The patient is disrobed
from the waist up and oriented in the prone position on our Patient
Positioning Table. Each breast is suspended, one at a time, through an
opening in the tabletop and aligned with the center of our system's unique
mirror design. Infrared images are then acquired using our digital IR camera
and mirror system that allows thermal energy to be collected from all aspects
of the breast simultaneously. Images acquired are electronically saved for
subsequent processing.
Following patient participation, each digital image sequence is
statistically analyzed and a set of quantitative features is extracted.
Patient results are then divided into two groups representing those with
malignant lesions and those with benign lesions. All of this data is then
analyzed and compared against the pathology findings, classified, and
submitted for FDA review.
FDA Review. The FDA review of our Pre-Market Application ("PMA") consists
of four steps: (1) administrative and limited scientific review by the FDA
staff to determine that our application is complete; (2) in-depth scientific
and regulatory review by the FDA compliance personnel; (3) an FDA good
manufacturing practices inspection; and (4) review and recommendation of the
appropriate advisory committee (panel review). Steps one, two and three are
accomplished in parallel with the modular submission process, whereas, step 4
can be accomplished only after the final module has been submitted and
reviewed. Following review, the FDA will notify us by letter of their
decision to approve or deny our application and will publish a notice in the
Federal Register.
Trademarks
----------
We believe that our use of the non-registered marks "CTI" and
"Computerized Thermal Imaging, Inc." for the past four years in our field
provides us with common law rights to these names. We also believe that we
acquired common law rights to the non-registered marks "Thermal Image
25
<PAGE>
Processor" and "Photonic Stimulator" in connection with our acquisition of
Bales Scientific, Inc. Accordingly, our products are being marketed under
these brand names. We intend to pursue registration of these, or other
registerable brand names, in due course.
Franchises, Concessions, Royalty Agreements, Labor Contracts
------------------------------------------------------------
Other than royalty agreements in connection with the sales of our
Photonic Stimulators, we have no franchises, concessions, royalty agreements
or labor contracts in effect.
In connection with our acquisition of Bales on April 18, 2000, we entered
into an Employment and Royalty Agreement with Maurice Bales whereby we agreed
to pay a $250 royalty upon the sale of each Photonic Stimulator. The Bales
acquisition documents also contemplate that we will, at a future date, enter
into a second royalty agreement with an individual from whom we acquired
intellectual property rights in connection with the Bales acquisition. It is
anticipated that this second royalty agreement, when and if formally executed,
will also provide for an additional $250 royalty upon the sale of each
Photonic Stimulator.
Recent Events
-------------
Private Placements. To provide funding necessary to continue clinical
testing and, thereby, accelerate the PMA process, we raised approximately
$44.5 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 $39.5 million. 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. We currently have a registration statement
in effect registering the shares underlying the securities issued in
connection with this private placement.
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. We currently have a registration statement
in effect registering the shares underlying the securities issued in
connection with this private placement.
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. The
common stock shares were issued in reliance upon the exemption available under
Section 4(2) of the Securities Act of 1933. Bales, founded in 1977,
26
<PAGE>
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 improve vascularity and increase blood flow
circulation in the treatment of 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 on the world-wide-web at www.balesscientific.com. The
information contained at this web site is not a part of this document.
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 June 30, 2000, we have 32 full-time employees, four of whom are
part of our executive management team. None of our employees are represented
by a union and we consider our employee relations to be good.
Risk Factors Concerning Our Business
------------------------------------
The following risk factors relate to our business, the development and
future marketing of our products, and the governmental environment and
financial markets in which we operate. 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 herein, 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 HAD ONLY LIMITED
REVENUES FROM OPERATIONS. WE HAVE A LIMITED OPERATING HISTORY.
WE MAY NEVER HAVE SUBSTANTIAL REVENUE FROM OPERATIONS. WE MAY
NEVER BE PROFITABLE.
Since inception in 1987, 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 achieve commercialization of
27
<PAGE>
our products. (See Part II, Item 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION," herein for a broader discussion
of our operations and financial condition.)
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 research and development
and the commercialization of our Medical Imaging Systems.
For fiscal year 2000, we had a net loss of $(8,893,155), a deficit of
$(34,601,965) and stockholders' equity of $48,284,845. For our fiscal year
1999, we had a net loss of $(5,025,841), a deficit of $(25,708,810) and
stockholders' deficit of $(159,709). Our increase in stockholders' equity for
the year ended June 30, 2000 was primarily due to the sale of our equity
securities in private transactions and the purchase of Bales Scientific, Inc.
("Bales") using our equity securities. (See Part II, Item 6, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION,"
herein for a more complete discussion concerning our financial condition.)
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 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.
IN THE PAST, 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 included an explanatory paragraph that describes
substantial doubt concerning our ability to continue as a going concern
without additional capital. Although we have since raised additional capital
through private placements of our equity securities, we may continue to incur
losses in the foreseeable future due to the significant costs associated with
the research and development and commercialization of our products. The
report of our independent accountants for the year ended June 30, 2000
contains no going-concern opinion.
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.
28
<PAGE>
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, if any, 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 August 30, 2000, the closing price of our common stock was $5.2188 per
share. If our closing stock price were to fall below $5.00, our stock could
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. Generally, a company's stock is EXEMPT from the penny stock rules
if, among other things, the: (i) company has net tangible assets in excess of
$2 million demonstrated by an audited balance sheet that is less than 15
months old from the date of the stock broker's transaction; (ii) stock broker
personally reviews the audited balance sheet; and (iii) stock broker has a
reasonable basis to believe that at the time of any given stock transaction in
a customer account, the company still has at least $2 million in net tangible
assets. If we were to become subject to the penny stock rules, there could be
delays in the trading of our stock and the market liquidity of our stock could
be adversely affected.
WE HAVE APPLIED TO HAVE OUR COMMON STOCK LISTED ON NASDAQ'S
LARGE-CAP NATIONAL MARKET. THERE IS NO ASSURANCE THAT OUR
COMMON STOCK WILL BE LISTED ON NASDAQ OR, IF LISTED, THAT WE
WILL CONTINUE TO MEET THE QUALIFICATIONS FOR LISTING.
On March 30, 2000, we applied to have our common stock listed on the
Large-Cap National Market of the Nasdaq Stock Exchange. On June 26, 2000,
Nasdaq approved the listing of our common stock to be effective June 29, 2000.
On June 28, 2000, Nasdaq informed us that our listing was "on hold" and
requested additional information from us. We are continuing to work with
Nasdaq staff to complete the application process. Our stock is currently
trading near the $5 minimum bid price required to obtain Nasdaq listing of our
stock. There can be no assurance that our common stock will be listed on
Nasdaq or, if listed, that we will continue to meet the qualifications for
listing.
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, which could be unrelated to our financial and operating results.
WE COULD ISSUE PREFERRED STOCK AND THIS COULD HARM YOUR INTERESTS.
29
<PAGE>
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 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 RELY ON OTHERS TO HELP DEVELOP AND MANUFACTURE OUR PRODUCTS.
IF THESE THIRD PARTIES FAIL TO PERFORM IN ACCORDANCE WITH THE
CONTRACTS WE HAVE IN PLACE WITH THEM, THE FDA APPROVAL, DEVELOPMENT,
AND/OR PRODUCTION OF OUR PRODUCTS COULD BE SUBSTANTIALLY DELAYED.
We have a material dependence upon various vendors and hospitals to
assist in the FDA clinical studies of our Breast Imaging System and the
development and manufacturing of our products. Our products are highly
specialized and require that many component parts be developed and
manufactured according to unique specifications. Although there may be more
than one developer or manufacturer for our component parts, failure to develop
or manufacture our component parts in a timely manner could result in a loss
of business for us and further result in substantial delays in the FDA
approval and/or commercialization of our products.
WE CURRENTLY DO NOT HAVE MANY CUSTOMERS FOR OUR PRODUCTS. IN
ORDER TO BE SUCCESSFUL, WE ANTICIPATE THAT OUR PRODUCTS WILL NEED
TO BE DISTRIBUTED TO A BROAD CUSTOMER BASE. IF WE ARE UNABLE TO
IDENTIFY AND ADEQUATELY MARKET OUR PRODUCTS TO A BROAD CUSTOMER BASE,
OUR PRODUCTS MAY NEVER REACH THE MARKETS AND OUR BUSINESS COULD FAIL.
We have sold one General Use System to a hospital in Bangkok, Thailand
and only recently received an order to deliver 10 Breast Imaging Systems to
CTII in Mexico. In the United States, we expect that if, and when, we are
able to obtain FDA approval on our Breast Imaging System, we will need to
market and sell our products to more than just a few major customers.
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 also
currently hold a patent (No. 5,999,842) dated December 7, 1999 on our bed
30
<PAGE>
apparatus. We also hold provisional applications on our algorithm (Serial No.
60/105,147 dated October 21, 1998) and Photonic Stimulator (Serial No.
09/229,689 dated January 13, 1999). However, 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 pursuant to PMA No. M990018. There is no
assurance that we will ever receive FDA approval. Failure to secure FDA
approval would reduce or eliminate 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.
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 and/or directors. 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, with the
exception of Mr. Packer whose employment agreement expired on April 30, 2000.
Mr. Packer is currently renegotiating his employment agreement. The loss of
the services of any of these individuals 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
31
<PAGE>
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 30, 2000, we had outstanding a total of 6,717,591 immediately
exercisable options to purchase our common stock at exercise prices ranging
from $.60 to $9.0625 per share. As of June 30, 2000, we also had 6,702,917
options to purchase our common stock at exercise prices ranging from $.70 to
$9.0625 that vest or may be granted at future dates pursuant to various
agreements. As of June 30, 2000 we had outstanding immediately exercisable
warrants to purchase 8,453,047 shares of our common stock at prices ranging
from $.72 to $7.25 per share.
Of the immediately exercisable options and warrants noted above,
2,271,083 expire at various times through the year 2000, 902,500 expire at
various times through the year 2001, 1,650,000 expire at various times through
the year 2002, 8,262,472 expire at various times through the year 2005 and
2,084,583 expire after 2005. If the exercises 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 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 on the existing holders of our common stock.
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 30, 2000, we had outstanding 80,149,516 shares of common
stock, out of which approximately 30.1 million shares are restricted
securities. Approximately 15.8 million shares of our restricted common stock
(2.96 million of which are held by affiliates) have been held for less than
one year and cannot be traded without an effective registration statement or
acceptable opinion that such shares can be sold. Approximately 6.9 million
shares of our restricted common stock (3.84 million of which are held by
32
<PAGE>
affiliates) have 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 7.4 million shares of our
restricted common stock (less 6.49 million of which are held by affiliates and
are subject to volume limits pursuant to Rule 144) have been held by our
shareholders for more than two years and can be sold immediately without
restriction. 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.
On June 6, 2000, we filed an amended registration statement on Form SB-2,
Amendment #9, File #333-47237, with the Securities and Exchange Commission to
register 7,443,948 shares of our common stock issued in connection with
transactions prior to the fiscal year ended June 30, 1999 and on June 15,
2000, we filed our Prospectus on Form 424 (b) (4). Such registration
statement was declared effective on June 15, 2000. On June 20, 2000, we filed
an initial registration statement on Form SB-2, File #333-39654, with the
Securities and Exchange Commission to register 23,427,338 shares of common
stock including common stock underlying each of the transactions occurring
July 1, 1999 through June 17, 2000. On June 30, 2000, the Securities and
Exchange Commission declared the registration statement effective and on July
3, 2000, we filed our Prospectus on Form 424(b)(4).
All of our common stock outstanding as of June 30, 2000 consists of
free-trading shares or restricted shares that can be sold, traded or otherwise
transferred pursuant to the terms of our currently effective registration
statements. Such registration statements go "stale" on October 31, 2000 which
effectively means that restricted securities registered pursuant to such
registration statements can no longer be sold, traded or otherwise transferred
unless, and until,
1) such time as we file amended registration statements containing
our June 30, 2000 audited financial statements, or
2) we receive a legal opinion to our satisfaction that such
underlying shares can be sold without an effective registration,
or
3) the requisite holding periods for such securities lapse.
We plan to file amended registration statements prior to the date that
the current registration statements go stale. However, there can be no
assurance that we will file such registration statements as planned, or that
if filed as planned, the Securities and Exchange Commission will declare such
registration statements effective prior to October 31, 2000; the date the
current registration statements go stale.
WE INDEMNIFY OUR DIRECTORS AND OFFICERS AND THIS REDUCES THE
LIKELIHOOD OF SHAREHOLDER LITIGATION.
Our Bylaws provide that we indemnify our directors and officers 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.
33
<PAGE>
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.
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.
ITEM 2: DESCRIPTION OF OUR PROPERTIES
We lease facilities under various operating leases that call for fixed
monthly payments, adjusted periodically, over their term as follows:
Lake Oswego, Oregon Office Agreement. On May 4, 2000, we entered into a
one-year office lease commencing May 8, 2000 and ending May 7, 2001. The
lease calls for a monthly office charge of $4,511 for 1,088 allocated square
footage of office space, furniture rental and shared administrative services.
The total monthly cost of the lease may exceed the base rate depending upon
the shared services utilized during a given month. The office space is used
to house our marketing personnel. We do not plan to renew this lease upon its
termination.
Walnut Creek, California Lease Agreement. In connection with our
acquisition of Bales Scientific, Inc. ("Bales") on April 18, 2000, we entered
into a three-year lease agreement commencing on April 20, 2000 and ending on
April 19, 2003. The monthly lease payment of $7,500 covers approximately
5,500 square feet of office space. The lease rate is scheduled to increase on
April 20 of each year of the lease by the Consumer Price Index, or comparable
index, in effect for the preceding calendar year. The facility is used to
house our Bales operations and employees.
Portland, Oregon Lease Agreement. On September 1, 1990, we entered into
an agreement to lease approximately 1,000 square feet of office space,
commencing September 1, 1990 and ending August 31, 1999, for $2,525 per month.
Although we continue to occupy this office space on a month-to-month basis, we
anticipate we will terminate this lease in the very near future. Shortly
following execution of this lease, the Lessor verbally agreed to delay receipt
of rental payments until such time as we were financially able to make such
payments. As of June 30, 2000, we determined that we owed Lessor
approximately $375,000 in past rents and interest. On June 30, 2000, the
Lessor agreed to accept $210,000 in settlement of all past rental payments,
interest, claims, demands or indebtedness related to, or arising out of, the
lease agreement and our occupancy of the office space. In August 2000, we
paid the lessor all amounts due in connection with this lease. This office
space is used as our executive offices.
34
<PAGE>
Layton, Utah Lease Agreement. On July 15, l997, we entered into an
agreement to lease 1,993 square feet for $2,907 per month commencing December
1, 1997 and ending November 30, 2002. On April 14, 2000, we amended the
agreement to add an additional 4,036 square feet of office space. For the
period May 1, 2000 through November 30, 2000, the monthly lease payment for
the total 6,029 square feet of office space is $9,521. This monthly lease
rate increases to $9,889 for the period December 1, 2000 through November 30,
2001 and to $10,302 for the period December 1, 2001 through November 30, 2002.
This office space is used to house our administrative, executive, financial,
and technical personnel.
St. Paul Properties Lease Agreement, Lake Oswego, Oregon. On May 31,
2000, we entered into an agreement to lease approximately 7,388 square feet of
executive office space commencing at such time as leasehold improvements are
completed (estimated to be on or about September 30, 2000) and ending July 31,
2005 with respect to 2,088 square feet and July 1, 2006 with respect to the
remaining 5,300 square feet. Pursuant to the agreement, monthly lease
payments shall begin on the first day of the fourth month following
commencement of our possession of the office space and shall continue as
follows: months 4 - 36, $15,700/mo.; months 37 - 60, $16,931/mo.; and months
61 - 72, $12,146/mo.
With respect to this agreement, we prepaid $15,700 upon signing the lease
agreement that will be applied to the initial lease payments and we provided
an $110,000 cash-collateralized letter of credit to secure leasehold
improvements made by the lessor. This office space is intended to house our
executive and marketing employees in Oregon and will ultimately replace the
Portland and Lake Oswego office leases noted above. A copy of the lease
agreement is attached hereto as Exhibit 10(aa).
We believe that our offices are adequate for our present needs and that
suitable space will be available for our future needs.
ITEM 3: LEGAL PROCEEDINGS
Kenneth M. Dodd Executive Employment Agreement
----------------------------------------------
On February 24, 1999, we filed a complaint against Kenneth M. Dodd
("Defendant") in the Eighth Judicial District Court, Clark County, Nevada,
Case No. A399754, seeking to enforce confidentiality agreements and certain
terms in connection with Defendant's employment contract with us. Defendant
resigned as CEO and President of CTICO, our subsidiary, in December 1998.
In 1995, Defendant entered into employment agreements with us under which
he would receive agreed upon consideration, including certain options to
purchase shares of our common stock and shares of CTICO. During his tenure,
we allege that Defendant gave unauthorized salary increases and bonuses that
were not disclosed to our Board of Directors, that Defendant misappropriated
certain funds and equipment for his own use, and that Defendant disclosed
certain proprietary information concerning our business. In connection with
Defendant's actions, we allege breach of contract, breach of fiduciary duty,
conversion, breach of duty of care, breach of duty of loyalty, and usurpation
of corporate opportunity.
35
<PAGE>
In August 2000, we made an offer of settlement whereby we would release
the Defendant of all claims under our complaint and pay Defendant $10,000 in
exchange for his 7.5 percent interest in our subsidiary, Computerized Thermal
Imaging Company ("CTICO", previously Thermal Medical Imaging, Inc.). On
August 25, 2000, the Defendant accepted our offer of settlement. As a result
of our settlement with Defendant, we now own approximately 97.9 percent of the
outstanding common stock of CTICO.
Kathleen Sullivan Employment Agreement
--------------------------------------
On June 27, 2000, Kathleen Sullivan ("Plaintiff") filed a complaint in
the Superior Court of California for the County of Los Angeles (Central
District), Case No. BC232482, against us alleging breach of contract.
Plaintiff seeks unspecified damages pursuant to an agreement whereby she was
to undertake particular promotional activities for the benefit of the Company
during 1998. The agreement required us to issue stock and/or warrants in
exchange for Plaintiff's performance. Plaintiff claims that we failed to duly
compensate her for services rendered, whereas, we assert breach and
non-performance as a defense on the basis that Plaintiff failed to fulfill her
contractual obligations.
We believe that Plaintiff's claims are without merit and will continue to
vigorously defend ourselves against any and all claims. We are currently
engaged in discovery and no trial date has been set at this time.
Salah Al-Hasawi Advisory Services Claim
---------------------------------------
On March 29, 2000, Salah Al-Hasawi ("Plaintiff"), a citizen and resident
of Kuwait, filed an action 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 the private placement of our securities. Shortly thereafter,
the New York Action was dismissed without prejudice and on April 12, 2000, the
Plaintiff filed a similar complaint in the United States District Court for
the District of Utah under Case No. 2:00CV-0317K. The Plaintiff is seeking
specified damages, attorney fees and unspecified damages pursuant to five
separate causes of action including breach of contract, fraud and unjust
enrichment.
In connection with our private placement, Plaintiff claims that he
personally placed and sold approximately $10.7 million of our securities on
contract and that we failed to pay him commissions of $516,000 plus stock
options to purchase 1,070,000 shares of our common stock valued at $15
million. Plaintiff alternatively alleges that he had a revised contract with
us whereby he was to receive one-third of the foregoing commissions and stock
options.
We have categorically denied all of Plaintiff's claims and have
affirmatively alleged that at all times, Plaintiff acted as an agent of
Financial Services Group, to who all commissions (less amounts inadvertently
paid to Plaintiff prior to our knowledge of the agency relationship between
Plaintiff and Financial Services Group) and stock options due and owing were
promptly paid.
36
<PAGE>
We are currently engaged in the discovery stages phase of the action and
no trial date has been set at this time.
Bristol Asset Management Claims
-------------------------------
We previously announced that in March 2000, Bristol Asset Management,
LLC, a California Limited Liability Company, filed two separate complaints
against us in the Superior Court of the State of California for the County of
Los Angeles, Complaint No. BC226822 and No. BC227158, alleging breach of
contract in connection with prior agreements.
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 in exchange for release of all claims made under the foregoing
complaints. In connection with the settlement, we have recognized a $475,000
litigation expense in our June 30, 2000 financial statements.
Bloomberg/Evans Defamation Action
---------------------------------
On August 28, 2000, we filed a complaint for libel in the United States
District Court for the District of Utah, Northern Division, Case No.
1:00CV00098K against Bloomberg, L.P. (the "Defendant"). The complaint and
summons were also serviced on Bloomberg through its registered agent in Utah.
The lawsuit alleges that on June 29 and July 18, 2000, Bloomberg published
certain "Defamatory Articles" about the Company that were written by David
Evans through its news service, Bloomberg News. According to the Complaint,
the Defamatory Articles were published over Bloomberg's Internet web site and
elsewhere to literally millions of people, and contained certain false,
misleading, and defamatory statements regarding our business and thermal
imaging technology, which we are focusing on developing as an adjunct imaging
tool to mammography in the detection of breast cancer. The lawsuit alleges
that, after publication of the "First Defamatory Article" on June 29, 2000, we
wrote to Bloomberg and explained the numerous inaccuracies and falsehoods
contained therein. Although Bloomberg then published on July 18, 2000 what it
labeled as a "correction" to the first story, this "Second Defamatory Article"
still contained defamatory matter calling into doubt (among other things) our
ability to attract capital as well as the efficacy of our Breast Imaging
System, which is currently undergoing clinical testing by physicians at five
independent hospital sites in accordance with a protocol used in connection
with our application for Pre-Market Approval from the Food and Drug
Administration. The Complaint alleges damages against Bloomberg in excess of
One Hundred Million Dollars ($100,000,000). A trial date has yet to be
determined and we have not yet begun discovery.
Alex Saenz Harassment Complaint and Counter-Complaint
-----------------------------------------------------
On June 1, 2000, we filed a complaint against Alex Saenz ("Defendant"),
an individual, in the Circuit Court of the State of Oregon for the County of
Clackamas, Case #CCV0006024. On July 7, 2000, the complaint was moved from
37
<PAGE>
the Circuit Court to the United States District Court for the District of
Oregon, Case #00942MA.
On June 15, 1999, we engaged Defendant to identify and arrange investors
to provide equity-based financing. Our written agreement with Defendant
expired on December 15, 1999. During January through February 2000, Defendant
assisted in the placement of our securities and, as consideration therefore,
received commissions and options to acquire our common stock.
The lawsuit alleges that Defendant thereafter interfered with our
business by threatening lawsuits to recover additional stock options allegedly
owed to him by us and threatening to sue and otherwise harass a certain
individual important to the continued conduct of our business if such stock
options were not granted. We allege tortious interference and plead for a
declaratory judgment 1) that we owe no additional money or stock options to
Defendant, and 2) awarding us $50,000 damages and recovery of costs and
disbursements in connection with the lawsuit.
On July 14, 2000, the Defendant filed his answer to our complaint denying
our allegations and, in connection therewith, Defendant filed a counterclaim
alleging that, despite his written acceptance of the commissions and options
received for his services, we have breached various verbal agreements to
compensate him in an amount other than what is specified in the written
acceptance. Defendant alleges breach of contract and damages ranging from
approximately $2.0 million to $104 million pursuant to three separate causes
of action. Under a fourth cause of action, Defendant alleges slander of his
business reputation and is seeking general damages of $10 million and punitive
damages of $10 million.
We believe Defendant's counterclaims are without merit and will continue
to prosecute this case. We have not yet begun the discovery process and a
date for trial has not been set.
State Securities Matters
------------------------
On May 22, 2000, the Alabama Securities Commission, without a hearing,
entered order No. CD-2000-0031 setting forth that we cease and desist from
further sales of our securities in Alabama. The order reflects that, in
connection with our December 31, 1999 private placement, no commissions can be
paid for soliciting except by a registered agent of a broker-dealer. Pursuant
to the order, we had a right to both a formal and an informal hearing before
the order became final. On July 19, 2000, we held an informal hearing with
the Alabama Securities Commission. On August 22, 2000, the Alabama Securities
Commission vacated their May 22, 2000 Cease and Desist Order.
In a letter dated May 17, 2000, the Utah Division of Securities proposed
terms of an order whereby we would cease and desist from paying commissions
except to broker-dealers and we would pay a $500 fine in connection with our
recent private placement. On July 21, 2000, we responded and requested that
they reconsider the proposed terms of their order. On August 17, 2000, we
were verbally advised by our legal counsel that the Utah Securities division
had considered our letter but was not predisposed to consider a change to
their initial order. We have requested a formal hearing
38
<PAGE>
before the Utah State Securities Commission and are waiting a date for the
hearing.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on June 27, 2000. A complete
description of matters voted upon at our Annual Meeting is given in our
Definitive Proxy Statement (Schedule 14(a) dated and filed May 22, 2000). Of
the 80,153,899 total shares of common stock outstanding and entitled to vote
at our Annual Meeting, 69,818,755 shares, or 87.1 percent, were present either
by proxy or in person.
The first proposal was the election of directors. The following persons
were nominated and elected to serve as members of our Board of Directors for
one year, or until their successors are elected and qualified, by the votes
indicated: David B. Johnston - 69,590,329 votes for and 228,426 withheld;
Richard V. Secord - 69,590,329 votes for and 228,426 withheld; David A. Packer
- 69,590,329 votes for and 228,426 withheld; Brent M. Pratley - 69,590,329
votes for and 228,426 withheld; Harry C. Aderholt - 69,590,329 votes for and
228,426 withheld; Milton R. Geilmann- 69,590,329 votes for and 228,426
withheld.
The second proposal was the proposal to amend our Articles of
Incorporation to authorize 200,000,000 shares of common stock. The proposal
was approved by a vote of 67,961,589 shares for, 1,413,571 shares against, and
443,595 shares abstaining.
The third proposal was the proposal to amend our 1997 stock option plan
to provide for 10,000,000 shares of common stock. The proposal was approved
by a vote of 39,336,763 shares for, 1,616,112 shares against, and 1,667,157
shares abstaining.
The fourth proposal was the proposal to ratify the selection of HJ &
Associates, LLC as our independent auditor for the fiscal year ending June 30,
2000. The proposal was approved by a vote of 68,316,558 shares for, 1,195,978
shares against, and 306,219 shares abstaining.
No other business was presented at our Annual Meeting. Based on the
foregoing, each of our proposals was passed by an affirmative vote of our
shareholders.
-----------------------------------------------------------------------------
PART II
ITEM 5: MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Over-the-Counter Bulletin Board of the
NASD (the "OTC.BB") under the trading symbol "COII". The market for our
common stock is highly volatile. Before you invest in us, you should read the
"Risk Factors" outlined in "Our Business" under Part I, Item 1.
Price Range of Our Common Stock
-------------------------------
39
<PAGE>
Our common stock trades on the OTC.BB under the trading symbol COII.
The following table summarizes the quarterly low and high 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.
Fiscal year ended June 30, 1999 Low Bid High Bid
------------------------------- -------- --------
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 $19.97
Fourth Quarter $5.38 $13.75
On August 30, 2000, the closing price of our common stock as reported on
the OTC.BB was $5.2188 per share. On August 30, 2000, we had approximately
23,600 beneficial stockholders of our common stock and 80,459,734 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, Phone
(801) 355-5740, Fax (801) 355-6505.
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.
Securities Issued without Registration
--------------------------------------
During the quarter ended June 30, 2000, we issued the following equity
securities, none of which were registered as of the date of their issuance:
In March 2000, we issued 76,250 common shares to two 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 April 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.
40
<PAGE>
In April 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.
In April 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.
In April 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.
In April 2000, we issued 269,432 options to four consultants 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.
In April 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.
In April 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.
In May 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.
In May 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.
In May 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.
In June 2000, we issued 35,000 shares to an officer/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.
In June 2000, we issued 400,000 warrants to Bristol Asset Management in
settlement of various alleged claims. Each warrant entitles the holder
41
<PAGE>
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.
In June 2000, we granted 100,000 options to an officer, for services,
10,000 of which immediately vest and 90,000 that vest pro-rata over a
three-year period dependent upon his continued employment with us. Each option
entitles the holder thereof, upon exercise, to one share of common stock at an
exercise price $5.02 per share. This transaction was a private placement made
in reliance on Section 4(2) of the Act.
In June 2000, we granted 400,000 options to an employee, for services,
20,000 of which immediately vest and 380,000 that vest pro-rata over a
three-year period dependent upon his continued employment with us. Each option
entitles the holder thereof, upon exercise, to one share of common stock at an
exercise price $7.71875 per share. This transaction was a private placement
made in reliance on Section 4(2) of the Act.
In June 2000, we granted 225,000 options to an employee, for services,
11,250 of which immediately vest and 213,750 that vest pro-rata over a
three-year period dependent upon his continued employment with us. Each option
entitles the holder thereof, upon exercise, to one share of common stock at an
exercise price $7.71875 per share. This transaction was a private placement
made in reliance on Section 4(2) of the Act.
In June 2000, we granted 200,000 options to an employee, for services,
10,000 of which immediately vest and 190,000 that vest pro-rata over a
three-year period dependent upon his continued employment with us. Each option
entitles the holder thereof, upon exercise, to one share of common stock at an
exercise price $7.71875 per share. This transaction was a private placement
made in reliance on Section 4(2) of the Act.
In July 2000, we issued 36,118 options to one consultant for services
rendered in connection with our recent private placement. This transaction was
accounted for in our June 30, 2000 financial statements as it related to
services rendered to us during that fiscal year. 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.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Forward-Looking Statements Concerning Our Business
--------------------------------------------------
This document contains numerous forward-looking statements about our
business and future. The United States Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for certain forward-looking statements.
Our forward-looking statements are expressed in good faith and we believe that
there is a reasonable basis for us to make them. However, readers are
cautioned not to place undue reliance on such statements. Forward-looking
statements include, but are not limited to, statements about our: 1) plans; 2)
objectives; 3) goals; 4) strategies; 5) expectations for the future; 6) future
performance and events; 7) underlying assumptions for all of the above; and 8)
other statements that are not statements of historical fact.
42
<PAGE>
We make these forward-looking statements based on our analysis of
internal and external historical trends and future expectations. However, such
statements involve risks and uncertainties that could cause our actual results
to materially differ from our forward-looking statements and there can be no
assurance that we will achieve the results set forth in these forward-looking
statements. In addition to other factors, the following are important factors
that could cause our actual results to materially differ from our
forward-looking statements: 1) the results of our pre-clinical and clinical
testing; 2) the time and costs involved in obtaining regulatory approvals for
our systems and products; 3) our ability to respond to changes in the medical
technology marketplace including our ability to develop or acquire new
technologies; 4) competitive factors; 5) the availability of financing on
terms and conditions acceptable to us; 6) the availability of personnel with
requisite skills; and 7) the terms of any new collaborative, licensing and
other arrangements that we may establish.
We have no obligation, or intent, to update or revise these
forward-looking statements to reflect future events, new information or
otherwise.
The following discussion and analysis of our combined financial condition
and results of operations should be read in conjunction with our Consolidated
Financial Statements and Notes thereto contained herein.
Trends/Uncertainties Affecting Continuing Operations
----------------------------------------------------
We are a development stage enterprise and have generated no significant
revenues since inception in 1987. Although our recently acquired subsidiary,
Bales, has generated limited revenues during the past several years, Bales has
also primarily been engaged in research and development activities since its
inception. Accordingly, our ability to achieve profitability will depend, in
part, on our ability to successfully develop clinical applications for our
products, obtain regulatory approvals, and develop the capacity to manufacture
and extensively market our products.
We can make no assurances that we will be able to successfully make the
transition from research and development to manufacturing and selling
commercial thermal imaging products on a broad basis. While attempting to
make this transition, we will be subject to all risks inherent in a growing
venture, including, but not limited to, the need to develop and manufacture
reliable and effective products, develop marketing expertise and expand our
sales force. (See "RISK FACTORS" discussed in Part I, Item 1.)
Overview
--------
We are a medical imaging systems integrator producing thermal imaging
diagnostic and patient management systems configured to produce, interpret,
and catalogue computerized thermal images for medical applications. Through
our subsidiary, Bales, we design, manufacture and sell high resolution,
dynamic, digital infrared imaging workstations and related products for both
medical and industrial application. Specialized cameras developed as part of
these workstations are integral components of our Breast Imaging and General
Use Systems. Our Breast Imaging System are designed to serve as a
non-invasive, painless adjunct to mammography, whereas, our General Use System
will function as a diagnostic tool to help healthcare payers identify and
43
<PAGE>
reduce fraudulent workers' compensation claims. Our recently introduced
Photonic Stimulators are used to improve vascularity and increase blood flow
circulation in the treatment of pain. Industrial application of our imaging
systems include non-destructive inspection of aging aircraft, electronics,
composites, metals and other advanced materials, as well as breakthroughs in
the inspection of turbine blades of large power-generation equipment. TRW is
our primary systems development vendor, BATTELLE is our principal systems
engineer and INFORMIX is our primary software database provider.
Capital is required to satisfy general corporate expenses, software
license and maintenance contract payments, professional fees to comply with
securities reporting requirements, cost of clinical trials and technical
support, FDA consulting expenses, acquisition of technology and expenses
associated with the private placement and registration of our securities. Our
capital resources are principally derived from the sale and private placement
of our common stock and warrants, equity funding pursuant to our agreement in
effect with Beach Boulevard LLC, and the exercise of our common stock warrants
and options.
Results of Operation
--------------------
The following discussion provides a narrative comparison of our financial
position for the fiscal years ended June 30, 2000 and 1999.
We incurred a loss of $8,893,155 for the year ended June 30 2000 compared
to a loss of $5,025,841 for the year ended June 30, 1999. The principal reason
for the increased loss is due to a $959,759 increase in general and
administrative expenses (from $2,576,169 during the 1999 fiscal year to
$3,535,928 during the 2000 fiscal year) and a $3,277,336 increase in research
and development costs (from $1,837,182 during the 1999 fiscal year to
$5,114,518 during the 2000 fiscal year). We also experienced increases in
depreciation and amortization expense of $565,812 and litigation expense of
$583,054 for the year ended June 30, 2000. The foregoing increases in
expenses were partially offset by a $534,742 decrease in interest expense and
an $831,558 increase in interest income.
The $959,759 increase in general and administrative expenses for the year
ended June 30, 2000 primarily resulted from a $448,537 increase in
office-related expenses, a $379,210 increase in salaries, a $113,430 increase
in employee-related benefits, a $73,976 increase in travel costs, and a
$894,636 increase in stockholder services costs offset by a $893,878 decrease
in special services including $525,000 of compensation expense resulting from
the elimination of a $525,000 subscription receivable during 1999. The
overall increase in general and administrative costs in fiscal year 2000
resulted from additional hiring of administrative and professional staff to
support regulatory reporting requirements, marketing efforts and advancement
of our FDA Pre-Market Application.
The $3,277,336 increase in research and development expenses for the year
ended June 30, 2000 primarily resulted from a $1,459,822 increase in payments
to TRW, a $396,590 increase in salaries, a $340,137 increase in software
maintenance fees, a $85,385 increase in clinical trial expenses, a $91,779
increase in FDA-related consulting expenses and a $923,101 increase in
payments to Battelle and Therma Corp. The overall increase in research and
development costs in fiscal year 2000 resulted from additional hiring of
44
<PAGE>
technical personnel and outside consultants to further our clinical trials and
advance submission of our modules towards final FDA approval.
The increase in depreciation and amortization expense primarily resulted
from amortization of goodwill associated with our acquisition of Bales
Scientific and amortization of our software licenses. The increase in
litigation expense primarily resulted from a $475,000 non-cash settlement
wherein we granted, at a discounted strike price, warrants to purchase our
stock, in satisfaction of two actions against us by Bristol Asset Management,
LLC. The increase in interest income primarily resulted from the investment
of cash raised from the placement of our equity securities.
During our 2000 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.
Sources of Liquidity
--------------------
We have generated no significant revenues from operations since inception
in 1987. Although our recently acquired subsidiary has generated limited
revenues during the past several years, Bales, like us, has primarily been a
development stage enterprise. (Refer to "RISK FACTORS" in Part I, Item 1,
"OUR BUSINESS"). Our cash requirements consist of, but are not limited to:
general corporate expenses including office salaries and expenses, lease
payments on our office space, acquisition of technology, software license and
maintenance contracts payments, legal and accounting fees to comply with
securities registration and reporting requirements, costs of clinical trials
and technical support, FDA consulting expenses, and expenses associated with
the private placement of our equity securities. Capital resources needed to
meet our planned expenditures are derived primarily from equity funding on the
private placement of our common stock and warrants, equity funding pursuant to
our agreement in effect with Beach, and the exercise of our outstanding
warrants and options.
Agreement with Beach Boulevard, LLC. On March 4, 1999, we entered into a
Securities Purchase Agreement (as amended in May 1999, the "Investment
Agreement") with Beach Boulevard L.L.C. ("Beach"). Subject to certain
conditions provided in the Investment Agreement, we could require Beach to
purchase up to $7 million of our common stock in a series of $500,000
tranches. As of the date hereof, we have required Beach to purchase
approximately $3 million of our common stock in a series of six tranches. 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 approximately $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 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
45
<PAGE>
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 initial term of the Consulting
Agreement was for one year and automatically renewed for annual periods
thereafter unless terminated upon proper notification. Consideration paid in
connection with the Consulting Agreement was 100,000 shares of our common
stock and a five-year option to purchase an additional 2 million shares at
$.60 per share. As of the date hereof, 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. As consideration for services rendered during our fiscal
year ended June 30, 1999, we eliminated a $525,000 subscription receivable
from MFG and issued 525,000 shares of common stock to MFG in connection
therewith. During the fiscal year ended June 30, 2000, we compensated
Manhattan approximately $46,000 and granted options to acquire 3,038 shares of
our common stock at a strike price of $1.70 per share for services rendered.
Sources of Potential Long-term Liquidity. We expect that both Use
Agreements and Equipment Financing will be sources of long-term liquidity for
us, although it is premature to anticipate the results of either. Although we
have investigated both options and have entered into preliminary discussions
with equipment financing companies, we are awaiting Pre-Market Approval of our
Breast Imaging System before entering into any additional planning or
definitive agreements regarding either. Much of what we anticipate as being
sources of long-term liquidity is contingent upon (1) whether or not we
achieve Pre-Market Approval of our Breast Imaging System, (2) the development
of a definitive and successful marketing strategy, (3) whether we are able to
develop our Medical Imaging Systems for other applications in the United
States, and (4) the results of our marketing efforts in domestic and foreign
markets.
Capital Requirements/Plan of Operation
--------------------------------------
We are a development stage enterprise and, as such, are largely dependent
on the sale of our common stock and warrants, and the exercise of our warrants
and options, to provide liquidity. Since inception, we have continually
sought funding to meet our day-to-day operations and business plan and have
often sought substantial loans from affiliates and shareholders to meet our
financial obligations. Such loans were often repaid in stock. Although we
believe that we have sufficient resources to meet our current plan of
operations for the next 12 months, it is possible that, due to
46
<PAGE>
unforeseen events, we will have insufficient resources and funding required to
implement our plan of operations. Until such time as we begin generating
significant revenues from operations, which is not likely until and unless
Pre-Market Approval of our Breast Imaging System is obtained from the FDA, we
will be faced with the difficulties and expenses associated with our financing
needs and obligations.
Our capital requirements may vary from our estimates and 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
technological and market developments; and 7) the terms of any new
collaborative, licensing and other arrangements that we may establish.
We estimate that we will require approximately $12.5 million in cash to
meet our business plan and obligations for the 12-month period ending June 30,
2001 including approximately $5.0 million in research and development to
complete our clinical trials, test our systems in connection with other
applications and complete our FDA PMA, $3.5 million for day-to-day operating
expenses including lease payments on our facilities, $2.5 million to cover
salaries, and $1.5 million for legal and accounting for SEC compliance with
reporting obligations and general legal representation. We currently have 37
employees and plan to hire additional employees as we move towards completion
of the FDA approval process and develop our marketing and distribution plan.
Certain aspects, listed in order of priority, of our Plan of Operation
for the next twelve months include: 1) completion of Pre-Market Application on
our Breast Imaging System through clinical trials as well as associated system
integration and algorithm development; 2) additional development of our
General Use System applications including imaging of lower-back and
reflex-sympathetic dystrophy-related diseases; 3) integration of new
technologies into the development of our Breast Imaging System; 4) development
of relationships with potential marketing and/or support entities; and 5)
listing our shares on the Nasdaq large cap market and maintain registration of
our shares.
There currently exists approximately 15.2 million shares underlying
options and warrants that can be purchased immediately upon conversion at
exercise prices ranging from $.60 to $9.0625 and representing gross proceeds
to us, upon conversion, of approximately $43.8 million. Additional proceeds
of approximately $17.1 million may be available to us at a future date upon
the vesting and exercise of yet unvested options. The likelihood of warrants
and options being exercised will be high as long as the listing price of our
common stock trades 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 and/or private investors to
support us either through loans or contributions to capital in exchange for
restricted common stock.
47
<PAGE>
Commitments of Capital Expenditures/Sources of Funding
------------------------------------------------------
See Capital Requirements/Plan of Operation above.
Seasonal Aspects
----------------
None.
48
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following comprise our audited consolidated financial statements for
the years ended June 30, 2000 and 1999.
C O N T E N T S
Independent Auditors' Report F-2
Consolidated Balance Sheet as of June 30, 2000 F-3
Consolidated Statement of Operations for the F-4
years ended June 30, 2000 and 1999 and for the
period from inception on June 10, 1987 to June
30, 2000
Consolidated Statements of Stockholders' Equity F-5
(Deficit) for the years ended June 30, 2000 and
1999 and for the period from inception on June
10, 1987 to June 30, 2000
Consolidated Statements of Cash Flows for the F-12
years ended June 30, 2000 and 1999 and for the
period from inception on June 10, 1987 to June
30, 2000
Notes to Consolidated Financial Statements F-14
F-1
<PAGE>
HJ & Associates, L.L.C.
------------------------
Certified Public Accountants and Consultants
American Institute of Certified Public Accountants
Utah Association of Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the 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, 2000, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended June 30, 2000 and 1999 and
from inception on June 10, 1987 through June 30, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 audits provide 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, 2000, and the consolidated results of their operations and their cash
flows for the years ended June 30, 2000 and 1999 and from inception on June
10, 1987 through June 30, 2000, in conformity with generally accepted
accounting principles.
/s/HJ & Associates, LLC
---------------------------
HJ & Associates, LLC
Salt Lake City, Utah
September 1, 2000
50 South Main Street Suite 1450
Salt Lake City, Utah 84144
Telephone (801) 328-4408 Facsimile (801) 328-4461
F-2
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Balance Sheet
ASSETS
June 30,
2000
--------------
CURRENT ASSETS
Cash and cash equivalents $ 8,997,767
Marketable securities (Note 3) 26,034,399
Accounts receivable, trade (net of $4,600 allowance) 177,254
Inventory (Note 4) 110,206
Interest receivable 439,273
Prepaid expenses 204,541
Software maintenance contract (Note 5) 309,863
--------------
Total Current Assets 36,273,303
--------------
PROPERTY AND EQUIPMENT, NET (Notes 1 and 6) 567,936
SOFTWARE LICENSES, NET (Notes 1 and 7) 3,447,289
GOODWILL, NET (Notes 1 and 8) 10,993,895
INTELLECTUAL PROPERTY RIGHTS 50,000
ADVANCES TO AFFILIATES (Note 9) 130,247
--------------
TOTAL ASSETS $ 51,462,670
==============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 688,064
Accrued employee costs 375,920
Sales taxes payable 14,809
Deferred revenues (Note 10) 1,750,000
Accrued liabilities 349,032
--------------
Total Current Liabilities 3,177,825
--------------
DEFERRED INCOME TAXES (Note 11) -
COMMITMENTS AND CONTINGENCIES (Note 12) -
STOCKHOLDERS' EQUITY (DEFICIT) (Note 13)
Convertible preferred stock, $5.00 par value,
3,000,000 shares authorized -
Common stock, $.001 par value, 200,000,000 shares
authorized, 80,149,516 issued and outstanding on
June 30, 2000 80,150
Additional paid in capital 82,774,168
Other comprehensive income 32,492
Losses accumulated during the development stage (34,601,965)
--------------
Total Stockholders' Equity (Deficit) 48,284,845
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 51,462,670
==============
The accompanying notes are an integral part
of these consolidated financial statements
F-3
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Operations
From
Inception
Years Ended through
June 30, June 30,
------------------------------ -------------
2000 1999 2000
------------- -------------- -------------
INCOME
Sales revenues $ 329,283 $ - $ 329,283
Cost of goods sold (176,936) - (176,936)
------------- -------------- -------------
Gross Margin 152,347 - 152,347
Interest income 837,682 6,124 863,689
Income from sale of prototypes - - 180,815
------------- -------------- -------------
Total Income 990,029 6,124 1,196,851
------------- -------------- -------------
COSTS AND EXPENSES
Operating, general and
administrative expenses 3,535,928 2,576,169 19,689,268
Research and development costs 5,114,518 1,837,182 12,146,764
Interest expense 33,479 568,221 2,173,812
Depreciation and amortization
expense 616,205 50,393 757,175
Litigation settlement 583,054 - 1,097,434
------------- -------------- -------------
Total Costs and Expenses 9,883,184 5,031,965 35,864,453
------------- -------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM (8,893,155) (5,025,841) (34,667,602)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT - - 65,637
------------- -------------- -------------
NET LOSS $ (8,893,155) $ (5,025,841) $ (34,601,965)
============= ============== =============
OTHER COMPREHENSIVE INCOME
Unrealized gain on
available-for-sale securities 32,492 - 32,492
------------- -------------- -------------
Total Other Comprehensive Income 32,492 - 32,492
------------- -------------- -------------
NET COMPREHENSIVE LOSS $ (8,860,663) $ - $ (34,569,473)
============= ============== =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 68,452,635 57,525,818
============= ==============
BASIC LOSS PER COMMON SHARE $ (0.13) $ (0.09)
============= ==============
The accompanying notes are an integral part
of these consolidated financial statements
F-4
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
<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 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
---------- ------- ----------- -------- ------------ -----------
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE> F-5
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
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 21,886,160 21,886 3,062,740 - - 3,084,626
Stock issued in
connection with
claims by certain
stockholders 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 30,304,015 30,340 10,068,346 (525,000) - 9,573,650
---------- ------- ----------- -------- ------------ -----------
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE> F-6
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
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 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 2,40 977,951 - - 980,355
---------- ------- ----------- -------- ------------ -----------
Balance Forward 38,141,487 38,142 14,388,524 (525,000) (14,739,084) (837,418)
---------- ------- ----------- -------- ------------ -----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
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 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
rescission 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
---------- ------- ----------- -------- ------------ -----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
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 62,275,560 62,276 25,486,825 - (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 - (25,708,810) 1,350,623
---------- ------- ----------- -------- ------------ -----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
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 - (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 1,235,963 1,236 3,187,130 - - 3,188,366
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
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
Warrants exercised for
cash at $.72 per share 24,209 24 17,406 - - 17,430
---------- ------- ----------- -------- ------------ -----------
Balance Forward 67,508,270 67,509 31,642,127 - (25,708,810) 6,000,826
---------- ------- ----------- -------- ------------ -----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit) (Continued)
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 67,508,270 67,509 31,642,127 - (25,708,810) 6,000,826
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
Warrants exercised for
cash at $2.50 per share 76,250 76 190,548 - - 190,624
Stock issued for cash at
$9.80 per share 510,204 510 4,999,490 - - 5,000,000
Stock and warrants issued
for cash, net of
offering expenses of
$2,932,324, at $3.81
per share and warrant 11,148,766 11,149 39,533,423 - - 39,544,572
Stock issued in
connection with
acquisition of Bales
Scientific at $7.75 per
share 709,678 710 5,499,290 - - 5,500,000
Shares issued on exercise
of stock options by
officer at $.70 per
share 35,000 35 24,465 - - 24,500
Options granted to
officer at 15%
discount to market
as compensation - - 91,750 - - 91,750
Warrants issued at 14%
discount to market
in connection with
the settlement of a
lawsuit - - 475,000 - - 475,000
Other comprehensive
income - - - - - 32,492
Net loss accumulated
in 2000 - - - - (8,893,155) (8,893,155)
========== ======= =========== ======== ============ ===========
Balance at June 30,
2000 80,149,516 $80,150 $82,774,168 $ - $(34,601,965) $48,284,845
========== ======= =========== ======== ============ ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows
From
Inception
through
Years Ended June 30, June 30,
------------------------------ -------------
2000 1999 2000
------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,893,155) $ (5,025,841) $(34,601,965)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 616,205 50,393 757,175
Amortization of debt issuance costs and
discounts on notes payable - 597,500 929,313
Common stock, warrants, and options
issued as compensation for services 432,205 555,686 9,343,801
Common stock issued for interest expense - - 423,596
Common stock issued to settle litigation - - 514,380
Options issued at discount to market to
settle litigation 475,000 - 475,000
Options issued at discount to market
as compensation expense 91,750 - 91,750
Common stock issued for failure to
complete timely registration - - 82,216
Common stock issued to 401(k) plan 43,236 - 43,226
Extraordinary gain on extinguishment
of debt - - (65,637)
Changes in operating assets and
liabilities:
Decrease in inventory 66,552 - 66,552
Increase in accounts receivable - trade (59,999) - (59,999)
Decrease in maintenance contract (309,863) - (309,863)
Increase (decrease) in deposits,
receivables and prepaids (335,488) 2,204 (335,488)
Increase (decrease) in accounts
payable and accrued liabilities 824,632 (204,517) 1,360,146
Increase in deferred revenues 1,750,000 - 1,750,000
------------- -------------- -------------
Net Cash Used in Operating Activities (5,298,925) (4,024,575) (19,535,787)
------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - 4,790 4,790
Capital expenditures (483,459) (144,569) (859,206)
Purchase of software license (3,850,000) - (3,850,000)
Purchase of marketable securities (26,332,615) - (26,332,615)
Acquisition of Bales Scientific common
stock (5,600,910) - (5,600,910)
Legal fees capitalized in connection
with acquisition of Bales Scientific (41,970) - (41,970)
Acquisition of minority interest of
subsidiary (60,000) - (60,000)
------------- -------------- -------------
Net Cash Used in Investing Activities $(36,368,954) $ (139,779) $(36,739,911)
------------- -------------- -------------
The accompanying notes are an integral part
of these consolidated financial statements.
F-12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows (Continued)
From
Inception
through
Years Ended June 30, June 30,
------------------------------ -------------
2000 1999 2000
------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock and warrants issued
for cash $ 53,604,850 $ 3,175,540 $ 63,630,152
Stock offering costs (3,007,324) - (3,007,324)
Cash purchased in Bales acquisition 38,822 - 38,822
Advances to affiliate (107,864) - (107,864)
Advances from stockholders - 904,164 2,320,738
Proceeds from borrowings and accrued
interest - 292,971 3,213,132
Legal fees and interest added to note - 258,146 496,599
Payment of debt issuance costs - - (133,600)
Retirement of notes and debentures - (559,369) (1,177,190)
------------- -------------- -------------
Net Cash Provided by Financing Activities 50,528,484 4,071,452 65,273,465
------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,860,605 (92,902) 8,997,767
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 137,162 230,064 -
------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,997,767 $ 137,162 $ 8,997,767
============= ============== =============
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 minority interest of subsidiary $ 165,500 $ - $ 165,500
Common stock issued in consideration of
Bales Scientific 5,500,000 - 5,500,000
Options issued at discount to market in
connection with offering 744,282 - 744,282
Options issued at discount to market in
connection with litigation settlement 475,000 - 475,000
Options issued at discount to market to
officer as compensation 91,750 - 91,750
Stock offering costs capitalized (744,282) - (744,282)
Common stock issued for advances from
shareholders - - 2,320,738
Common stock issued for notes payable,
accrued discount & interest - 980,355 2,224,953
Common stock issued for convertible
subordinated debentures - 640,660 640,660
Common stock returned to equity,
rescission offer declined - (306,873) -
Common stock issued for liabilities - - 50,000
The accompanying notes are an integral part
of these consolidated financial statements.
F-13
</TABLE>
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Computerized Thermal Imaging, Inc. (the "Company") is a Nevada
Corporation, involved in the development of a thermal imaging system for
applications in the health care industry. The Company's system is based upon
computer interpretation of thermal photography using proprietary software
developed by the Company. The Company was originally incorporated as Business
Helpers, Inc. on June 10, 1987 and subsequently adopted name changes to DTI
Dorex, Ltd. and, finally, to Computerized Thermal Imaging, Inc. The Company
is considered a development stage enterprise because it has not yet generated
significant revenues from the sale of its products. Since inception, the
Company has devoted substantially all of its efforts to: 1) the development
and improvement of systems for commercial application of thermal imaging
technology in the medical industry; 2) the development of markets for its
technology; and 3) the search for sources of capital to fund its efforts. On
April 18, 2000, the Company acquired 100 percent of the outstanding common
stock of Bales Scientific, Inc. ("Bales"), a company that designs,
manufactures, and sells high-resolution, dynamic, digital infrared-imaging
workstations and related products for both medical and industrial
applications.
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. and its
wholly-owned subsidiary, Bales Scientific, Inc., for the short period from
April 18, 2000 (the date of acquisition) through June 30, 2000. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
b. Significant Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
periods. Actual results could differ from estimates making it reasonably
possible that a change in the estimates could occur in the near 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.
F-14
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
d. Inventories
The Company values inventory at its lower of cost or market and utilizes
the FIFO (first-in, first-out) method in determining the cost of inventory.
e. 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.
f. 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.
g. Goodwill
Goodwill is recorded at cost. Amortization is provided on the
straight-line method over the estimated useful life of the goodwill, which is
15 years. The cost and related accumulated amortization of goodwill written
off or otherwise disposed of are removed from the accounts, and any gain or
loss is included in operations. The goodwill is evaluated annually for any
impairment.
h. Income Taxes
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax basis of
assets and liabilities and their financial amounts at year-end. The Company
has reviewed its net deferred tax assets, together with net operating loss
carryforwards, and has decided to forego recognition of potential tax benefits
arising there from. In making this determination, the Company has considered
the Company's history of tax losses incurred since inception and the fact that
the Company is still within the development stage. The Company has provided a
valuation allowance to reduce its potential deferred tax assets to their net
realizable value.
F-15
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
i. 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
and other technologies.
j. 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".
k. 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.
l. Revenue Recognition
The Company recognizes revenues upon delivery of the product and
acceptance of the product by the customer.
m. Reclassification
Certain amounts for the year ended June 30, 1999 have been reclassified
to conform to the presentation used at June 30, 2000. The reclassifications
have no effect on net income for either of the years presented.
NOTE 2. NEW ACCOUNTING STANDARD
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), subsequently amended by FAS 138 "Accounting
for Hedging Activities", which establishes accounting and reporting standards
for derivative instruments and hedging activities. Effective for all fiscal
quarters beginning after June 15, 2000, SFAS 133 requires the Company to
recognize all derivative instruments as either assets or liabilities in the
statement of financial position and measure those instruments at their fair
value on an on-going basis.
F-16
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 2. NEW ACCOUNTING STANDARD (Continued)
The Company is assessing the effect of adopting SFAS 133 on its financial
statements and plans to adopt the statement on July 1, 2000. The Company does
not anticipate that the adoption of SFAS 133 will have a material effect on
the financial condition of the Company.
NOTE 3. MARKETABLE SECURITIES
The Company reports its marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This Statement establishes
standards of financial accounting and reporting for investments in equity
securities that have a readily determinable fair value and for all investments
in debt securities. Under Statement 115, debt and marketable equity
securities are required to be classified into one of three categories:
trading, available-for-sale, or held to maturity. The Company's debt and
equity securities qualify under Statement 115 as available-for-sale. Such
securities are recorded at fair value, and unrealized holding gains and
losses, net of the related tax effects, are reflected as a separate component
of earnings. Net unrealized holding gains of $32,492 are reported in the
Company's balance sheet under "Other Comprehensive Income" for the year ended
June 30, 2000. At such dated, the gross unrealized gains (losses) on
available-for-sale securities were as follows:
Gross
Amortized Unrealized
Cost Gains Fair Value
------------ ------------ ------------
Corporate Securities $ 11,932,885 $ 21,359 $ 11,954,244
Government Securities 13,959,022 11,133 13,970,155
Other 110,000 - 110,000
------------ ------------ ------------
Total $ 26,001,907 $ 32,492 $ 26,034,399
============ ============ ============
Contractual maturities and yields of investments in available-for-sale
securities at June 30, 2000 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
Corporate Securities Government Securities All Other Debt Securities
----------------------------- ----------------------------- -----------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield Cost Value Yield
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 3.023 $ 3.028 8.11% $ 8.484 $ 8.485 6.82% $ 0.110 $ 0.110 6.50%
After 1 but
within 5 years 8.910 8.926 6.63% 5.475 5.485 6.97% - - -
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $ 11.933 $ 11.954 7.01% $ 13.959 $ 13.970 6.88% $ 0.110 $ 0.110 6.50%
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
F-17
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 4. INVENTORIES
Inventories are valued at their lower of cost or market. The FIFO
(first-in, first out) method is used to determine the cost of inventories.
Inventories at June 30, by major classification, were as follows:
2000 1999
---------- ----------
Raw materials and work-in-process $ 110,206 $ -
Finished goods - -
Supplies - -
---------- ----------
$ 110,206 $ -
========== ==========
NOTE 5. SOFTWARE MAINTENANCE CONTRACT
On December 22, 1999, the Company entered into a 12-month software
maintenance contract from Informix Software, Inc. at a cost of $650,000. The
maintenance agreement expires on December 21, 2000. As of June 30, 2000, the
Company recorded a current asset of $309,863 related to the unexpired portion
of the maintenance agreement.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment at June 30 consisted of the following:
2000 1999 Life
----------- ---------- ---------
Leasehold improvements $ 10,591 $ - 3 years
Office furniture and fixtures 57,965 23,115 5-7 years
Machinery and equipment 708,406 356,498 5-7 years
----------- ----------
776,962 379,613
Less accumulated depreciation (209,026) (140,970)
----------- ----------
Net property and equipment $ 567,936 $ 238,643
=========== ==========
Depreciation expense for the years ended June 30, 2000 and 1999 was
$68,056 and $33,962, respectively.
NOTE 7. SOFTWARE LICENSES
On December 22, 1999, the Company acquired from Informix Software, Inc.,
an unlimited license to use Informix Internet Foundation 2000 software for the
Company's thermal imaging systems. The Company's agreement with Informix
provides for a total purchase price of $3,850,000.
F-18
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Note 7. SOFTWARE LICENSES (Continued)
As of June 30, 2000, the Company had made all installment payments owing
on the license agreement. The software licenses at June 30 consisted of the
following:
2000 Life
----------- -------
Software license $ 3,850,000 3 years
Less accumulated amortization (402,711)
-----------
Net software license $ 3,447,289
===========
Amortization expense related to software licenses for the year ended June
30, 2000 was $402,711.
NOTE 8. GOODWILL
On April 18, 2000, the Company acquired 100 percent of the outstanding
common stock of Bales Scientific, Inc. for approximately $11.1 million;
consisting of $5.6 million cash and $5.5 million in common stock of the
Company. The total purchase price paid in excess of the fair market value of
the identifiable assets, i.e., accounts receivable, inventory, and various
other fixed assets, was recorded as goodwill. During the fiscal year, the
Company also acquired approximately 8 percent of the outstanding common stock
of its subsidiary, Computerized Thermal Imaging Company ("CTICO") (previously
Thermal Medical Imaging, Inc.) for $60,000 cash and common stock of the
Company valued at $165,500. Accordingly, as of June 30, 2000, the Company's
ownership in CTICO increased to approximately 88 percent. The Company
amortizes goodwill over its estimated useful life of 15 years. As of June 30,
the Company recorded a net long-term asset of $10,993,895 relating to goodwill
and consisting of the following:
2000 Life
----------- ----------
Goodwill, Bales acquisition $10,871,863 15 years
Goodwill, CTICO acquisition 225,500 15 years
Transaction costs 41,970 15 years
-----------
Subtotal 11,139,333
Less accumulated amortization (145,438)
-----------
Net goodwill $10,993,895
===========
Amortization expense related to goodwill for the year ended June 30, 2000
was $145,438.
F-19
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 9. ADVANCES TO AFFILIATES
During the year ended June 30, 2000, the Company incurred amounts on
behalf of Thermal Imaging, Inc. and T.S.E.T.; both of with are affiliated with
the Company. Mr. David B. Johnston, Chairman and CEO of the Company, owns 100
percent of the outstanding common stock of Thermal Imaging, Inc. ("TII").
Costs incurred by the Company for TII totaled $107,864 and were incurred in
connection with on-going legal matters of TII. Mr. Richard V. Secord, Vice
Chairman of the Company, owns 500,000 common shares of T.S.E.T. at June 30,
2000. Costs incurred by the Company for T.S.E.T. totaled $22,383 and were
incurred in connection with general and administrative office expenses of
T.S.E.T.
NOTE 10. DEFERRED REVENUES
The Company entered into two letter Agreements on October 28, 1999 with
Computerized Thermal Imaging International, Inc. ("CTII"), an entity in which
it owns 15 percent, whereby CTII received 1) the exclusive right to represent
the expansion of the Company's business into Central and South America, 2) the
right to prepare and implement a marketing strategy for deployment of the
Company's Breast Imaging System in those areas of the world, 3) the right of
first refusal on the Company's Health Card manufacturing worldwide, and 4) the
right to sell a minimum of 100 of the Company's Breast Imaging Systems over a
two-year period in the target territories. The Agreements provide that the
Company shall issue to CTII, as compensation, options to purchase up to 5
million shares of the Company's common stock in 50,000 share increments based
on CTII's placement of each Breast Imaging System into commercial use in the
specified territories. Each 50,000 block of options grants the holder thereof
the right to purchase 50,000 shares of the Company's common stock at a strike
price equal to $1.6745, or a 15 percent discount to the bid price at October
28, 1999, the Effective Date of the Agreement. Options expire two years from
the date of grant.
In connection with the foregoing agreements, on June 6, 2000, the Company
entered into agreements for the sale of 10 of its Breast Imaging Systems to
CTII for $5 million. In connection therewith, the Company received a down
payment of $1.75 million with the remaining $3.25 million to be received upon
delivery of the systems to CTII. The $1.75 million down payment has been
recorded as deferred revenues in the accompanying financial statements until
such time as the systems are delivered and placed into commercial use. At
such time, the Company will also record a cost related to the issuance of
options equal to the fair value of such options on the date of issuance.
The Company expects to deliver the 10 systems to CTII on, or about,
mid-October, 2000. The Company expects to issue 500,000 options upon delivery
and placement of such systems into commercial use. As of June 30, 2000, the
Company has not issued any options to CTII.
F-20
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 11. INCOME TAX
The composition of deferred tax assets and the related tax effects at
June 30, 2000 and 1999 are as follows:
1999
2000 (Restated)
----------- -----------
Benefit from carryforward of net
operating losses $ 9,567,289 $ 6,643,135
Less valuation allowance (9,567,289) (6,643,135)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
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:
June 30,
------------------------------------------------
2000 1999
----------------------- -----------------------
% of % of
Pre-Tax Pre-Tax
Amount Loss Amount Loss
------------ -------- ------------ --------
Benefit for income tax at
federal statutory rate $ 3,023,673 34.0% $ 1,500,000 34.0%
Non-deductible expenses ( 99,519) (1.1%) ( 25,000) ( 7.5%)
Increase in valuation
allowance (2,924,154) (32.9%) (1,475,000) (26.5%)
------------ -------- ------------ --------
Total $ - 0% $ - 0%
============ ======== ============ ========
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, 2000, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $28.4 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 2020 and could be subject to severe limitations if significant
ownership changes occur in the Company. Of the $28.4 million of unused net
operating losses noted above, approximately $6.0 million relates to losses
incurred by the Company's subsidiary, Computerized Thermal Imaging Company
("CTICO"). In fiscal years prior to June 30, 2000, CTICO did not file its tax
returns on a consolidated basis with the Company. Accordingly, the $6.0
million loss incurred by CTICO is further subject to separate limitations that
severely restrict the ability of the Company to use such losses.
F-21
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 12. COMMITMENTS AND CONTINGENCIES
Litigation
During the year ended June 30, 2000, the Company settled two complaints,
both with Bristol Asset Management, LCC ("Bristol"), by issuing warrants to
purchase 400,000 shares of the Company's common stock. The warrants issued
can be exercised for a period of two years at a strike price of $7.75, which
strike price was a discount to the market price of the Company's common stock
on the date of issuance. The Company recorded a $475,000 charge to income in
connection with this settlement.
Other than noted above, at June 30, 2000 and 1999, the Company was not
involved in any pending or threatened legal disputes that the Company believes
would have a material adverse impact on the Company's financial statements.
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 shares of common stock 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, if initiated, the Company would prevail in any such litigation.
On February 4, 1998 a majority of the stockholders, by written consent,
amended the Company's Articles of Incorporation 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.
F-22
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases
At June 30, 2000, the Company had three existing lease agreements for
office space that are accounted for as operating leases. One of the leases
expired in August 1999 and the Company continues to occupy the space on a
month-to-month basis at a monthly rental fee of $2,525 per month. On May 31,
2000, the Company entered into a fourth agreement to lease additional office
space in Portland, Oregon. The effective date of this new lease is on, or
about, September 15, 2000. At June 30, 2000, the future minimum payments
required under the noncancelable operating leases are as follows:
Year Ended
June 30 Portland, OR Layton, UT Walnut Creek, CA Lake Oswego, OR
---------- ---------- ---------- ---------- ----------
2001 $ 45,110 $ 116,821 $ 90,000 $ 109,897
2002 121,554 90,000 188,394
2003 51,510 72,500 188,394
2004 200,707
2005 230,170
2006 155,320
2007 24,292
---------- ---------- ---------- ----------
Total $ 45,110 $ 289,885 $ 252,500 $1,097,174
========== ========== ========== ==========
With respect to the New Lease, the Company prepaid $15,700 that will be
applied to the initial lease payments and the Company provided an $110,000
cash-collateralized letter of credit to secure leasehold improvements made by
the lessor.
NOTE 13. 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, 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, 2000.
F-23
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 13. STOCKHOLDERS' EQUITY (Continued)
Subscription Receivable
The Company treated as compensation a subscription note receivable in the
amount of $525,000 to Manhattan Financial Group ("MFG") in its fiscal year
ended 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.
Common Stock Subject to Rescission Offers
During 1998, the Company issued a total of 8,976,418 shares of common
stock to the Affiliates (See Note 15) for cash or other consideration and such
common shares were considered to be "restricted" securities with limited
transferability under state and federal securities laws. The Affiliates, in
secondary transactions, subsequently sold or otherwise transferred 1,187,000
shares of the common stock between themselves and to fourteen non-affiliates
and it has come to the Company's attention that the transactions between
Affiliates and non-affiliates may have been in violation of various state
and/or federal securities laws.
In the event that the subsequent transfers of "restricted" shares of the
Company's common stock by the Affiliates are deemed to be in violation of
state and/or federal securities laws, the exemptions from registration, relied
upon by the Company for the initial issuance of those shares, could be lost.
Additionally, if an exemption from registration for the issuances is not
available, and the Company is found to have engaged in a public offering of
securities, the Company may face claims by the subsequent purchasers for
rescission and/or administrative sanctions, fines and penalties even though
the Company took the step of applying appropriate restrictive legends to the
stock certificates in question.
Based on the limited number of parties involved in the above-described
transactions and the precautions taken by the Company, management does not
believe that there was any public offering of the Company's shares of the
Common Stock, and consequently, the exemption available to the Company at the
time of the issuance of the securities was not forfeited. However, in order
to lessen any problems which may emanate from the transfer of the
above-described shares of the common stock, the Company and the Affiliates
offered to rescind the sales of all such shares, pursuant to the securities
laws of the various states where the transfers took place. The Company made
its rescission offer in the form of an exempt offering in conformity with the
applicable state securities laws. Subsequent to June 30, 1998, all of the
stockholders in question elected to reject the rescission offers.
F-24
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 13. STOCKHOLDERS' EQUITY (Continued)
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 offers at June 30, 1998 were
reclassified as no longer subject to rescission at June 30, 1999.
NOTE 14. STOCK WARRANTS AND OPTIONS
Warrants
During the year ended June 30, 2000, warrants were exercised for the
purchase of 2,029,042 common stock shares of the Company for proceeds of
$4,229,757. 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 11,148,766 shares of common stock during the quarter ended March
31, 2000, the Company issued 11,148,766 warrants entitling holders thereof,
for a period of five years, to purchase 5,574,316 shares of the Company's
common stock at $5 per share.
During February and April 2000, the Company issued 37,648 warrants to
Sitrick & Company for services rendered. 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.
As compensation for investment consulting services, the Company issued
200,000 warrants to Sutro & Company in April 2000. Each warrant is
exercisable through December 15, 2000 and entitles the holder thereof the
right to purchase one share of the Company's common stock at a strike price of
$1.70 per share.
As compensation for services rendered, the Company issued one of its
non-executive employees 170,000 warrants in May 2000. Each warrant is
exercisable through May 2, 2005 and entitles the holder thereof the right to
purchase one share of the Company's common stock at an exercise price of
$1.5625 per share.
During the year ended June 30, 2000, the Company settled two complaints,
both with Bristol Asset Management, LCC ("Bristol"), by issuing warrants to
purchase 400,000 shares of the Company's common stock. The warrants issued
can be exercised for a period of two years at a strike price of $7.75, which
strike price was a discount to the market price of the Company's common stock
on the date of issuance. The Company recorded a $475,000 charge to income in
connection with this settlement.
F-25
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 14. STOCK WARRANTS AND OPTIONS (Continued)
During 1999, as an inducement to exercise certain warrants, the Company
issued an aggregate of 264,166 warrants to three parties. The parties were
the beneficial owners of certain of those warrants 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.
The same number of new warrants was 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, a reduction in the exercise price, and an extension of the
expiration date to December 31, 1999. In December 1999, the expiration date
was further extended to December 31, 2000.
A summary of warrant activity for the period from July 1, 1998 through
June 30, 2000 is as follow:
# of
Shares Exercise Price
------------ -----------------
Balance at June 30, 1998 (restated) 4,126,327 $0.72 - $2.50
Exercised ( 264,166) $ 0.72
Granted 264,166 $ 1.19
------------
Balance at June 30, 1999 (restated) 4,126,327 $0.46 - $3.72
Exercised (2,042,143) $0.46 - $3.72
Granted 6,381,964 $1.70 - $7.25
Cashless exercise (13,101)
------------
Balance at June 30, 2000 8,453,047 $0.46 - $7.25
============
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 Board of Directors approves the issuance of such
options. Options are usually granted under the Company's 1997 Stock Option
and Restricted Stock Plan (the "Plan").
F-26
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 14. STOCK WARRANTS AND OPTIONS (Continued)
On May 24, 1999, the Company granted options 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.
On June 27, 2000, the Company granted options to purchase 100,000 shares
of the Company's common stock to one officer under its Plan. 10,000 of the
options immediately vest and the remaining 90,000 options vest at one-third
each, starting from the first, anniversary date of officer at an exercise
price of $5.02 per share and will expire in accordance with the terms of the
Plan.
On April 17, 2000, the Company granted options to purchase 100,000 shares
of the Company's common Stock to one non-executive employee. The options
vested on the date of grant at an exercise price of $9.0625 and will expire on
April 17, 2003. In concert with this grant, the Company entered into a
three-year employment agreement with the employee, which provides that options
to purchase an additional 200,000 shares of the Company common stock will be
granted upon each of the next two anniversary dates of such employee. These
additional options, if granted, are conditioned upon employee's continued
employment with the Company and will fully vest upon the date of grant. Such
options will have a strike price equal to the market price of the Company's
common stock on the date of grant.
On June 27, 2000, the Company granted options to purchase 825,000 shares
of the Company common stock to three non-executive employees in connection
with separate employment contracts executed in May 2000 by each of the
respective employees. 41,250 of the options vested on the date of grant and
the remaining 783,750 option vest at one third each, starting from the first,
anniversary date of each respective employee at an exercise price of $7.71875
per share and expire 15 days following each respective employee's termination
of employment with the Company.
On April 17, 2000, the Company granted 380,508 options to purchase the
Company's common stock to one non-executive employee and four consultants as
compensation for services rendered in connection with the Company's recent
private placement of securities. The options granted immediately vest at an
exercise price of $1.70 per share and expire on February 28, 2003. In July
2000, the Company also granted 36,118 options to a consultant with the same
terms as those options immediately noted above. Although such options were
not outstanding at June 30, 2000, the financial impact of their issuance was
recorded in the Company's June 30, 2000 financial statements since the
issuance of such options related to services rendered to the Company during
their June 30, 2000 fiscal year.
F-27
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 14. STOCK WARRANTS AND OPTIONS (Continued)
On October 28, 1999, the Company executed two letter agreements with
Computerized Thermal Imaging International, Inc. ("CTII"), an entity in which
the Company owns 15 percent, whereby CTII received certain rights in
connection with the marketing and sales of the Company's Breast Imaging System
in Central and South America. The Agreements provide that the Company will
grant to CTII, as compensation, options to purchase up to 5 million shares of
the Company's common stock in 50,000 share increments based on CTII's
placement of each Breast Imaging System into commercial.
Each 50,000 block of options grants the holder thereof the right to
purchase 50,000 shares of the Company's common stock at a strike price equal
to $1.6745, or a 15 percent discount to the bid price at October 28, 1999, the
effective date of the Agreements. Options expire two years from the date of
grant. As of June 30, 2000, no options were issued to CTII and no options
were vested.
The Company has granted the following fixed stock options during the
period July 1, 1998 through June 30, 2000:
<TABLE>
<CAPTION>
Number of Shares
-------------------------------------------
Employee Non-Employee Total Exercise Price
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Options outstanding, June 30, 1998 5,250,000 2,275,000 7,525,000 $0.60 - 1.25
Granted 100,000 - 100,000 $ 0.76
Forfeited ( 500,000) ( 275,000) ( 775,000) $0.75 - 1.25
------------ ------------ ------------
Options outstanding, June 30, 1999 4,850,000 2,000,000 6,850,000 $0.60 - 1.25
Granted 1,136,076 269,432 1,405,508 $1.70 - 9.06
Exercised ( 35,000) ( 35,000) $ 0.70
------------ ------------ ------------
Options outstanding, June 30, 2000 5,951,076 2,269,432 8,220,508 $0.60 - 9.06
============ ============ ============
</TABLE>
The following table summarizes information about fixed stock options
outstanding at June 30, 2000:
Number of Shares Vested Expiration Date Exercise Price
-------------------- ---------- --------------- --------------
1,215,000 902,500 Aug. 2001 $ 0.70
500,000 500,000 Apr. 2002 $ 0.97
1,000,000 750,000 Sep. 2002 $ 0.75
2,000,000 2,000,000 Nov. 2002 $ 0.60
380,508 380,508 Feb. 2003 $ 1.70
100,000 100,000 Apr. 2003 $ 9.06
825,000 41,250 Jun. 2003 $ 7.72
100,000 33,333 May 2004 $ 0.76
2,000,000 2,000,000 Jun. 2005 $ 1.25
100,000 10,000 Jun. 2010 $ 5.02
------------------- ---------
8,220,508 6,717,591
=================== =========
F-28
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 14. 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, if the exercise price of the Company's employee
stock options is greater than or equal to the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Options issued one employee/officer of the Company was issued at a
discount to the market price of the underlying stock on the date of grant and
compensation expense of $91,750 was accordingly recognized in the accompanying
financial statements for the year ended June 30, 2000.
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 assumptions for
2000 and 1999:
1) risk-free interest rate between 5.77 and 6.36 percent depending upon
the term of the option,
2) no dividend yield,
3) no discount for lack of marketability, and
4) and a volatility factor of the expected market price of the
Company's common stock of 1.144529. The volatility factor was
determined using the weekly closing price of the Company's common
stock as quoted on the OTC.BB of the NASD between April 1997 and
June 2000.
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options that 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 outstanding stock
options.
For purposes of proforma disclosures, the estimated fair value of the
options is included in expense over the vesting period of the options. The
Company's proforma information follows:
F-29
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 14. STOCK WARRANTS AND OPTIONS (Continued)
Year Ended
June 30,
---------------------------
2000 1999
------------ ------------
Net loss available to common
stockholders $(8,893,155) $(5,025,841)
Proforma net loss available to
common stockholders $(9,109,043) $(5,244,729)
Proforma basic loss per share $ (0.13) $ (0.07)
Proforma diluted loss per share $ (0.12) $ (0.07)
NOTE 15. RELATED PARTY TRANSACTIONS
Since its inception, the Company has been dependent upon certain
individuals, officers and stockholders and 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 business. The
Affiliates have generally provided services and incurred expenses on behalf of
the Company in exchange for shares of the Company's common stock.
Following is an analysis of transactions involving affiliates Thermal
Imaging, Inc. ("Affiliate 1") and Manhattan Financial Group ("Affiliate 2")
during the years ended June 30, 2000 and 1999:
Affiliate 1 Affiliate 2
----------------------- ----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Year ended June 30, 1999
------------------------
Total balance of debt and
cash advances at June
30, 1998 - $1,192,854 - $ 354,167
Interest accrued and
accretion of discount
on notes - - - 542,721
Non-interest bearing
advances to fund
current operations,
uncollateralized - 1,080,582 2,140,164 (1,244,638)
Funding included in
notes payable - - - 347,750
Payments via stock
and cash 4,514,507 (2,273,436) - -
---------- ---------- --------- ----------
Total balance of debt
and cash advances at
June 30, 1999 4,514,507 $ - 2,140,164 $ -
Year ended June 30, 2000
------------------------
Advances for payment
of legal fees - (107,864) - -
---------- ---------- ---------- ----------
Total balance of debt
and cash advances at
June 30, 2000 4,514,507 $ (107,864) 2,140,164 $ -
========== ========== ========== ==========
F-30
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 15. RELATED PARTY TRANSACTIONS (Continued)
In addition to the foregoing, as consideration for services rendered
during the fiscal year ended June 30, 1999, the Company also eliminated a
$525,000 subscription receivable from Affiliate 2 and issued 525,000 shares of
common stock in connection therewith. During the fiscal year ended June 30,
2000, the Company compensated Affiliate 2 approximately $46,000 and granted
options to acquire 3,038 shares of common stock at a strike price of $1.70 per
share for services rendered.
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 16. SUBSEQUENT EVENTS
Subsequent to June 30, 2000, the date of the accompanying financial
statements, the following events transpired.
Status of Pre-Market Application
--------------------------------
On September 5, 2000, the Company submitted Module 4 of its Pre-Market
Application to the FDA. The Company anticipates that it will submit its final
module, Module 5, to the FDA prior to December 31, 2000. Recruiting patients
as part of the clinical trials and obtaining reliable data there from are
important elements to permit a timely submission of Module 5 to the FDA for
review. Although the Company anticipates that it will be able to obtain and
assemble the data necessary to timely submit Module 5, any delay or
difficulties experienced in the recruitment of patients or the assembly and
verification of patient data could delay its submission of Module 5 beyond
December 31, 2000. The Company cannot determine if, or when, it will
ultimately obtain FDA approval.
Alex Saenz Harassment Complaint and Counter-Complaint
-----------------------------------------------------
On June 1, 2000, the Company filed a complaint against Alex Saenz
("Defendant"), an individual, in the Circuit Court of the State of Oregon for
the County of Clackamas, Case #CCV0006024. On July 7, 2000, the complaint was
moved from the Circuit Court to the United States District Court for the
District of Oregon, Case #00942MA. The lawsuit alleges that Defendant
interfered with the Company's business by threatening lawsuits to obtain stock
options allegedly owed to him as a result of Defendant's efforts in selling
the Company's securities. The Company alleges tortious interference and
pleads for a declaratory judgment 1) that it owes no additional money or stock
options to Defendant, and 2) awarding the Company $50,000 damages and recovery
of costs and disbursements in connection with the lawsuit.
F-31
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 16. SUBSEQUENT EVENTS (Continued)
On July 14, 2000, the Defendant filed his answer to the Company's
complaint denying its allegations and, in connection therewith, Defendant
filed a counterclaim alleging that the Company has breached various verbal
agreements to compensate him other than what is specified in a written
agreement. Defendant alleges breach of contract and damages ranging from
approximately $2.0 million to $104 million pursuant to three separate claims
of action. Under a fourth cause of action, Defendant alleges slander and is
seeking general damages of $10 million and punitive damages of $10 million.
Under a fourth cause of action, Defendant alleges slander of his business
reputation and is seeking general damages of $10 million and punitive damages
of $10 million.
The Company believes the Defendant's counterclaims are without merit and
will continue to prosecute this case. The Company has not yet begun the
discovery process and a date for trial has not been set.
Bloomberg/Evans Defamation Action
---------------------------------
On August 28, 2000, the Company filed a complaint for libel in the United
States District Court for the District of Utah, Northern Division, Case No.
1:00CV00098K, against Bloomberg, L.P. (the "Defendant"). The complaint and
summons were also serviced on Bloomberg through its registered agent in Utah.
The lawsuit alleges that on June 29 and July 18, 2000, Bloomberg
published certain "Defamatory Articles" about the Company that were written by
David Evans through its news service, Bloomberg News. According to the
Complaint, the Defamatory Articles were published over Bloomberg's Internet
web site and elsewhere to literally millions of people, and contained certain
false, misleading, and defamatory statements regarding the Company's business
and thermal imaging technology, which the Company is focusing on developing as
an adjunct imaging tool to mammography in the detection of breast cancer. The
lawsuit alleges that, after publication of the "First Defamatory Article" on
June 29, 2000, the Company wrote to Bloomberg and explained the numerous
inaccuracies and falsehoods contained therein. Although Bloomberg then
published on July 18, 2000 what it labeled as a "correction" to the first
story, this "Second Defamatory Article" still contained defamatory matter
calling into doubt (among other things) the Company's ability to attract
capital as well as the efficacy of the Company's Breast Imaging System, which
is currently undergoing clinical testing by physicians at five independent
hospital sites in accordance with a protocol used in connection with the
Company's application for Pre-Market Approval from the Food and Drug
Administration. The Complaint alleges damages against Bloomberg in excess of
One Hundred Million Dollars ($100,000,000). A trial date has yet to be
determined and discovery has not yet begun.
F-32
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
NOTE 16. SUBSEQUENT EVENTS (Continued)
Kenneth M. Dodd Executive Employment Agreement
----------------------------------------------
On February 24, 1999, the Company filed a complaint against Kenneth M.
Dodd ("Defendant") in the Eighth Judicial District Court, Clark County,
Nevada, Case No. A399754, seeking to enforce confidentiality agreements and
certain terms in connection with Defendant's employment contract with the
Company.
In consideration of Defendant's actions under the employment agreement,
the Company alleged breach of contract, breach of fiduciary duty, conversion,
breach of duty of care, breach of duty of loyalty, declaratory judgment, and
usurpation of corporate opportunity.
In August 2000, the Company made an offer of settlement whereby it would
release the Defendant of all claims under its complaint and pay Defendant
$10,000 in exchange for his 7.5 percent interest in the Company's subsidiary,
Computerized Thermal Imaging Company ("CTICO", previously Thermal Medical
Imaging, Inc.).
On August 25, 2000, the Defendant accepted the offer of settlement. As a
result of this settlement with Defendant, the Company now owns approximately
97.9 percent of the outstanding common stock of CTICO.
F-33
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the preceding two years we have had no changes in, or
disagreements with, accountants on accounting and financial disclosure other
than the termination of our principal auditor, Ham, Langston & Brezina, LLP on
August 17, 1999 with the engagement of Jones, Jensen & Company LLC on that
same date as reported on Form 8-K filed with the Securities and Exchange
Commission on August 23, 1999, and amended on August 25, 1999.
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. 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.
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 previously provided Ham, Langston & Brezina with a copy of the
disclosures 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.
-----------------------------------------------------------------------------
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
--------------------------------
Set forth below is our directors and executive officers, together with
their ages, as of June 30, 2000.
49
<PAGE>
Name Age Position Since
-------------------------- ---- ----------------------------- -----------
David B. Johnston (1)..... 57 Chairman of the Board & Chief Aug. 1987
Executive Officer
David A. Packer (1)....... 48 President & Chief Operating Dec. 1999
Officer, Director
Richard V. Secord (1)..... 67 Vice Chairman, Director Feb. 1996
Brent M. Pratley (2)(3)... 64 Director Jun. 1994
Milton R. Geilmann (2)(3). 68 Director Jan. 1998
Harry C. Aderholt (2)(3).. 80 Director Jan. 1998
Kevin L. Packard.......... 39 Secretary, Treasurer & Chief Mar. 2000
Financial Officer
-----------------------------------------------------------------------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
We may employ additional management personnel, as our Board of Directors
deems necessary. We have not identified or reached an agreement or
understanding with any other individual to serve in a management position,
either executive or non-executive. We do not anticipate any difficulty in
employing qualified personnel.
Biographical Information
------------------------
A description of the business experience during the past several years
for each of our directors and executive officers is set forth below.
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 98-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.
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 since July 1, 1997. From Jul 1, 1997 to June 27, 2000, Mr.
Secord also served as our Secretary. 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
F-50
<PAGE>
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. Mr. Packer also
previously served as our 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
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 was elected as a director of the Company in
January 1998. Mr. Geilmann has been associated with the medical field for over
32 years. From 1965 to 1992, he worked at E. R. Squibb and Sons, where he held
many positions, including Nuclear Consultant for Diagnostic Medicine. Mr.
Geilmann received an Associates degree in dental science in 1952 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 and Secretary/Treasurer in June 2000. From January 1999 through March
2000, Mr. Packard was employed with PricewaterhouseCoopers in Salt Lake City
and from June 1987 through July 1992 was employed 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 Chief Financial Officer. Mr. Packard is licensed as a certified
public accountant in Utah, Idaho and Washington and is a member of the AICPA.
Mr. Packard received Bachelor of Science (Accounting) and Masters of
Professional Accountancy degrees from the University of Utah in 1986 and 1987,
respectively.
Directors are elected by our stockholders at each annual meeting and
serve until the next annual meeting of stockholders or until 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 and David
A. Packer 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
51
<PAGE>
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, our 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. A complete copy of our Charter was
included as "Attachment A" of our Schedule 14(a), Definitive Proxy Statement,
filed on May 22, 2000. Only independent Directors may serve on the Audit
Committee.
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.
In connection with our audited financial statements for the year ended
June 30, 2000, the Audit Committee has reviewed and discussed our audited
financial statements with management and discussed with our independent
auditors the matters required by SAS 61. The Audit Committee has received the
written disclosures and the letter from our independent accountants required
by Independence Standards Board No. 1, and the Audit Committee has discussed
with our independent accountants their independence. The Audit Committee did
not make any recommendation to our Board of Directors that should be included
in our audited financial statements for the fiscal year ended June 2000 and
1999.
There is no family relationship between or among any of our directors and
executive officers, except for the relationship between Messrs. Johnston and
Packer, who are cousins by marriage.
52
<PAGE>
Involvement in Other Public Companies
-------------------------------------
None of the Company's officers or directors are involved with any other
public company deemed to be a "reporting company."
Involvement in Certain Legal Proceedings by Directors or Executive Officers
---------------------------------------------------------------------------
Except as indicated below and, or herein before, to the knowledge of
Management, during the past five years, no present director or executive
officer of the Company:
(1) Filed a petition under federal bankruptcy laws or any state
insolvency law, now had a receiver, fiscal agent or similar officer appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an
executive officer at or within two years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of a pending
criminal proceeding (excluding traffic violations and other minor offences);
(3) Was the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him or her from or otherwise limiting his
involvement in any type of business, securities or banking activities; or
(4) Was found by a court of competent jurisdiction in a civil action, by
the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated any federal or state securities law, and the
judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or vacated.
Richard Secord Vacate Order. On November 8, 1989, Richard V. Secord, our
Vice Chairman pleaded guilty to one count of making a false statement to
congressional staffers and was fined $50. Subsequently, the Supreme Court of
the United States found this type of charge to be illegal. On August 7, 2000,
the United States District Court for the District of Columbia issued an order
vacating the conviction and ordered that "for all purposes, Mr. Secord's
conviction shall be considered to have been void...and of no force or effect,
and he shall bear no legal disability under the laws of any sovereign on
account of said conviction".
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Act") requires our officers and directors, and persons who own more than 10%
of a registered class of our equity securities, to file initial reports of
ownership and reports of changes in ownership with the SEC. Such persons are
also required to furnish us with copies of all Section 16(a) reports they
file.
53
<PAGE>
Based solely on our review of the copies of such reports received by us
with respect to our fiscal year ended June 30, 2000, we believe that all
filing requirements applicable to our officers and directors and persons who
own more than 10% of a registered class of our equity securities have been
complied with except for Messrs. Johnston, Secord, Packer, Pratley, Geilmann,
& Aderholt, each of whom filed a Form 5 late.
The following individuals are considered reporting persons during the
last fiscal year (officer, director, 10% shareholder):
David B Johnston, Chairman of the Board & Chief Executive Officer
Richard Secord, Vice Chairman of the Board & Director
David A. Packer, President & Chief Operating Officer
Milton R. Geilmann, Director
Brent M. Pratley, M.D., Director
Harry C. Aderholt, Director
Kevin L. Packard, Secretary, Treasurer & Chief Financial Officer
ITEM 10: 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, 1998, 1999 and
2000. Mr. Johnston, our Chief Executive Officer, has not been paid a salary
or bonus over the past three years:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------- ----------------------
Securities
Underlying
Options
All Other Restricted and
Fiscal Bonus Compensation Common Warrants
Position Year Salary (3) (1) Stock (2)
-------------------- ------ -------- -------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David B. Johnston, 2000 $ 0 0 $ 15,000 0 0
Chairman & Chief 1999 $ 0 0 $ 15,000 0 0
Executive Officer 1998 $ 0 0 $ 15,000 0 1,000,000
Richard V. Secord, 2000 $175,000 0 $ 6,000 0 0
Vice Chairman 1999 $175,000 0 $ 6,000 0 0
1998 $175,000 0 $ 6,000 0 1,250,000
David A. Packer, 2000 $163,000 $200,000 $ 6,000 0 0
President & Chief 1999 $135,000 0 $ 6,000 0 0
Operating Officer 1998 $135,000 0 $ 6,000 0 0
Kevin L. Packard, 2000 $ 32,000 0 $ 91,750 0 100,000
Chief Financial 1999 $ NA 0 $ NA NA NA
Officer, Treasurer 1998 $ NA 0 $ NA NA MA
& Secretary
54
</TABLE>
<PAGE>
------------------------------------------------------
(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. Included in
"Other Annual Compensation" is the estimated fair value of a Company
vehicle used by Mr. Johnston. Mr. Secord and Mr. Packer each receive
a monthly automobile allowance of $500. Mr. Packard received 100,000
options at a $5.02 strike price, which was a 15 percent discount to
the market price of our common stock on the date such options were
granted. Accordingly, pursuant to APB Statement 25, a $91,750
compensation expense was recorded in our financial statements in
connection therewith.
(2) As of June 30, 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. Of General Secord's
options on 1,250,000 shares, 35,000 have been exercised and 902,500
shares are vested as of the date hereof. Of the 100,000 options
granted to Mr. Packard, 10,000 are vested as of the date hereof.
(3) The $200,000 bonus to Mr. Packer was accrued as of June 30, 2000 and
paid shortly thereafter.
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 30, 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.
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
55
<PAGE>
options. As of June 30, 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's three-year employment agreement with us expired April
30, 2000. In December 1999, our Board of Directors approved a $40,000
increase, to $175,000, in Mr. Packer's base annual salary. In June 2000, our
Board approved a $200,000 retention bonus for Mr. Packer. Mr. Packer is
currently re-negotiating a new employment agreement with us.
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
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:
56
(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;
(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. A complete copy of the Severance Agreement is
attached as Exhibit 10(fff) of our Post Effective Amendment No. 9 filed on
Form SB-2 on June 6, 2000, Registration No. 333-47237.
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. For the year ended June 30, 2000, our independent directors each
57
<PAGE>
received $5,000 as compensation for their services. At our Annual Board
Meeting held June 27, 2000, the Board voted to set our independent director's
annual compensation at $20,000, payable, pro-rated on a quarterly basis.
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 stockholders
of the Company formally adopted the Plan 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 10,000,000 shares of common stock
may currently be issued pursuant to the provisions of the Plan. The Plan is
administered by the Board of Directors or by a committee of the Board composed
solely of two or more non-employee directors (the "Administrator"). The
Administrator 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
58
<PAGE>
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 Administrator may grant the Restricted Stock 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 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 Administrator determines the terms, conditions,
and restrictions of the Restricted Stock 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 30, 2000, no shares of Restricted Stock have been granted
under the Plan. As of June 30, 2000, the following options were outstanding
under the Plan for executive officers and directors.
59
<PAGE>
<TABLE>
<CAPTION>
Option Plan Grant Table
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of
Shares Expiration
Name of Person to Whom Options Were Under Date of Vesting Exercise
Granted Option Option Date Price
------------------------------------ --------- ---------- -------- -----------
David B. Johnston, Chairman of the 250,000 09/18/02 (1) 09/18/97 $.75/share
Board and Chief Executive Officer 250,000 09/18/02 (1) 09/18/98 $.75/share
250,000 09/18/02 (1) 09/18/99 $.75/share
250,000 09/18/02 (1) 09/18/00 (2) $.75/share
Richard V. Secord, Vice-Chairman 277,500 09/18/02 (1) 09/18/97 $.70/share
of the Board (3) 312,500 09/18/02 (1) 09/18/98 $.70/share
312,500 09/18/02 (1) 09/18/99 $.70/share
312,500 09/18/02 (1) 09/18/00 (2) $.70/share
David A. Packer, President & Chief
Operating Officer (3) 0 N/A N/A
Kevin L. Packard, Chief Financial 10,000 05/26/10 (1) 06/27/00 $5.02/share
Officer, Treasurer & Secretary 30,000 05/26/11 (1) 03/23/01 (2) $5.02/share
30,000 05/26/12 (1) 03/23/02 (2) $5.02/share
30,000 05/26/13 (1) 03/23/03 (2) $5.02/share
---------------------------------------------------------------
(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 agreements were amended to ratify and incorporate the terms
of our 1995 Stock Option Plan into the respective stock option agreements as contractual
provisions.
</TABLE>
Other than the 100,000 options granted to Messr. Packard on June 27,
2000, 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 at June 30, 2000.
<TABLE>
<CAPTION>
Aggregated Option Exercises and Values at June 30, 2000
-------------------------------------------------------------------------------------------
Number of Securities Value of the Unexercised
Shares Underlying Unexercised In-The-Money Options
Acquired Value Options Exercisable/ Unexercisable
Name of Officer on Exercise Realized Exercisable/ Unexercisable (1)
--------------------- ------------ -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
David B. Johnston, 0 $ 0 750,000/250,000 $4,898,438/$1,632,813
Chairman & Chief
Executive Officer (2)
Richard V. Secord, 35,000 $300,000 2,902,500/312,500 $18,002,078/$2,056,641
Vice Chairman (3)
David A. Packer, 0 $ 0 500,000/0 $3,155,625/$0
President & Chief
Operating Officer (4)
Kevin L. Packard, 0 $ 0 10,000/90,000 $22,613/$203,513
Chief Financial Officer,
Treasurer & Secretary
60
<PAGE>
-----------------------------------------------------------------------------------------------------
(1) The value of the unexercised in-the-money options at June 30, 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 30, 2000, which was $7.28125. The resulting amount is deemed to be the value of the
options/warrants for purposes of this table.
(2) The options granted to Mr. Johnston for 1,000,000 shares of common stock are exercisable at
$0.75 per share.
(3) The options granted to General Secord for 2,000,000 shares of common stock have an exercise
price of $1.25 per share; the options granted for 1,250,000 shares of common stock (35,000 of
which have been exercised as of the date hereof) have an exercise price of $0.70 per share.
(4) The options granted to David Packer for 500,000 shares have an exercise price of $0.97 per
share.
(5) The options granted to Kevin Packard for 100,000 shares have an exercise price of $5.02 per
share.
</TABLE>
The Company has no long-term incentive plans or defined benefit plans.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of all shares of common stock at June 30, 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.
Except as otherwise indicated, we believe that each of the following persons
has sole voting and investment power over the shares beneficially owned by
such person.
<TABLE>
<CAPTION>
Number of Shares
Name and Address of Directors, Officers and More of Common Stock
5% Beneficial Owners Owned Percent of Class
-------------------------------------------------- ---------------- ----------------
<S> <C> <C> <C>
David B. Johnston, 6105 Macadam, Portland, OR 97201 13,967,761 (1) 17.266%
Thermal Imaging, Inc., 6105 Macadam,
Portland, OR 97201 13,217,761 16.491%
Daron C. Dillia dba Manhattan Financial Group,
1147 Manhattan Avenue #134, Manhattan Beach,
CA 90266 5,561,178 (2) 6.712%
Richard V. Secord, 515 Pocahontas Dr., Ft. Walton
Beach, FL 52347 3,053,500 (3) 3.677%
David A. Packer, 476 Heritage Park Blvd, Suite 210,
Layton, UT 84041 693,939 (4) 0.860%
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 146,500 0.183%
Kevin L. Packard, 476 Heritage Park Blvd,
Suite 210, Layton, UT 84041 10,000 (5) 0.012%
---------------- ----------------
DIRECTORS, OFFICERS AND GREATER THAN 5% BENEFICIAL
OWNERS AS A GROUP (EIGHT PERSONS) 23,448,628 28.729%
================ ================
--------------------------------------------------------------------------------------------
(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.
61
<PAGE>
(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, 150,000 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.
(5) Includes 10,000 shares of common stock underlying options that are immediately
exercisable.
</TABLE>
As of the date hereof, we know of no arrangement or understanding that
may, at a subsequent date, result in a change of control.
ITEM 12: 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, 2000, we advanced $107,864 to Thermal Imaging, Inc. ("TII"), an
affiliate of David B. Johnston, for legal expenses. For the year ended June
30, 1999, we issued 4,514,507 shares of common stock, at a 50 percent discount
to market, to TII in satisfaction of advances from TII of $2,273,436.
Manhattan Financial Group ("MFG"). On April 17, 2000, we granted options
to purchase 3,038 shares of our common stock to MFG as compensation for
services rendered in connection with our recent private placement of
securities. The options granted immediately vest at an exercise price of
$1.70 per share and expire on February 28, 2003. We also paid MFG $46,000 in
consulting fees for the year ended June 30, 2000. For the year ended June 30,
1999, we issued 2,140,164 shares of common stock to MFG in satisfaction of
advances from MFG and interest accrued on notes payable.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this Form 10-KSB for our
year ended June 30, 2000. Summaries of all exhibits contained in this report
are modified in their entirety by reference to such exhibits.
* 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 filed 6/10/87.
<PAGE> 62
3(b)* Amendment to Articles of Incorporation
filed 7/31/87.
3(c)* Amendment to Articles of Incorporation
filed 9/12/89.
3(d)* Amendment to Articles of Incorporation
filed 11/06/89.
3(e)* Amendment to Articles of Incorporation
filed 4/22/92.
3(f)* Amendment to Articles of Incorporation
dated 2/17/98.
3(g)** Amendment to Articles of Incorporation
filed 7/05/00.
3(h)* Bylaws, as Amended 01/15/98.
4(a)* Common Stock specimen.
4(b)** Form of Warrant Agreement defining the
rights of holders of purchasers of our
Warrants in connection with our Private
Placement Memorandum dated December 31,
1999.
10(a)* Consulting Agreement dated November 5, 1997
between the Company and Daron Dillia doing
business as Manhattan Financial Group.
10(b)* Employment Agreement dated April 30, 1997
between the Company and David A. Packer.
10(c)* Computerized Thermal Imaging, Inc. Employee
Stock Option Agreement dated October 29,
1997 between the Company and David B.
Johnston.
10(d)* Employment Agreement dated October 29, 1997
between the Company and David B. Johnston.
10(e)* License Agreement dated June 8, 1996
between the Company and Thermal Imaging,
Inc.
10(f)* Employment Agreement dated November 13,
1997 between the Company and Richard V.
Secord.
10(g)* Computerized Thermal Imaging, Inc. Employee
Stock Option Agreement dated January 15,
1998 between the Company and Richard V.
Secord.
<PAGE> 63
10(h)* Computerized Thermal Imaging, Inc. Employee
Stock Option Agreement dated June 12, 1995
between the Company and Richard V. Secord.
10(i)* Computerized Thermal Imaging, Inc.
Employee Stock Option Agreement dated June
12, 1995 between the Company and Richard V.
Secord.
10(j)* Amendment to Employee Stock Option
Agreement dated January 26, 1998 between
the Company and David Packer.
10(k)* Amendment to Employee Stock Option
Agreement dated January 26, 1998 between
the Company and Richard V. Secord.
10(l)* 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(m)* Computerized Thermal Imaging, Inc. 1995
Stock Option Plan.
10(n)* Computerized Thermal Imaging, Inc. 1997
Stock Option and Restricted Stock Plan.
10(o)*** Computerized Thermal Imaging, Inc. 1997
Stock Option and Restricted Stock Plan, as
amended on June 27, 2000, filed as
Attachment B to Schedule 14A Definitive
Proxy Statement dated and filed May 22,
2000.
10(p)* 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(q)* Clinical Trial Agreement dated September
16, 1997 between Thermal Medical Imaging,
Inc. and Health Research Association.
<PAGE> 64
10(r)* 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(s)* Clinical Trial Agreement dated November 7,
1997 between Thermal Medical Imaging, Inc.
and the University of Southern California.
10(t)* Clinical Trial Agreement dated June 4, 1998
between Thermal Medical Imaging, Inc. and
Mt. Sinai Hospital.
10(u)* Clinical Trial Agreement dated February 14,
1998 between Thermal Medical Imaging, Inc.
and Providence Hospital.
10(v)* 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(w)* Beach Boulevard L.L.C. Securities Purchase
Agreement.
10(x)*** Executive Severance Agreement attached as
Exhibit 10(fff) to Form SB-2, Amendment #9,
filed June 6, 2000.
10(y)*** 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(z)*** 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.
<PAGE> 65
10(aa)** Lease Agreement dated May 31, 2000 between
Computerized Thermal Imaging, Inc. and St.
Paul Properties, Inc.
11* Statement regarding computation of per
share earnings.
16*** 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
herein.
21** Subsidiaries of the Registrant.
24* Powers of Attorney.
27** Financial Data Schedules.
99*** Audit Committee Charter attached as Exhibit
99 to Form SB-2, Amendment #9, filed June
6, 2000.
-----------------------------------------------------------------------
(b) Reports on Form 8K filed during the last quarter.
Form 8-K dated March 31, 2000 and filed April 6, 2000 reporting the close
and acceptance of our private placement dated December 31, 2000.
Form 8-K dated April 18, 2000 and filed April 27, 2000 reporting our
acquisition of Bales Scientific, Inc.
Form 8-K/A dated April 18, 2000 and filed June 19, 2000 reporting the
required audited financial statements of Bales Scientific, Inc.
SIGNATURES
In accordance with Sections 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMPUTERIZED THERMAL IMAGING, INC.
Date: September 15, 2000 /s/ David A. Packer
--------------------------------------
David A. Packer
Director, President & Chief Operating Officer
In accordance with The Exchange Act, this report has been signed by the
following persons on behalf of the issuer and in the capacities and on the
dates indicated.
<PAGE> 66
/s/David B. Johnston September 15, 2000
-------------------------------
DAVID B. JOHNSTON
Director, Chairman of the Board and Chief Executive
Officer
/s/Richard V. Secord September 15, 2000
-------------------------------
RICHARD V. SECORD
Director, Vice Chairman of the Board
/s/David A. Packer September 15, 2000
-------------------------------
DAVID A. PACKER
Director, President & Chief Operating Officer
/s/Brent M. Pratley, M.D. September 15, 2000
-------------------------------
BRENT M. PRATLEY, M.D.
Director
/s/Milton R. Geilmann September 15, 2000
-------------------------------
MILTON R. GEILMANN
Director
/s/Harry C. Aderholt September 15, 2000
-------------------------------
HARRY C. ADERHOLT
Director
/s/Kevin L. Packard September 15, 2000
-------------------------------
KEVIN L. PACKARD
Chief Financial Officer, Treasurer & Secretary
<PAGE> 67
