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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(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, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-23955
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COMPUTERIZED THERMAL IMAGING, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0458721
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
TWO CENTERPOINTE DRIVE, SUITE 450, 97035
LAKE OSWEGO, OR (zip code)
(Address of principal executive
offices)
(Registrant's telephone number, including area code) (503) 594-1210
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common
(Title of class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days: $2.20 as of September 10, 2001.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 82,794,350 shares of
common stock were outstanding as of September 25, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents incorporated by reference and the Part of the
Form 10-K (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.
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COMPUTERIZED THERMAL IMAGING, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
3
Available Information...............................................................
PART I
ITEM 1. Our Business................................................ 4
ITEM 2. Description of Our Properties............................... 14
ITEM 3. Legal Proceedings........................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
ITEM 5. Market for Our Common Equity and Related Stockholder
Matters..................................................... 17
ITEM 6. Selected Financial Data..................................... 18
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Plan of Operation....................................... 18
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
ITEM 8. Financial Statements........................................ F-1
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 24
PART III
ITEM 10. Our Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Act........... 25
ITEM 11. Executive Compensation...................................... 28
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
ITEM 13. Certain Relationships and Related Transactions.............. 37
ITEM 14. Exhibits and Reports on Form 8-K............................ 37
(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
2
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: Bernard J. Brady, Chief Financial Officer, Two Centerpointe
Drive, Lake Oswego, OR 97035, voice: (503) 594-1210, fax: (503) 594-1215. 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.
3
PART I
THIS DOCUMENT, AND THE DOCUMENTS INCORPORATED BY REFERENCE, INCLUDING, BUT
NOT LIMITED TO, CERTAIN STATEMENTS CONTAINED IN ITEM 1, "BUSINESS" AND ITEM 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND SECURITIES EXCHANGE ACT OF 1934. FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED. WHEN USED IN THIS DOCUMENT THE WORDS "EXPECTS",
"ANTICIPATES," "INTENDS," "PLANS," "MAY," "BELIEVES," "SEEKS," "ESTIMATES," AND
SIMILAR EXPRESSIONS GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS.
THIS DOCUMENT SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED FINANCIAL
STATEMENTS INCLUDED IN PART II AND OUR "RISK FACTORS" NOTED BELOW.
ITEM 1. OUR BUSINESS
INTRODUCTION
Our mission is to enhance the quality of human life through the development
of thermal imaging systems and associated technologies. Computerized Thermal
Imaging, Inc. ("we", "us", "our", "CTI", "the Company") designs, manufactures
and markets thermal imaging devices and services used for clinical diagnosis,
pain management and industrial non-destructive testing. The Company markets its
products worldwide through an internal sales force and a network of independent
distributors.
From its inception in 1987, the Company has emphasized the research and
development of thermal imaging equipment and proprietary imaging technology.
These efforts have led to the development of our non-invasive and
non-destructive infrared imaging systems. We believe our thermal imaging system
generates data, difficult to obtain or not available using other imaging
modalities, that are useful to health care providers in the detection of certain
diseases and disorders and useful to industry as a tool for product quality
testing.
Our research indicates that our equipment and technology is useful in
studying and diagnosing breast cancer, which is the most common cancer in women
after skin cancers. Our research and development efforts have led to the
creation of our Breast Cancer System 2100-TM- ("Breast Cancer System"). We are
seeking FDA pre-market approval ("PMA") for this system, as an adjunct to
mammography and clinical examinations, for use as a painless and non-invasive
technique for acquiring clinical information. To receive FDA approval, we must
establish the Breast Cancer System's ability to consistently distinguish between
malignant and benign tissue and thereby significantly reduce the number of
unnecessary (benign finding) breast biopsies performed. We have received
acceptance on four of five modules required for PMA approval. We submitted the
fifth module, which includes clinical trial results and efficacy claims, during
June 2001. We are awaiting FDA review and comment.
In addition to breast cancer screening, we believe our technologies may have
application in pain treatment, the identification of musclo-skeletal
abnormalities, and non-destructive testing of industrial and structural
components. We design, manufacture and sell our Thermal Image Processor ("TIP")
and Photonic Stimulator for pain treatment and have contracted with third
parties to conduct research on whether the Photonic Stimulator is useful in
treating the symptoms of diabetic neuropathy. We have developed industrial
applications for our technology that address industrial markets for
non-destructive testing and inspection of turbine blades, aging aircraft,
electronics, composites, metals and other advanced materials.
4
In January 2001, we began transitioning our focus from research and
development to commercializing our technology. We have a sales and marketing
organization headquartered in Oregon, and earlier this year, we initiated a
marketing campaign designed to establish distribution channels for our products
by establishing relationships with medical equipment dealers. We are developing
an internal manufacturing operation. Success in this transition depends upon the
Company's ability, among other things, to:
- obtain FDA approval for our Breast Cancer System;
- develop and manufacture reliable and effective products;
- attract, retain, train and motivate qualified personnel;
- develop manufacturing and marketing expertise and expand our internal
sales force; and
- attract qualified distributors.
We have had limited revenues from operations and immaterial revenues from
our Breast Cancer System. To date, the Company has generated revenues from the
Photonic Stimulator, TIP, Turbine Blade Inspection System and inspection
services. We cannot assure you that we will achieve profitability in the near
future.
As of September 25, 2001, the Company had approximately 81 million shares of
common stock held by approximately 29,000 primarily individual shareholders. We
have warrants and options for approximately 16.0 million shares of common stock
that remain unexercised. Accordingly, on a fully diluted basis, we have
approximately 97.6 million common shares outstanding. In addition, we own
100 percent of Bales Scientific, Inc and 97.9 percent of Computerized Thermal
Imaging, Co. We have no other interest in any other entity. We trade on the
American Stock Exchange under the symbol "CIO".
The Company uses capital to pay general corporate expenses, including
salaries, manufacturing costs, professional fees, clinical trials and technical
support costs, and general and administrative expenses. To date, the Company has
funded its business activities with funds raised through the private placement
of its common stock and warrants and the exercise of warrants and options.
INDUSTRY OVERVIEW & TRENDS
The American Cancer Society estimates that 192,200 new cases of invasive
breast cancer will be diagnosed, and that 40,600 women in the United States will
die from the disease during 2001. Excluding cancers of the skin, breast cancer
is the most common cancer among women, accounting for nearly one of every three
cancers diagnosed. Most breast lumps and abnormalities are benign and
non-life-threatening. However, to identify the 192,000 new cases of breast
cancer expected during 2001, physicians will perform more than 1 million
biopsies. More than 80 percent of all breast biopsies performed during 2001 are
expected to yield benign results.
BREAST HEALTH TRENDS
During 2000, of the approximately 1.3 million breast biopsies performed in
the United States, 80% of them had negative (benign) findings. Approximately
800,000 of these biopsies were open surgical procedures where the patient is
fully anesthetized or heavily sedated and a surgeon extracts the mass through an
incision. The remaining 500,000 biopsies were performed using somewhat less
invasive procedures.
5
OUR PRODUCTS AND SERVICES
OVERVIEW. The Company has developed six significant proprietary
technologies: (1) a climate-controlled examination unit to provide patient
comfort and facilitate reproducible tests; (2) a controlled, dynamic imaging
protocol that produces consistent results; (3) a statistical model that detects
physiological irregularities; (4) infrared imaging and analysis hardware,
including our sophisticated heat-sensing camera; (5) the Photonic Stimulator;
and (6) the Turbine Blade Inspection System.
Our imaging systems integrate third party hardware, proprietary software,
and our sophisticated heat-sensing camera to produce, interpret, and catalogue
thermal images. These systems provide medical professionals with information to
assist in the evaluation of breast abnormalities and the management of chronic
pain; and fill industrial requirements for non-destructive testing and
inspection. Specifically, our Breast Cancer System provides a non-invasive,
painless adjunct to mammography for the evaluation of breast lesions. The TIP
and Photonic Stimulator provide tools for the location and treatment of pain.
The Turbine Blade Inspection System provides customers an effective,
cost-efficient quality assurance tool.
Mammography, and other imaging modalities, create anatomical snapshots, but
do not expose dynamic function. Mammography may detect the presence of a
structural abnormality in the breast; however, biopsy is required to determine
the presence of cancer. We believe our thermal imaging technology provides
functional images that complement structural images provided by mammography, and
provide health professionals a tool for discriminating between cases requiring
invasive biopsy and those that do not.
Our image processing technology operates on the premise that every
externally or internally triggered physiological event causes a measurable
caloric heat-releasing response. Abnormal caloric activity stimulates the body's
temperature and thermal regulating systems, creating a physiological response
detectable by heat-sensing equipment. In a controlled environment, we believe
our technology can 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 of an organ or body part.
In fulfilling its intended adjunctive role of providing physiological data
and reducing the number of benign biopsies while maintaining high "true
positive" rates, we believe that the Breast Cancer System, if it receives FDA
approval, offers patients, physicians, health care providers and payers the
following potential advantages:
- For the Patient--the Breast Cancer System is fast, painless and
non-invasive. The immediate availability of diagnostic results, absence of
radiation and uncomfortable breast compression should contribute to
patient well-being.
- For the Physician--Early diagnosis of disease and chronic conditions will
help physicians provide a cost-effective treatment option that can
eliminate unnecessary pain, suffering, procedures and hospitalization. The
Breast Cancer System, without the use of radiation or painful breast
compression, provides diagnostic data to assist in the accurate
determination of whether a lesion requires biopsy.
- For the Provider--Procedure duration is comparable to other diagnostic
modalities, taking approximately 10 minutes, involves no hazardous
radiation, does not consume disposable supplies and provides immediate
digital images to assist in diagnosis.
- For the Payer--The reimbursement rate for adjunctive diagnosis using the
Breast Cancer System is expected to be under $300. For each suspicious
lesion identified as benign by the Breast Cancer System, the payer can
potentially save an average of $1,400, if the physician avoids an invasive
core-needle or surgical biopsy.
6
In addition to the Breast Cancer System, we design, manufacture and sell our
TIP System, Photonic Stimulator and non-destructive test systems. The TIP is
used for physiological imaging in connection with localizing sources of pain and
to test the effect of treatment. The Photonic Stimulator increases blood flow,
and is used in the treatment of pain and the symptoms of diabetes, carpal tunnel
syndrome, myofascial pain and reflex sympathetic dystrophy.
Using pattern-recognition algorithms similar to the ones utilized in our
Breast Cancer System, we have created an automated system for analyzing turbine
blades and determining whether a blade is fully functional. Compared with
traditional testing methods, our fully automated test system reduces turbine
blade test time approximately 90 percent. Our turbine blade test system, tests
dynamically to find anomalies in the casting such as porosity and the
identification of core shift. Our proprietary Automated Defect Recognition (ADR)
software then analyzes the information to determine whether the blade is defect
free. The analysis identifies core shift, residual core material, blocked
cooling hole and disbonded thermal barrier coating defects. This system can
identify blockages in cooling holes as small as the diameter of a human hair.
As we emerge from the product development stage, we anticipate continued
shifting from a reliance on trade secrets for intellectual property protection
to reliance on formal patent protection. The Company has two patents:
No. 5,999,842 for a Functional Thermal Imaging Apparatus, our patient
positioning table; and No. 6,157,854 for an Irradiation Pain Treatment method,
our Photonic Stimulator. In addition, we have a pending patent application
(No. 60/105,147) for an algorithm used to analyze imaging data and nine
applications in review or development.
OUR BUSINESS STRATEGY
We believe thermal imaging generally has failed to achieve its commercial
potential because of deficiencies in enabling technologies. Technological
advances in computing and our sophisticated heat-sensing cameras allow us to
address healthcare provider concerns by offering valid and cost-effective
computerized thermal imaging.
Our Breast Cancer System qualifies as a medical device because of its
intended use in the diagnosis of disease while not interacting chemically with
the body. We do not believe that our Breast Cancer System requires a Pre-Market
Application ("PMA") because it is non-invasive and poses no risk to the patient.
We have chosen to pursue FDA PMA approval, however, because we believe that such
approval will enhance our ability to introduce our system to the market by:
1) allowing us to reference medical efficacy claims in connection with marketing
our Breast Cancer System, 2) improving physician acceptance of our systems, and
3) obtaining designation of insurance payment codes.
OUR MARKETS
The medical imaging market has three distinct segments: hospital-based,
freestanding, and mobile. We have targeted the hospital-based segment for the
following reasons: (1) substantial market size; (2) centralized management
structure which provides an opportunity to maximize selling economies; (3) our
familiarity with hospitals through clinical trials; (4) a potential to align
ourselves and our products with prestigious institutions; (5) the hope that
visibility in hospitals will induce freestanding and mobile medical diagnostic
imaging centers to adopt our Breast Cancer System where our system's
comparatively small size and ease of installation will be important; and (6) a
hospital's substantial, on-going patient management practices.
Our pain management products, the TIP and Photonic Stimulator, are designed
for use in clinics and doctor's offices and are marketed directly to
chiropractors, physicians, and sports medicine and pain management specialists.
7
RELATIONSHIPS WITH HOSPITALS BRAND EQUITY. We plan to leverage our
relationships with the hospitals that conducted 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 provide publicity that will encourage the remaining market (the freestanding
and mobile diagnostic imaging centers) to adopt our Breast Cancer System.
PATIENT MANAGEMENT. Hospitals, chiropractors, sports medicine and pain
management practitioners provide significant on-going patient management
service. Because our thermal scans are non-invasive, physicians can use them
whenever they deem necessary.
COMMERCIALIZED PRODUCT WITH INTERNATIONAL APPEAL. 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 Breast Cancer System may lead to substantial
international demand.
OUR COMPETITION
MEDICAL IMAGING. The principal methods used to visualize internal human
anatomy are: X-ray, computed tomography, ultrasound and magnetic resonance
imaging. Physicians do not view these technologies as substitutes, but as
elements of a toolkit, each uniquely suited to the diagnosis of a specific
problem.
Our Breast Cancer System is positioned as an adjunct to mammography and does
not compete directly with X-ray, computed tomography or magnetic resonance
imaging. Our system is painless, requires no disposable supplies or radio-active
materials, and involves no invasive technology.
Ultrasound, our closest competing technology, is clinically useful only for
discriminating between harmless fluid filled cysts and solid masses, which may
or may not be cancerous and provides no diagnostic information about the mass
itself. Our Breast Cancer System is designed to evaluate any breast mass and to
determine the presence of cancerous tissue.
The companies that supply diagnostic imaging equipment range from large
manufacturers to smaller specialized companies. Large diversified manufacturers,
for which medical systems define only a small percentage of their total
business, include General Electric, Siemens, Toshiba, Hitachi and Philips. These
companies have significantly more financial and marketing resources than us and
their entry into our market as a direct competitor could adversely affect
performance.
NEW TECHNOLOGIES: Digital X-ray and positron emission tomography ("PET").
Digital X-ray captures images electronically and promises several important
benefits: (1) reduced radiation dosage, (2) faster access to images, which is
critical for emergency room use, (3) digital technology enables remote
consultation for difficult cases; and (4) increased productivity, accompanied by
reductions in labor and radiographic film costs.
PET, an invasive, diagnostic imaging technique for measuring the metabolic
activity of human cells, may benefit patients suffering from certain types of
cancer or certain conditions affecting the brain and heart. Many insurance
carriers approve PET, but the technology is expensive. PET, like computerized
thermal imaging, can diagnose some functional disorders at the biochemical
level, such as Alzheimer's disease.
The Company believes it competes favorably with respect to each alternative
imaging technology. However, in an evolving market we cannot assure that the
Company will compete successfully against current and future competitors and the
failure to do so could have a material adverse effect on operating results and
financial condition.
8
OUR SALES AND MARKETING STRATEGY
OVERVIEW. The Company plans to address the medical imaging market with a
multi-channel strategy incorporating independent distributors, telemarketing,
the internet and corporate marketing. We will address the industrial market with
a direct sales force augmented by distributors as appropriate.
DISTRIBUTORS. To leverage our limited resources, the Company has retained
and will continue to seek the services of distributors for specific geographic
regions within the United States and internationally. We believe that
distributors provide intimate local market knowledge and as independent
businesses are motivated to deliver unit sales.
TELEMARKETING/TELESALES. The Company believes telemarketing/telesales
provides important direct marketing, lead follow-up and customer service
capability, particularly in the pain management segment. Telemarketing creates
revenue through direct sales and provides distributors with leads for additional
sales of enhanced thermal imaging products.
INTERNET. The Company intends to use the internet to provide information to
current and potential customers and investors, and plans to provide
"communities" where its customers can report problems, make service requests and
discuss various issues relating to thermal imaging and use of the Company's
products.
CORPORATE MARKETING. We intend to develop product and company collateral
materials, advertise in select trade journals, and demonstrate our products and
present papers and research results at conferences and trade shows. We believe
that this activity will build corporate and product awareness and support our
sales efforts in selected vertical markets.
INDUSTRIAL PRODUCTS. The Company is building an internal organization to
pursue industrial sales. The Company expects that this team will manage
relationships with existing and potential customers in the turbine power
repair/replace and OEM markets, and explore potential customer relationships
with industrial and construction customers requiring non-destructive testing
capabilities.
SERVICE PROVIDERS AND CONTRACTOR RELATIONSHIPS
OVERVIEW. As a development company, our business model relied upon
contractors and suppliers to reduce our development risk. By reducing overhead
expenses and outsourcing, integration and various elements of our research and
development, the Company focused resources on sales, brand development and
adapting our systems to new opportunities and evolving customer needs.
TRW. Since 1996, we have entered into several agreements with TRW, which
continues to provide assistance developing and enhancing one element of the
Breast Cancer System software.
BATTELLE. In 1999, we signed an agreement with Battelle Memorial Institute
("Battelle"), under which Battelle assists us in the preparation of regulatory
submissions and provides technical consulting services in connection with
(1) algorithm development, (2) organization of design files, (3) statistical
consultation for interaction with the FDA, and (4) manufacturing review.
QUINTILES. An independent consulting firm, authorized by the FDA to verify
clinical examination results, provide clinical trial monitoring and FDA
preparation support, Quintiles provides the Company services on a time and
materials basis. Quintiles continues to provide consulting support in connection
with securing FDA approval of Module 5.
9
CLINICAL TRIALS. We contracted with five U.S. hospitals to conduct the
clinical trials necessary for FDA approval of the Breast Cancer System:
-- USC/Norris Comprehensive Cancer Center, Los Angeles;
-- Mt. Sinai Hospital, Miami;
-- St. Agnes Hospital, Baltimore;
-- Lahey Clinic, Boston; and
-- Providence Hospital, Washington, D.C.
We entered into substantially identical agreements with each hospital. Under
the terms of these agreements, the hospitals enrolled patients and collected
thermal images and mammography x-ray images for use in the clinical trials
required to prove safety and efficacy for FDA Pre-Market Approval. The
agreements provided that the study would be conducted in accordance with our
protocol and that (1) any intellectual property that is the direct and specific
result of performing the protocol belongs to us, (2) any intellectual property
conceived or made jointly by one or more of our employees and the hospital
belongs jointly to the respective hospital and us and, (3) any other
intellectual property developed under the study belongs to the respective
hospital. In addition, each hospital agreed not to disclose confidential
information exchanged in connection with the agreement and agreed to prevent
disclosures of confidential information to third parties. As of April 30, 2001,
we concluded the clinical trials related to obtaining FDA approval for the
Breast Cancer System and all sites terminated enrollment of clinical trial
subjects.
The Company continues to maintain relationships with these institutions and
is conducting clinical studies involving TIP and Photonic Stimulator at
Providence Hospital. In addition, we plan to initiate studies involving the
Breast Cancer System, TIP and Photonic Stimulator with other hospitals during
Fiscal 2002.
GOVERNMENT REGULATION
OVERVIEW. Our Breast Cancer System and pain management devices 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 but do not
interact chemically with the body. Typically, low risk Class I or Class II
devices, substantially similar to approved products already on the market,
obtain FDA clearance by the agency's pre-market notification known as a 510(k)
filing. Sophisticated instruments that entail significant risk, generally
described as Class III devices, require manufacturers to submit a Pre-Market
Application ("PMA") to the FDA. More complex and time-consuming to prepare than
a 510(k) filing, a PMA typically contains significant clinical testing,
manufacturing and other data, all of which are scrutinized by the FDA to
demonstrate the product's safety, reliability and effectiveness.
We do not believe our products require a PMA, and that our Breast Cancer
System qualifies as a Class I or II device. We have chosen to pursue FDA
approval via the PMA process for our Breast Cancer System, however, because we
believe that FDA approval will 1) allow us to reference medical efficacy claims
in connection with marketing of our Breast Cancer System, 2) improve physician
acceptance of our systems, and 3) help us to obtain designation of insurance
payment codes. We believe all of these are necessary to building a market for
our products.
We have submitted our PMA to the FDA in five modules. Module 1:
a) introduces the use of thermography, its safety and effectiveness;
b) summarizes indications for use of thermography; c) summarizes incidence,
diagnosis and prognosis of breast cancer; d) describes current modalities for
detecting breast cancer; e) describes our Breast Cancer System, including major
components and the population for which our device has clinical utility;
f) describes our clinical study and the population of the study; and
g) provides a statement of marketing of our device for its intended use. Module
2
10
provides: a) a detailed description of our Breast Cancer System and its
component parts; b) 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 Cancer
System, including software used in the development of our system and the
acquisition of data in our clinical study. Module 3 provides: a) manufacturing
information concerning our Breast Cancer 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 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
materials used in manufacturing the device. Finally, Module 5 is an evaluation
of our clinical studies, including the accumulation and analysis of all the
clinical study data.
We have submitted all modules, and have received FDA acceptance of Modules 1
through 4. We are awaiting FDA review and acceptance of Module 5. We cannot
determine when or whether the FDA will approve our Pre-Market Application.
CURRENT EMPLOYEES
As of June 30, 2001, we had 53 full-time employees. None of our employees
are represented by a union and we consider our employee relations to be good.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
WE ARE SUBJECT TO GOVERNMENT REGULATION.
Our Breast Cancer System is presently under review with the FDA pursuant to
PMA Application No. M990018. There is no assurance that we will receive FDA
approval. Failure to secure FDA approval would reduce or eliminate the market
for our Breast Cancer System.
WE HAVE LIMITED REVENUES FROM OPERATIONS, AND MAY NEVER HAVE SUBSTANTIAL REVENUE
FROM OPERATIONS.
Since inception, we have engaged in research and development activities and
have only recently begun product commercialization. With limited exceptions, our
products have not been used in commercial applications and there is no assurance
that the market will accept our products.
WE MAY NOT BE ABLE TO MANAGE GROWTH AND THIS COULD RESULT IN A WEAKENING OF OUR
FINANCIAL AND COMPETITIVE POSITION.
We must expand our business operations substantially in order to
commercialize our products. This expansion will subject us to a variety of risks
associated with rapidly growing companies. If we cannot manage our expanding
work force, improve our reporting systems and customer service infrastructure
and manage the integration of products or technologies, we will be unable to
properly manage the growth of our operations, which could harm our business and
financial results.
WE EXPECT TO CONTINUE TO INCUR LOSSES, DEFICITS, AND DEFICIENCIES IN LIQUIDITY
THAT COULD IMPAIR OUR ABILITY TO GROW.
Our ability to achieve profitability depends upon our ability to
successfully develop clinical applications, obtain regulatory approvals and
market our products. There is no assurance that we will be able to accomplish
this profitably. We have incurred substantial losses in the past and expect to
continue to incur losses, deficits and deficiencies in liquidity due to the
significant costs associated with the continuing development and
commercialization of our products.
11
WE WILL HAVE TO RAISE ADDITIONAL CAPITAL IN ORDER TO FUND OPERATIONS IN THE
FORSEEABLE FUTURE.
Until our operating results improve, we will have to rely on outside
financing to fund our business. We expect to rely on the sale of equity
securities and debt financing for such funds. The sale of equity securities
could dilute our existing stockholders' interest, and borrowings from third
parties could result in assets being pledged as collateral and loan terms that
could restrict our operations. There is no assurance that capital will be
available from any source or, if available, upon terms and conditions acceptable
to us.
WE HAVE NEVER PAID A CASH DIVIDEND. IT IS LIKELY THE ONLY WAY YOU WILL REALIZE A
RETURN ON YOUR INVESTMENT IS BY SELLING YOUR SHARES.
We have never paid cash dividends on any of our securities and do not
anticipate paying cash dividends in the foreseeable future. We will retain
future earnings, if any, to fund growth.
THE MARKET PRICE OF YOUR SHARES MAY BE VOLATILE.
The stock price of companies like ours 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.
We have authorized 3.0 million shares of preferred stock, par value $5.00
per share, none of which are outstanding. The preferred stock, if issued, could
have preferential voting, dividend and liquidation rights which adversely affect
the rights of the holders of common stock. Our Board's authority to issue
preferred stock without shareholder approval 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 and
costly.
WE MAY SEEK BUSINESS COMBINATIONS AND ISSUE SECURITIES THAT COULD DILUTE YOUR
INTERESTS.
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 to existing shareholders.
WE RELY ON THIRD PARTIES TO HELP DEVELOP AND MANUFACTURE OUR PRODUCTS. IF THEY
FAIL TO PERFORM, FDA APPROVAL, DEVELOPMENT, AND/OR PRODUCTION OF OUR PRODUCTS
COULD BE SUBSTANTIALLY DELAYED.
We depend upon many third parties and hospitals to assist in our clinical
studies and the development and manufacturing of our products. Our products are
highly specialized and have component parts 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.
LIMITED NUMBER OF CUSTOMERS.
At the present time, we have only a few customers for our products. In order
to be successful, we believe that our products require distribution to a broader
customer base. If we are unable to identify and adequately market our products
to a large number of customers, we may never achieve
12
profitability. Further, third party payers, such as Medicare or Medicaid, could
reduce the reimbursement rate for diagnostic procedures. This could reduce the
market for our products.
IF WE WERE UNSUCCESSFUL IN PREVENTING OTHERS FROM USING OUR INTELLECTUAL
PROPERTY, WE WOULD LOSE A COMPETITIVE ADVANTAGE.
Our success will depend, in part, on our ability to use and prevent others
from using our trademarks and other intellectual property. We currently hold
patents No. 5,999,842 dated December 7, 1999 on our bed apparatus and
No. 6,157,854 dated December 5, 2000 covering techniques designed to reduce or
eliminate pain by the application of infrared therapy while monitoring the
process as it is being conducted. We also hold a provisional application on our
algorithm (Serial No. 60/105,147 dated October 21, 1998). There can be no
assurance that the steps we have taken to protect our property will be adequate
to protect our rights. Any attempts that we make to defend our intellectual
property would be expensive and time consuming, and parties that misappropriate
our intellectual property could have significantly more financial resources.
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 our executive officers, including Richard V. Secord, John M. Brenna and
Bernard J. Brady. 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
attract, motivate, retain and manage qualified employees. Demand for medical
technology personnel is intense. There is no assurance that we will be able to
attract and retain the people we need.
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 because our imaging systems are in development 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.
WE MAY NOT BE ABLE TO COMPETE FOR BUSINESS AND THIS WOULD SUBSTANTIALLY IMPAIR
OUR GROWTH.
There are many firms competing in the medical imaging and diagnostic
marketplace. 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 million 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.
13
ITEM 2: DESCRIPTION OF OUR PROPERTIES
We lease facilities under various operating leases requiring fixed monthly
payments, adjusted periodically, over their term as follows:
ST. PAUL PROPERTIES LEASE AGREEMENT, LAKE OSWEGO, OREGON. We lease
approximately 7,388 square feet of executive office space through 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 are
$15,700. This space is used as our headquarters and houses our administrative,
financial, executive, and marketing employees.
LAYTON, UTAH LEASE AGREEMENT. We currently lease approximately 10,500
square feet of office space in Layton, Utah for $17,252 per month pursuant to a
lease that expires in November 2002. We are relocating our Layton, Utah
operations to Ogden, Utah and Portland, Oregon and are actively seeking
sub-tenants for this space.
WALNUT CREEK, CALIFORNIA LEASE AGREEMENT. In connection with the
acquisition of Bales Scientific, Inc., we entered into a three-year lease ending
on April 19, 2003. The monthly lease payment of $7,900 covers approximately
5,500 square feet of office space. The lease rate increases on April 20 of each
year by an amount computed using the Consumer Price Index. The facility is used
to house our industrial products and product research and development
operations.
OGDEN, UTAH LEASE AGREEMENT. We lease approximately 7,660 square feet of
manufacturing space in Ogden, Utah through June 30, 2003. Monthly payments under
the lease are $4,655. Our manufacturing, regulatory, quality assurance and
clinical development departments use this space.
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
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),
alleging breach of contract for failure to compensate her for promotional
services rendered to the Company. In March 2001, Plaintiff amended her complaint
to include causes of action for fraud and negligent misrepresentation against us
and a former officer. Plaintiff seeks unspecified damages. We believe
Ms. Sullivan breached the agreement and intend to defend this lawsuit on that
basis. We are currently engaged in discovery and no trial date has been set.
ALEX SAENZ COMPLAINT AND COUNTERCLAIMS
On June 1, 2000, we filed a complaint against Alex Saenz ("defendant") in
the Circuit Court of the State of Oregon. On July 7, 2000, the complaint was
moved from the circuit court to the United States District Court for the
District of Oregon.
We believe that defendant interfered with our business by threatening
lawsuits to recover stock options allegedly owed to him in connection with our
April 2000 Private Placement, and threatening to sue and otherwise harass an
individual important to the continued conduct of our business. The defendant has
denied our allegations and filed a counterclaim alleging breach of various
verbal agreements to compensate him for services rendered.
Following a trial that ended August 16, 2001, the court ruled that defendant
was not entitled to any additional compensation from our company. The court also
dismissed the defendant's counterclaim against the company.
14
The defendant has 30 days after a judgment is entered to file an appeal. We
anticipate the court's judgment will be filed shortly.
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 against Bloomberg, L.P. ("Bloomberg").
The lawsuit alleges that on June 29 and July 18, 2000, Bloomberg published
certain defamatory articles about the Company through its news service. We
allege damages in excess of One Hundred Million Dollars ($100,000,000).
On March 26, 2001, the Court dismissed our complaint against Bloomberg,
without prejudice. The Court ruled that, despite the possibility that a jury
could have found Bloomberg's statements defamatory, damages had not been
sufficiently pleaded. We had alleged that Bloomberg's statements directly caused
a decline in our stock price and that the price decline did not merely
"coincide" with those statements, as Bloomberg maintained. The court held that
any decline in our stock value attributable to Bloomberg's statements may be
damage to our shareholders, but not necessarily to the Company itself.
We have appealed the District Judge's decision to the Federal 10th Circuit
Court of Appeals in Denver, Colorado, where the matter will be briefed soon.
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, against us and our former Chief Executive Officer,
alleging violations under Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, for commissions allegedly due to
Plaintiff in connection with the private placement of our securities. Shortly
thereafter, the Plaintiffs lawsuit 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. Plaintiff seeks specified damages,
attorney fees and unspecified damages pursuant to five separate causes of action
including breach of contract, fraud and unjust enrichment.
We have denied all of Plaintiffs claims and have affirmatively alleged that
all amounts due have been paid in full. We are currently engaged in discovery
and the no trial date has yet been set.
DAVID PACKER VS. COMPUTERIZED THERMAL IMAGING. INC.
On March 19, 2001, we entered into a Separation Agreement with David A.
Packer. Under that agreement, Packer's employment with the Company was to
terminate on December 31, 2001.
On June 13, 2001, the Company communicated its intent to terminate the
agreement based upon information discovered subsequent to the signing of that
agreement regarding alleged misrepresentations made by Packer in regard to his
employment duties. The Company also cancelled 1,000,000 options granted to
Mr. Packer under the agreement.
Packer filed suit against the Company in Davis County, Utah on June 19, 2001
to recover the benefits and compensation, including the 1,000,000 options, that
were contemplated under the agreement. The Company has filed a counterclaim
against Packer for breach of contract, misrepresentation, and a declaration that
the Separation Agreement is void. Discovery in the case is set to commence
within the next 60 days.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on June 21, 2001. A complete
description of matters considered at our Annual Meeting is set forth in our
Proxy Statement dated May 21, 2001. Of
15
the 80,693,120 shares of common stock outstanding and entitled to vote at the
Annual Meeting, 67,450,968 shares, or 83.6 percent, were present by proxy or in
person.
The first proposal was the election of directors. Richard V. Secord, John M.
Brenna, Brent M. Pratley, Harry C. Aderholt, Milton R. Geilmann, and Robert L.
Simmons were nominated and elected to serve as members of our Board of Directors
for one year, or until their successors are elected and qualified.
The second proposal was ratification of Deloitte & Touche, LLP as our
independent auditor for the fiscal year ending June 30, 2001. The proposal was
approved.
No other business was presented at our Annual Meeting.
16
PART II
ITEM 5: MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the American Stock Exchange under the symbol
"CIO".
PRICE RANGE OF OUR COMMON STOCK
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, 2000 LOW BID HIGH BID
------------------------------- -------- --------
First Quarter.............................................. $0.63 $ 1.45
Second Quarter............................................. $1.40 $ 5.03
Third Quarter.............................................. $3.00 $19.97
Fourth Quarter............................................. $5.38 $13.75
FISCAL YEAR ENDED JUNE 30, 2001
-----------------------------------------------------------
First Quarter.............................................. $4.81 $ 4.97
Second Quarter............................................. $1.44 $ 1.63
Third Quarter.............................................. $2.28 $ 2.47
Fourth Quarter............................................. $2.77 $ 4.95
On September 10, 2001, the closing price of our common stock as reported on
the American Stock Exchange was $2.20 per share. On September 25, 2001, we had
approximately 29,000 beneficial stockholders of our common stock and 82,794,350
shares of our common stock outstanding.
17
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are for each fiscal
year in the five-year period ended June 30, 2001. This data is derived from, and
qualified by reference to, CTI's audited consolidated financial statements and
notes thereto. CTI is considered a development stage enterprise as described in
Note 1 to the consolidated financial statements.
DESCRIPTION 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ---------- ----------
Revenues......................... $ 673,782 $ 329,283 $ -- $ -- $ 55,815
Cost of goods sold............... (419,157) (176,936) -- -- --
----------- ----------- ----------- ---------- ----------
Gross margin..................... 254,625 152,347 -- -- 55,815
OPERATING EXPENSES
General & administrative......... 12,162,069 2,890,869 2,576,169 3,167,690 1,598,393
Marketing........................ 2,995,650 645,059 -- --
Research & development........... 7,991,158 5,114,518 1,837,182 2,430,038 1,812,798
Depreciation & amortization...... 2,258,445 616,205 50,393 -- --
Other............................ 2,893,849 583,054 -- -- --
Total operating expenses......... 28,301,171 9,849,705 4,463,744 5,597,728 3,411,191
Operating (loss)................. (28,046,546) (9,697,358) (4,463,744) (5,597,728) (3,355,376)
Other income (expense)........... 1,933,962 804,203 (562,097) (411,794) 5,762
Net Loss......................... (26,112,584) (8,893,155) (5,025,841) (6,009,522) (3,349,614)
----------- ----------- ----------- ---------- ----------
BASIC LOSS PER SHARE............. (0.32) (0.13) (0.09) (0.14) (0.10)
----------- ----------- ----------- ---------- ----------
Cash, cash equivalents, and
marketable securities.......... 18,893,850 35,032,166 137,162 232,268 196,056
Total Assets..................... 31,843,009 51,462,670 375,805 381,525 528,675
Accumulated deficit.............. (60,913,229) (34,601,965) (25,708,810) (2,787,343) (1,817,773)
Total Equity..................... 29,184,680 48,284,845 (159,709) (2,480,470) (1,142,773)
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS CONCERNING OUR BUSINESS
The following discussion should be read in conjunction with the Consolidated
Financial Statements, the Notes thereto and the other information included in
this Report. Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements.
When used in this document, the words "expects," "anticipates," "intends,"
"plans," "may," "believes," "seeks," "estimates," and similar expressions
generally identify forward-looking statements. The forward-looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. For a more detailed discussion of
these and other business risks, see "Risk Factors".
OVERVIEW
Our mission is to enhance the quality of human life through the development
of thermal imaging systems and associated technologies. Computerized Thermal
Imaging, Inc. ("we", "us", "our", "CTI", "the Company") designs, manufactures
and markets thermal imaging devices and services used for clinical diagnosis,
pain management and industrial non-destructive testing. The Company markets its
products worldwide with an internal sales force and through a network of
independent distributors.
18
We have developed applications for our technology that address industrial
markets for non-destructive testing and inspection of turbine blades, aging
aircraft, electronics, composites, metals and other advanced materials. We
provide inspection services and design and build non-destructive test systems
for industrial customers.
Our current products consist of our Breast Cancer System (currently
undergoing FDA review), Photonic Stimulator, Thermal Image Processor, and our
Turbine Blade Inspection System. As mentioned above, we are a developmental
stage entity, and as such, report as a single operating entity.
To date, revenues have been generated from sales of our Photonic Stimulator,
Thermal Image Processor and services provided in connection with our Turbine
Blade Inspection System.
RESULTS OF OPERATION
FISCAL YEARS ENDED JUNE 30, 2001 AND 2000
REVENUES
Revenues for the 12 months ended June 30, 2001 totaled $674,000 compared to
$329,000 for the prior year, an increase of $345,000 or 105%, and result from
owning the Bales Scientific subsidiary for a full fiscal year. Revenues do not
include $600,000 in back orders for industrial and medical products received
during the six months ended June 30, 2001, which will be recognized as revenues
in future periods in accordance with, and to the extent permitted by, generally
accepted accounting principles and regulations promulgated by the Securities and
Exchange Commission.
EXPENSES
GENERAL AND ADMINISTRATIVE. During the 12 months ended June 30, 2001,
general and administrative expenses increased $9,301,000 or 325% to $12,162,000.
This increase is primarily a result of additional compensation expense of
$6,155,000, of which $5,140,000 is employee non-cash compensation, and
$1,015,000 is cash compensation resulting from an increased number of employees.
The increase is further attributable to a) additional legal expenses of
$1,339,000 incurred in connection with regulatory filings, on-going litigation,
and other legal matters; b) additional retirement plan and employee-related
expenses of $372,000 resulting from the increase in the number of employees;
c) an increase in travel costs of $345,000; d) an increase in professional
related services of $225,000 incurred in connection with recruiting and business
consultation; and e) a $216,000 increase in insurance expenses. These expenses
were partially offset by a decrease of $280,000 in stockholder services related
to public relations, shareholder meetings, and SEC filing requirements.
MARKETING. During the 12 months ended June 30, 2001 marketing expenses
increased $2,321,000 or 344% to $2,996,000. The primary causes of this increase
are: a) salary and wage expense increased $1,181,000, of which $577,000 is from
non-cash compensation, and $604,000 is cash compensation attributable to an
increase in the number of marketing employees; b) increased marketing and public
relations expenses of $755,000; and c) a $132,000 increase in travel expenses.
RESEARCH AND DEVELOPMENT. During the 12 months ended June 30, 2001,
research and development expenses increased $2,877,000 or 56%, to $7,991,000.
The increase results from a) increased clinical trial expenses, $194,000;
b) increased salary and wage expense of $1,514,000, of which $216,000 is from
non-cash compensation and $1,298,00 is cash compensation attributable to an
increase in the number of research employees; and c) a $382,000 increase in
other research and development costs related to industrial and medical
applications.
For the 12 months ended June 30, 2001, and all prior periods, we expensed
all costs associated with process and systems development, including software
code development, computer hardware and software purchases, and expenses related
to the development of our examination table.
19
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
12 months ended June 30, 2001 increased $1,642,000, or 267% to $2,258,000. This
increase is expense resulting from amortization of goodwill associated with our
acquisition of Bales Scientific in April 2000 and amortization of our software
licenses.
NON-REOCCURRING EXPENSES. During the 12 months ended June 30, 2001, we
concluded that changes in the regulatory environment precluded effective
marketing of our data base management system and abandoned the project. In
connection therewith, we reduced the capitalized value of the software to zero,
incurring a one-time charge of approximately $2,740,000. We also wrote off other
tangible and intangible assets, with a net book value of $154,000 in connection
with relocating our Utah operations to our Ogden, Utah manufacturing facility.
NET INTEREST INCOME (EXPENSE)
Interest income for the 12 months ended June 30, 2001 increased $1,083,000
or 129% to $1,921,000. This increase resulted from investing proceeds from the
April 2000 private placement of our common stock.
NET LOSS
As a result of the foregoing, we incurred a loss of $26,113,000, or $(0.32)
per share, for the 12 months ended June 30, 2001, compared to a loss of
$8,893,000, or $(0.13) per share, for the 12 months ended June 30, 2000.
FISCAL YEARS ENDED JUNE 30, 2000 AND 1999
REVENUES
Revenues for the 12 months ended June 30, 2000 totaled $329,000 compared to
$0 for the prior year. These revenues resulted entirely from product sales by
our Bales Scientific subsidiary, acquired in April 2000.
EXPENSES
We incurred a loss of $8,893,000 for the 12 months ended June 30, 2000
compared to a loss of $5,026,000 for the 12 months ended June 30, 1999. The
principal reason for the increased loss is a $285,000 increase in general and
administrative expenses (from $2,576,000 during the 1999 fiscal year to
$2,861,000 during the 2000 fiscal year), a $675,000 increase in marketing
expenses (from $0 during the 1999 fiscal year to $675,000), and a $3,277,000
increase in research and development costs (from $1,837,000 during the 1999
fiscal year to $5,114,000 during the 2000 fiscal year). We also experienced
increases in depreciation and amortization expense of $566,000 and litigation
expense of $583,000 for the 12 months ended June 30, 2000. The foregoing
increases in expenses were partially offset by a $535,000 decrease in interest
expense and an $832,000 increase in interest income.
GENERAL AND ADMINISTRATIVE. The $285,000 increase in general and
administrative expenses for the 12 months ended June 30, 2000 primarily resulted
from a $449,000 increase in office-related expenses, a $379,000 increase in
salaries, a $113,000 increase in employee-related benefits, a $74,000 increase
in travel costs, and a $895,000 increase in stockholder services costs offset by
a $894,000 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.
20
MARKETING. The $675,000 increase in marketing for the 12 months ended
June 30, 2000 resulted from an increase in public relations expenses.
RESEARCH AND DEVELOPMENT. The $3,277,000 increase in research and
development expenses for the 12 months ended June 30, 2000 primarily resulted
from a $1,460,000 increase in payments to TRW, a $397,000 increase in salaries,
a $340,000 increase in software maintenance fees, a $85,000 increase in clinical
trial expenses, a $92,000 increase in FDA-related consulting expenses and a
$923,000 increase in payments to Battelle. The overall increase in research and
development costs in fiscal year 2000 resulted from hiring additional technical
personnel and outside consultants to further our clinical trials and advance
submission of our modules towards final FDA approval.
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, and material expenses in the
development of our examination table.
DEPRECIATION & AMORTIZATION. The increase in depreciation and amortization
expense resulted from amortization of goodwill associated with our acquisition
of Bales Scientific and amortization of 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.
NET INTEREST INCOME (EXPENSE)
Interest income in the 12 months ended June 30, 2000 increased $832,000
compared with the 12 months ended June 30, 1999, to $838,000. This increase is
the result of investing the proceeds from the private placement of our common
stock during the quarter ended March 31, 2000.
NET LOSS
As a result of the foregoing, for the 12 months ended June 30, 2000, we
incurred a loss of $8,893,000, or $(0.13) per share, compared to a loss of
$5,026,000, or $(0.09) per share, for the 12 months ended June 30, 1999.
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table summarizes our results of operations for each of the
four quarters ended June 30, 2000 and June 30, 2001. This information was
derived from unaudited interim consolidated financial statements that, in the
opinion of management, have been prepared on a basis consistent with the audited
consolidated financial statements contained elsewhere in this report and include
all adjustments necessary for fair statement of such information when read in
conjunction with the audited consolidated financial statements and notes
thereto.
21
We believe that period-to-period comparisons of our historical operating
results are not necessarily indicative of future performance.
QUARTER ENDED (UNAUDITED)
------------------------------------------------------------------------------------------------------
6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/01 12/31/99 9/30/99
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues............. 371,363 106,712 116,042 79,665 329,283 -- -- --
Cost of goods sold... (285,599) (41,759) (48,780) (43,019) (176,936) -- -- --
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....... 85,764 64,953 67,262 36,646 152,347 -- -- --
General &
administrative..... 4,952,286 2,114,077 3,386,396 1,709,310 1,156,869 555,459 738,508 410,578
Research &
development........ 1,999,264 1,989,246 2,378,855 1,623,793 1,992,972 1,190,557 1,251,617 679,372
Marketing............ 1,585,273 661,050 504,078 245,249 206,864 303,381 164,269 --
Depreciation &
amortization....... 567,383 544,038 709,237 437,787 364,798 212,352 22,750 16,305
Impairment loss...... 2,893,849 -- -- -- -- -- -- --
Litigation........... -- -- -- -- 520,554 62,500 -- --
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses......... 11,998,055 5,308,411 6,978,566 4,016,139 4,242,057 2,324,249 2,177,143 1,106,256
Net interest income.. 367,843 424,720 511,661 616,842 569,425 258,789 7,975 1,493
Misc. Income......... 6,344 4,000 -- 2,552 -- -- -- --
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other
income........... 374,187 428,720 511,661 619,394 569,425 258,789 7,975 1,493
Net loss............. (11,538,104) (4,814,738) (6,399,643) (3,360,099) (3,520,285) (2,065,460) (2,169,168) (1,104,763)
=========== ========== ========== ========== ========== ========== ========== ==========
SOURCES OF LIQUIDITY
Since inception, we have generated significant losses from operations.
Although our recently acquired subsidiary, Bales Scientific, has generated
limited revenues during the past several years, it is also a development stage
enterprise. Our cash requirements consist of, but are not limited to: general
corporate expenses including salaries and benefits, lease payments for office
space, technology acquisition, software license and maintenance contracts
payments, legal and accounting fees, clinical trial and technical support, FDA
consulting, marketing, and expenses associated with the private placement of our
equity securities. Capital resources needed to meet our past and planned
expenditures have been financed and are likely to continue to be primarily from
the sale of equity securities. As of September 25, 2000, we had approximately
$17.4 million in working capital.
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 may 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. Subject to various factors specified
in the Investment Agreement, Beach remains obligated to provide us with the
remaining $4 million commitment. There is no assurance that these conditions
will be met or that Beach will fulfill its obligations in the future.
CAPITAL REQUIREMENTS/PLAN OF OPERATION
Our capital requirements may vary from our estimates and depend upon
numerous factors including, but not limited to: a) progress in our research and
development programs; b) results of pre-clinical and clinical testing; c) costs
of technology; d) time and costs involved in obtaining regulatory approvals;
e) costs of filing, defending and enforcing any patent claims and other
intellectual property rights; f) the economic impact of competing technological
and market developments; and g) the terms of any new collaborative, licensing
and other arrangements that we may establish.
22
We estimate that we will require approximately $12.3 million in net cash to
meet our operating plan goals for the Fiscal Year ending June 30, 2002. We
expect to use approximately $6.5 million to fund research and development to
continue our clinical trials, test our medical systems in connection with other
clinical applications, and expand our industrial applications into new
possibilities; $2.0 million for day-to-day operating expenses including lease
payments on our facilities; $4.5 million to cover salaries not including R&D
salaries; 2.8 million for public relations, advertising, and commercialization
of our products; $0.7 million for capital expenditures, and $0.5 million for
legal and accounting expenses.
We believe we will have sufficient capital to fund our business plan over
the next year. If additional capital is required, we will rely on private
investors to support us either through loans or contributions to capital in
exchange for restricted common stock.
ITEM 7A: QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a development stage enterprise. We currently believe we are not
subject to market risks beyond ordinary economic risks, such as interest rate
fluctuation and inflation.
At June 30, 2001, we had invested approximately $11.07 million in
available-for-sale marketable securities including investments in United States
government securities and corporate bonds and had approximately $7.8 million in
cash available to invest in available-for-sale marketable securities. Although
we believe the issuers of these marketable securities are solvent and are
favorably rated by recognized rating agencies, there is the risk that such
issuers may not have sufficient liquid assets to satisfy their obligations at
the time such obligations become due. If such were to occur, we may not be able
to recover the full amount of our investment.
Each of our marketable securities has a fixed rate of interest. Accordingly,
a change in market interest rates may result in an increase or decrease in the
market value of our marketable securities. If we liquidate any of our marketable
securities prior to the time of their maturity, we could receive less than the
face value of the security.
23
ITEM 8. FINANCIAL STATEMENTS
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
PAGE
--------
Independent Auditors' Report................................ F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets as of June 30, 2001 and 2000.... F-4
Consolidated Statements of Operations for the years ended
June 30, 2001, 2000, and 1999 and for the period from
June 10, 1987 (Inception) to June 30, 2001................ F-5
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 2001, 2000, and 1999 and for the
period from June 10, 1987 (Inception) to June 30, 2001.... F-6
Consolidated Statements of Cash Flows for the years ended
June 30, 2001, 2000, and 1999 and for the period from
June 10, 1987 (Inception) to June 30, 2001................ F-13
Notes to Consolidated Financial Statements.................. F-15
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
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 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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 accounting principles generally
accepted in the United States of America.
HJ & Associates, LLC
Salt Lake City, Utah
September 1, 2000
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Computerized Thermal Imaging, Inc. and Subsidiaries
(A Development Stage Company)
Layton, Utah
We have audited the accompanying consolidated balance sheet of Computerized
Thermal Imaging, Inc. and Subsidiaries (the Company) (a development stage
company) as of June 30, 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended, and
for the period June 10, 1987 (date of inception) to June 30, 2001. 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 audit. The Company's consolidated financial
statements as of and for the year ended June 30, 2000, for the year ended
June 30, 1999 and for the period June 10, 1987 (date of inception) through
June 30, 2000 were audited by other auditors whose report, dated September 1,
2000, expressed an unqualified opinion on those statements. The consolidated
financial statements for the period June 10, 1987 (date of inception) through
June 30, 2000 reflect total revenues and net loss of $329,283 and $34,601,965,
respectively, of the related totals. The other auditors' report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for such prior period, is based solely on the report of such other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors for the
cumulative information for the period from June 10, 1987 (date of inception)
through June 30, 2000, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company at
June 30, 2001, and the results of their operations and their cash flows for the
year then ended, and for the period from June 10, 1987 (date of inception) to
June 30, 2001, in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
September 11, 2001
F-3
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,810,285 $ 8,997,767
Investments available for sale............................ 11,070,065 26,034,399
Accounts receivable--trade (less allowance for doubtful
accounts: 2001--$23,963; 2000--$4,200).................. 383,331 177,254
Accounts receivable--other................................ 559,080 439,273
Inventories............................................... 643,098 110,206
Prepaid expenses.......................................... 269,708 514,404
----------- -----------
Total current assets.................................... 20,735,567 36,273,303
----------- -----------
PROPERTY AND EQUIPMENT, Net................................. 1,228,609 567,936
----------- -----------
INTANGIBLE ASSETS:
Software license (less accumulated amortization:
2000--$402,711)......................................... -- 3,447,289
Goodwill (less accumulated amortization: 2001--$1,348,184;
2000--$144,772)......................................... 9,834,830 10,994,561
Intellectual property rights (less accumulated
amortization: 2001--$5,993; 2000--$666)................. 44,003 49,334
----------- -----------
Total intangible assets................................. 9,878,833 14,491,184
----------- -----------
NOTE RECEIVABLE--Shareholder................................ -- 130,247
----------- -----------
TOTAL ASSETS................................................ $31,843,009 $51,462,670
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,802,866 $ 688,064
Accrued liabilities....................................... 844,203 739,761
Deferred revenues......................................... 11,260 1,750,000
----------- -----------
Total current liabilities............................... 2,658,329 3,177,825
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 7, 9, 10, and 12)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $5.00 par value, 3,000,000
shares authorized; none issued..........................
Common stock, $.001 par value, 200,000,000 shares
authorized, 81,076,546 and 80,149,516 issued and
outstanding on June 30, 2001 and 2000, respectively..... 81,077 80,150
Additional paid-in capital................................ 89,910,457 82,774,168
Other comprehensive income................................ 106,375 32,492
Deficit accumulated during the development stage.......... (60,913,229) (34,601,965)
----------- -----------
Total stockholders' equity.............................. 29,184,680 48,284,845
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $31,843,009 $51,462,670
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
FROM
JUNE 10, 1987
YEARS ENDED JUNE 30, (INCEPTION)
---------------------------------------- THROUGH
2001 2000 1999 JUNE 30, 2001
------------ ----------- ----------- --------------
INCOME:
Revenues............................... $ 673,782 $ 329,283 -- $ 1,003,065
Cost of goods sold..................... (419,157) (176,936) -- (596,093)
------------ ----------- ----------- ------------
GROSS MARGIN............................. 254,625 152,347 -- 406,972
------------ ----------- ----------- ------------
OPERATING EXPENSES:
General and administrative............. 12,162,069 2,861,414 $ 2,576,169 31,028,731
Research and development............... 7,991,158 5,114,518 1,837,182 20,137,922
Marketing.............................. 2,995,650 674,514 -- 3,818,234
Depreciation and amortization.......... 2,258,445 616,205 50,393 3,015,620
Litigation settlement.................. -- 583,054 -- 1,097,434
Impairment loss........................ 2,893,849 -- -- 2,893,849
------------ ----------- ----------- ------------
Total operating expenses................. 28,301,171 9,849,705 4,463,744 61,991,790
------------ ----------- ----------- ------------
OPERATING LOSS........................... (28,046,546) (9,697,358) (4,463,744) (61,584,818)
------------ ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income........................ 1,921,066 837,682 6,124 2,784,755
Interest expense....................... -- (33,479) (568,221) (2,173,812)
Other.................................. 12,896 -- -- 193,711
------------ ----------- ----------- ------------
Total other income (expense)............. 1,933,962 804,203 (562,097) 804,654
------------ ----------- ----------- ------------
LOSS BEFORE EXTRAORDINARY ITEM........... (26,112,584) (8,893,155) (5,025,841) (60,780,164)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF
DEBT................................... -- -- -- 65,637
------------ ----------- ----------- ------------
NET LOSS................................. (26,112,584) (8,893,155) (5,025,841) (60,714,527)
OTHER COMPREHENSIVE INCOME--Unrealized
gain on investments available for
sale................................... 73,883 32,492 -- 106,375
------------ ----------- ----------- ------------
TOTAL COMPREHENSIVE LOSS................. $(26,038,701) $(8,860,663) $(5,025,841) $(60,608,152)
============ =========== =========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING...... 80,463,731 68,452,635 57,525,818 --
============ =========== =========== ============
BASIC AND DILUTED LOSS PER COMMON
SHARE.................................. $ (0.32) $ (0.13) $ (0.09) --
============ =========== =========== ============
The accompanying notes are an integral part of these consolidated statements.
F-5
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
LOSSES
ACCUMULATED
COMMON STOCK ADDITIONAL ACCUMULATED DURING THE
--------------------- PAID-IN SUBSCRIPTION COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
---------- -------- ----------- ------------ ------------- ------------ ------------
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
stock-holders 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.
F-6
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
LOSSES
ACCUMULATED
COMMON STOCK ADDITIONAL ACCUMULATED DURING THE
--------------------- PAID-IN SUBSCRIPTION COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
---------- -------- ----------- ------------ ------------- ------------ ------------
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
Common stock issued upon
conversion of preferred
shares in 1996 at $1.70 per
share........................ 14,700 14 24,986 -- -- -- 25,000
---------- ------- ----------- --------- -------- ------------ ------------
Balance Forward................ 30,318,715 30,318 10,093,332 (525,000) -- -- 9,598,650
---------- ------- ----------- --------- -------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
LOSSES
ACCUMULATED
COMMON STOCK ADDITIONAL ACCUMULATED DURING THE
--------------------- PAID-IN SUBSCRIPTION COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
---------- -------- ----------- ------------ ------------- ------------ ------------
Balance Forward................ 30,318,715 $30,318 $10,093,332 $(525,000) -- -- $ 9,598,650
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
Conversion of debentures to
common stock at $0.41 per
share........................ 2,403,838 2,404 977,951 -- -- -- 980,355
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
---------- ------- ----------- --------- -------- ------------ ------------
Balance Forward................ 47,815,479 47,816 17,367,302 (525,000) -- -- 16,890,118
---------- ------- ----------- --------- -------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
LOSSES
ACCUMULATED
COMMON STOCK ADDITIONAL ACCUMULATED DURING THE
--------------------- PAID-IN SUBSCRIPTION COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
---------- -------- ----------- ------------ ------------- ------------ ------------
Balance Forward................ 47,815,479 $47,816 $17,367,302 $(525,000) -- -- $ 16,890,118
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)
Losses accumulated during the
period from inception
June 10, 1987 to June 30,
1998......................... -- -- -- -- -- (20,682,969) (20,682,969)
---------- ------- ----------- --------- -------- ------------ ------------
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
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
---------- ------- ----------- --------- -------- ------------ ------------
Balance Forward................ 60,434,998 60,435 24,526,326 (525,000) -- (20,682,969) 3,378,792
---------- ------- ----------- --------- -------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
LOSSES
ACCUMULATED
COMMON STOCK ADDITIONAL ACCUMULATED DURING THE
--------------------- PAID-IN SUBSCRIPTION COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
---------- -------- ----------- ------------ ------------- ------------ ------------
Balance Forward................ 60,434,998 $60,435 $24,526,326 $(525,000) -- $(20,682,969) $ 3,378,792
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
Subscription receivable
forgiven in lieu of
compensation................. -- -- -- 525,000 -- -- 525,000
Net loss....................... -- -- -- -- -- (5,025,841) (5,025,841)
---------- ------- ----------- --------- -------- ------------ ------------
Balance, June 30, 1999......... 62,275,560 62,276 25,486,825 -- -- (25,708,810) (159,709)
Stock issued for cash:
$0.54 per share, net of
offering expenses of
$25,000.................... 933,707 934 474,066 -- -- -- 475,000
$0.55 per share.............. 913,916 914 499,086 -- -- -- 500,000
$0.60 per share, net of
offering expenses of
$25,000,................... 875,657 876 502,583 -- -- -- 503,459
$1.25 per share, net of
offering expenses of
$25,000.................... 400,641 401 474,569 -- -- -- 474,970
$9.80 per share.............. 510,204 510 4,999,490 -- -- -- 5,000,000
Stock issued to corporation for
services at $0.94 per
share........................ 33,997 34 31,839 -- -- -- 31,873
Warrants exercised for cash:
$0.46 per share.............. 150,000 150 68,850 -- -- -- 69,000
$0.72 per share.............. 133,166 133 95,746 -- -- -- 95,879
$1.19 per share.............. 254,155 254 302,203 -- -- -- 302,457
$1.50 per share.............. 50,000 50 74,950 -- -- -- 75,000
$2.00 per share.............. 100,000 100 199,900 -- -- -- 200,000
$2.50 per share.............. 1,235,963 1,236 3,187,130 -- -- -- 3,188,366
Stock issued to individuals for
services:
$1.20 per share.............. 200,000 200 239,800 -- -- -- 240,000
$2.80 per share.............. 2,000 2 5,598 -- -- -- 5,600
Stock issued to individual for
shares of CTICO (a
subsidiary): -- -- --
$1.20 per share.............. 15,000 15 17,985 -- -- -- 18,000
$1.50 per share.............. 5,000 5 7,495 -- -- -- 7,500
$2.80 per share.............. 50,000 50 139,950 -- -- -- 140,000
Warrants exercised for
services: -- -- --
$3.63 per share.............. 13,885 13 50,319 -- -- -- 50,332
$3.72 per share.............. 15,623 16 58,083 -- -- -- 58,099
---------- ------- ----------- --------- -------- ------------ ------------
Balance Forward................ 68,168,474 68,169 36,916,467 -- -- (25,708,810) 11,275,826
---------- ------- ----------- --------- -------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
LOSSES
ACCUMULATED
COMMON STOCK ADDITIONAL ACCUMULATED DURING THE
--------------------- PAID-IN SUBSCRIPTION COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
---------- -------- ----------- ------------ ------------- ------------ ------------
Balance Forward................ 68,168,474 $68,169 $36,916,467 -- -- $(25,708,810) $ 11,275,826
Stock issued to Company's
401(k) 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 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 -- 32,492
Net loss....................... -- -- -- -- -- (8,893,155) (8,893,155)
---------- ------- ----------- --------- -------- ------------ ------------
Balance at June 30, 2000....... 80,149,516 80,150 82,774,168 -- 32,492 (34,601,965) 48,284,845
Warrants exercised on a
cashless basis:
$0.9375 per share............ 32,249 32 (32) -- -- -- --
$1.70 per share.............. 162,430 162 (162) -- -- -- --
Warrants exercised for cash:
$0.72 per share.............. 16,379 16 11,777 -- -- -- 11,793
$2.50 per share.............. 73,125 73 182,740 -- -- -- 182,813
$5.00 per share.............. 26,246 27 131,204 -- -- -- 131,231
---------- ------- ----------- --------- -------- ------------ ------------
Balance forward................ 80,459,945 80,460 83,099,695 -- 32,492 (34,601,965) 48,610,682
---------- ------- ----------- --------- -------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
LOSSES
ACCUMULATED
COMMON STOCK ADDITIONAL ACCUMULATED DURING THE
--------------------- PAID-IN SUBSCRIPTION COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
---------- -------- ----------- ------------ ------------- ------------ ------------
Balance Forward................ 80,459,945 $80,460 $83,099,695 -- $ 32,492 $(34,601,965) $ 48,610,682
Options exercised for cash:
$0.70 per share.............. 264,286 264 184,736 -- -- -- 185,000
$1.50 per share.............. 45,766 46 68,603 -- -- -- 68,649
$1.70 per share.............. 105,659 106 179,516 -- -- -- 179,622
Stock issued to Company's
401(k) plan at $4.5739 per
share........................ 11,533 12 52,739 -- -- -- 52,751
Stock issued for services:
$3.75 per share.............. 189,357 189 134,646 -- -- -- 134,835
Compensation expense on options
marked to market............. -- -- 3,840,942 -- -- -- 3,840,942
Refund received of stock
offering costs............... -- -- 192,664 -- -- -- 192,664
Deemed dividend on extension of
warrants..................... -- -- 198,680 -- -- (198,680) --
Options issued at a discount to
market....................... -- -- 270,986 -- -- -- 270,986
Options extended beyond their
expiration date.............. -- -- 1,687,250 -- -- -- 1,687,250
Other comprehensive income..... -- -- -- -- 73,883 -- 73,883
Net loss....................... -- -- -- -- -- (26,112,584) (26,112,584)
---------- ------- ----------- --------- -------- ------------ ------------
Balance at June 30, 2001....... 81,076,546 $81,077 $89,910,457 -- $106,375 $(60,913,229) $ 29,184,680
========== ======= =========== ========= ======== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
FROM
JUNE 10, 1987
YEARS ENDED JUNE 30, (INCEPTION)
---------------------------------------- THROUGH
2001 2000 1999 JUNE 30, 2001
------------ ----------- ----------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(26,112,584) $(8,893,155) $(5,025,841) $(60,714,527)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 2,258,445 616,205 50,393 3,015,620
Impairment loss........................................... 2,893,849 -- -- 2,893,849
Amortization of bond premium.............................. (74,685) -- -- (74,685)
Amortization of debt issuance costs and discounts on notes
payable................................................. -- -- 597,500 929,313
Common stock, warrants, and options issued as compensation
for services............................................ 270,986 432,205 555,686 9,614,787
Options extended beyond their expiration date............. 1,687,250 -- -- 1,687,250
Common stock issued for interest expense.................. -- -- -- 423,595
Compensation expense on options marked to market.......... 3,840,942 -- -- 3,840,942
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................................................. 134,836 91,750 -- 226,586
Common stock issued for failure to complete timely
registration............................................ -- -- -- 82,216
Common stock issued to 401(k) plan........................ 52,751 43,236 -- 95,977
Extraordinary gain on extinguishment of debt.............. -- -- -- (65,637)
Bad debt expense.......................................... 346,874 -- -- 346,874
Changes in operating assets and liabilities:
Accounts receivable--trade.............................. (230,040) (55,888) -- (290,039)
Accounts receivable--other.............................. (119,807) (439,273) -- (293,168)
Inventories............................................. (532,892) 66,552 -- (466,340)
Prepaid expenses........................................ 244,696 (512,200) 2,204 (27,934)
Accounts payable........................................ 1,114,802 635,194 -- 1,650,316
Accrued liabilities..................................... 104,442 89,758 (204,517) 729,703
Deferred revenues....................................... (1,738,740) 1,750,000 -- 11,260
------------ ----------- ----------- ------------
Net cash used in operating activities................. (15,858,875) (5,700,616) (4,024,575) (35,394,662)
------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. -- -- 4,790 4,790
Capital expenditures for property and equipment........... (1,160,616) (483,459) (144,569) (2,019,822)
Acquisition of Thermal Imaging, Inc. common stock......... (40,000) (60,000) -- (100,000)
Purchase of software license.............................. -- (3,850,000) -- (3,850,000)
Purchase of investments available for sale................ (2,070,655) (26,332,615) -- (28,403,270)
Proceeds on redemption of investments available for
sale.................................................... 17,183,558 -- -- 17,183,558
Acquisition of Bales Scientific common stock, net of cash
acquired................................................ -- (5,604,058) -- (5,604,058)
------------ ----------- ----------- ------------
Net cash provided by (used in) investing activities... 13,912,287 (36,330,132) (139,779) (22,788,802)
------------ ----------- ----------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2001, 2000, AND 1999
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2001
FROM
JUNE 10, 1987
YEARS ENDED JUNE 30, (INCEPTION)
---------------------------------------- THROUGH
2001 2000 1999 JUNE 30, 2001
------------ ----------- ----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants, net
of offering costs....................................... $ 759,106 $50,597,526 $ 3,175,540 $ 61,381,934
Advances to affiliate..................................... -- (107,864) -- (107,864)
Advances from stockholders................................ -- -- 904,164 2,320,738
Proceeds from issuance of debt, net of debt issuance costs
paid.................................................... -- -- 551,117 3,576,131
Payments on debt.......................................... -- -- (559,369) (1,177,190)
------------ ----------- ----------- ------------
Net cash provided by financing activities............. 759,106 50,489,662 4,071,452 65,993,749
------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (1,187,482) 8,860,605 (92,902) 7,810,285
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 8,997,767 137,162 230,064 --
------------ ----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 7,810,285 $ 8,997,767 $ 137,162 $ 7,810,285
============ =========== =========== ============
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
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
and 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
During the year ended June 30, 2001, 237,648 warrants were exercised on a
cashless basis for 194,679 shares of common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Computerized Thermal Imaging, Inc. and Subsidiaries (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 also applies elements
of its core thermal imaging technology to industrial non-destructive testing
applications. 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
(see Note 6).
BASIS OF PRESENTATION--The Company's financial statements have been
presented on a going concern basis which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company is in the development stage and has been primarily involved in research
and development activities. This has resulted in significant operating losses
and an accumulated deficit at June 30, 2001 of $60,913,229. The Company's
continued existence is dependent on its ability to secure requisite regulatory
approvals, successfully commercialize its products, and secure additional
funding, if required, to market its products in the United States and abroad. In
January 2001, the Company began commercializing its pain management and
industrial technology products. The Company has expanded its sales and marketing
organization, began establishing a distribution channel with medical equipment
dealers, and accepted a customer order for industrial non-destructive test
equipment and services. The Company has completed clinical trials and filed the
fifth and final module of its Breast Cancer System Pre-market Approval
application with the Food and Drug Administration (FDA).
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Computerized
Thermal Imaging Company ("CTICO"), formerly known as Thermal Medical
Imaging, Inc. and Bales. All intercompany transactions and accounts have been
eliminated in consolidation.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS--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, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS--For purposes of the statements of cash flows, the
Company defines cash and cash equivalents as cash in checking accounts and
short-term highly liquid investments with an original maturity of three months
or less.
INVESTMENTS AVAILABLE FOR SALE--The Company invests cash reserves in U.S.
government securities, corporate bonds and certificates of deposit. Investments
with original maturities of less than one year
F-15
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are considered short term. All investments are classified as available for sale
and are reported at fair market value with net unrealized gains or losses
reported as a separate component of stockholders' equity. As of June 30, 2001
and 2000, there were approximately $106,000 and $32,000 of unrealized gains,
respectively.
INVENTORIES--Inventories consist of finished goods, work-in-process, and raw
materials. Inventories are stated at the lower of cost or market, with cost
determined using the first-in first-out method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost and
depreciated and amortized using the straight-line method over their estimated
useful lives as follows:
Leasehold improvements...................................... 3 years
Office furniture and fixtures............................... 5-7 years
Machinery and equipment..................................... 5-7 years
INTANGIBLE ASSETS--Intangible assets are stated at cost and amortized using
the straight-line method over their estimated useful lives as follows:
Software licenses........................................... 3 years
Goodwill.................................................... 10 years
Intellectual property rights................................ 10 years
During the year ended June 30, 2001, the Company changed the estimated
useful life of goodwill from 15 years to 10 years. The effect of the change in
2001 was to increase the net loss by $257,877 or $0.003 per common share.
REVENUE RECOGNITION--The Company recognizes revenues when it is realized or
realizable and earned, which is generally upon shipment and acceptance of
product in fulfillment of a customer order.
INCOME TAXES--The Company uses the asset and liability method of accounting
for income taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
and tax reporting purposes. The Company has provided a valuation allowance to
reduce deferred tax assets to the amount that is more likely than not to be
realized.
RESEARCH AND DEVELOPMENT EXPENSES--The Company expenses as incurred the
direct, indirect, and purchased research and development costs associated with
its product.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
F-16
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION--The Company has elected to follow the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES FOR STOCK-BASED COMPENSATION, for stock options
granted to employees and directors and to furnish the pro forma disclosure
required under Statement of Financial Accounting (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION.
COMPREHENSIVE INCOME--The Company classifies components of other
comprehensive income in the consolidated financial statements and displays the
accumulated balance of other comprehensive income as a separate component of
stockholders' equity in the consolidated balance sheets. The only component of
other comprehensive income relates to unrealized gains on investments available
for sale. Unrealized gains on investments available for sale arising during the
year ended June 30, 2001 totalled $96,000. The reclassification adjustment for
gains included in net income during 2001 was $22,000.
BASIC LOSS PER COMMON SHARE--Basic loss per common share is based on the net
loss and the weighted average number of common shares outstanding during each
period. Common equivalent shares from common stock options and warrants are
excluded from the computation, as their effect would be antidilutive for all
periods presented.
SEGMENT REPORTING--The Company currently operates in a single segment. In
addition, financial results are prepared and reviewed by management as a single
operating segment. The Company continually evaluates its operating activities
and the method utilized by management to evaluate such activities and will
report on a segment basis when appropriate to do so.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS--In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS.
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, which is effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company is currently assessing but has not yet determined the
impact of SFAS 142 on its financial position and results of operations.
RECLASSIFICATION--Certain prior period amounts have been reclassified to
conform to the 2001 presentation.
F-17
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
2. INVESTMENTS
The following table summarizes the Company's investments in debt securities
classified as available for sale as of June 30, 2001 and 2000 (in thousands):
2001 2000
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Corporate securities..... $10,106 $ 92 $ -- $10,198 $11,933 $23 $ (2) $11,954
Government securities.... 748 14 -- 762 13,959 21 (10) 13,970
Other.................... 110 -- -- 110 110 -- -- 110
------- ---- ---- ------- ------- --- ---- -------
Total.................... $10,964 $106 $ -- $11,070 $26,002 $44 $(12) $26,034
======= ==== ==== ======= ======= === ==== =======
Contractual maturities and yields of investments in debt securities
classified as available for sale securities at June 30 were as follows:
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------
ALL OTHER DEBT
CORPORATE SECURITIES GOVERNMENT SECURITIES SECURITIES
------------------------------- ------------------------------- -------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
--------- -------- -------- --------- -------- -------- --------- -------- --------
2001
Due within 1 year......... $10,106 $10,198 6.44% $ 748 $ 762 6.64% $110 $110 6.50%
======= ======= ==== ======= ======= ==== ==== ==== ====
2000
Due within 1 year......... $ 3,023 $ 3,028 8.11% $ 8,484 $ 8,485 6.82% $110 $110 6.35%
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% $110 $110 6.35%
======= ======= ==== ======= ======= ==== ==== ==== ====
During the year ended June 30, 2001, gross realized gains from sales of
investment securities classified as available for sale totaled $22,000. There
were no gross realized losses during 2001 and no gross realized gains or losses
during 2000 and 1999.
3. INVENTORIES
Inventories consist of the following at June 30, 2001 and 2000:
2001 2000
-------- --------
Raw materials and work-in-process....................... $341,898 $110,206
Finished goods.......................................... 301,200
-------- --------
Total................................................... $643,098 $110,206
======== ========
F-18
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 2001 and 2000:
2001 2000
---------- ---------
Leasehold improvements................................ $ 197,470 $ 10,591
Office furniture and fixtures......................... 237,579 57,965
Machinery and equipment............................... 1,276,237 708,406
---------- ---------
Total................................................. 1,711,286 776,962
Less accumulated depreciation and amortization........ (482,677) (209,026)
---------- ---------
Property and equipment, net........................... $1,228,609 $ 567,936
========== =========
During the year ended June 30, 2001, the Company recognized an impairment
loss relating to property and equipment of approximately $150,000.
5. INTANGIBLE ASSETS
During the fourth quarter of 2001, the Company concluded that changes in the
regulatory environment precluded effective marketing of its database management
system and abandoned the project. Therefore, the Company reduced the carrying
value of the software license to zero, due to the fact there was no market for
the license, and recognized an impairment loss of approximately $2,740,000.
6. BUSINESS COMBINATIONS
Effective April 18, 2000, the Company acquired all of the issued and
outstanding capital stock of Bales for $5,604,058 in cash, common stock with a
fair market value of $5,500,000, and the assumption of liabilities totaling
$155,167. The acquisition was accounted for using the purchase method of
accounting; as such, results of operations have been included in the
accompanying consolidated financial statements from the date of acquisition. In
conjunction with the acquisition, the Company recorded goodwill of approximately
$10,871,863, which is being amortized over 10 years.
The unaudited pro forma consolidated results of operations of the Company
for the years ended June 30, 2000 and 1999 (assuming the acquisition of Bales
had occurred as of July 1, 1998) are as follows:
2000 1999
----------- -----------
Net sales.......................................... $ 1,222,530 $ 687,772
Net loss........................................... (8,900,830) (4,081,498)
Net loss per common share--basic and diluted....... (0.11) (0.06)
During each of the years ended June 30, 2001 and 2000, the Company acquired
part of the minority interest of its subsidiary, CTICO, formerly known as
Thermal Medical Imaging, Inc. In 2000, the Company acquired an additional 8
percent interest in CTICO for cash of $60,000 and common
F-19
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
6. BUSINESS COMBINATIONS (CONTINUED)
stock with a fair market value of $165,500. In 2001, the Company acquired an
additional minority interest for cash of $40,000.
Based on the fact that losses of CTICO exceeded the minority interest and
the minority interest was not obligated to make good such losses, the Company
absorbed all of the losses in excess of the minority interest before its
acquisition in 2001 and 2000. The acquisitions have been accounted for as step
acquisitions and resulted in the recognition of goodwill totaling $265,500.
7. DEFERRED REVENUES
The Company entered into two letter agreements on October 28, 1999 with
Computerized Thermal Imaging International, Inc. ("CTII"), whereby CTII received
the exclusive right to represent the Company and market and sell its products in
Central and South America, including rights of first refusal to certain
developmental products subsequently discontinued by the Company.
In June 2000, the Company accepted a purchase order for the sale of ten
Breast Imaging Systems to CTII for $5,000,000. In connection therewith, the
Company received a down payment of $1,750,000 with the remaining $3,250,000 to
be received upon delivery.
In September 2000, the Company advised CTII of its desire to renegotiate the
foregoing agreements given substantial changes in market conditions, the
increased value of the Company's common stock, and unresolved issues concerning
CTII's deployment of the systems in Mexico. In October 2000, following attempts
to reach more favorable terms, the Company concluded it was in the best
interests of the Company and its shareholders to mutually terminate the
agreements and the purchase order. The Company canceled the agreement and
purchase order and refunded the $1,750,000 down payment received from CTII.
8. INCOME TAX
The composition of net deferred tax assets and the related tax effects at
June 30, 2001 and 2000 are as follows:
2001 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforward................ $ 20,434,674 $ 10,846,658
Research credit carryforward................... 1,253,066 994,454
Other.......................................... 89,622 93,258
------------ ------------
Total............................................ 21,777,362 11,934,370
Less valuation allowance......................... (21,615,745) (11,773,908)
------------ ------------
Deferred tax assets.............................. 161,617 160,462
Deferred tax liabilities--differences between tax
basis and financial reporting basis of property
and equipment.................................. (161,617) (160,462)
------------ ------------
Net deferred tax assets.......................... $ -- $ --
============ ============
F-20
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
8. INCOME TAX (CONTINUED)
The difference between the income tax benefit in the accompanying
consolidated 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
for the years ended June 30, 2001, 2000, and 1999:
2001 2000 1999
----------- ----------- -----------
Computed Federal income tax benefit at statutory rate
of 34%............................................... $(8,878,279) $(3,023,845) $(1,710,868)
State income tax benefit, net of Federal benefit....... (1,175,066) (400,215) (226,438)
Nondeductible amortization............................. 463,948 55,740 190,029
Other nondeductible items.............................. 6,171 117,196 221,409
Research credit........................................ (258,611) (258,612) (608,634)
Increase in valuation allowance........................ 9,841,837 3,509,736 2,134,502
----------- ----------- -----------
Total.................................................. $ -- $ -- $ --
=========== =========== ===========
At June 30, 2001, for federal income tax and alternative minimum tax
reporting purposes, the Company has approximately $53,077,000 of unused net
operating losses available for carryforward to future years. The benefit from
carryforward of such net operating losses will expire in various years between
2002 and 2020 and could be subject to severe limitations if significant
ownership changes occur in the Company. Of the $53,077,000 of unused net
operating losses noted above, approximately $6,000,000 relates to losses
incurred by the Company's subsidiary, CTICO. In fiscal years prior to June 30,
2001, CTICO did not file its tax returns on a consolidated basis with the
Company. Accordingly, the $6,000,000 loss incurred by CTICO is further subject
to separate limitations that severely restrict the ability of the Company to use
such losses.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION--In connection with a private placement of the Company's
securities, an individual claims that he personally placed and sold
approximately $10.7 million of the Company's securities on contract and that the
Company failed to pay him commissions of $516,000 plus stock options to purchase
1,070,000 shares of the Company's common stock valued at approximately $15
million. The individual alternatively alleges that he had a revised contract
with the Company whereby he was to receive one-third of the foregoing
commissions and stock options.
The Company has categorically denied all of the individual's claims and has
affirmatively alleged that, at all times, the individual acted as an agent of
Financial Services Group, a shareholder of the Company. The Company is currently
engaged in discovery and no trial date yet has been set. The Company believes it
has meritorious defenses to the individual's claims and, accordingly, no
provision for this matter has been made in the Company's consolidated financial
statements.
On June 1, 2000, the Company filed a complaint against Alex Saenz that he
interfered with the Company by threatening lawsuits to recover stock options
allegedly owed to him in connection with the Company's April 2000 Private
Placement. The defendant denied the Company's allegations and filed a
counterclaim alleging breach of various verbal agreements to compensate him for
services rendered.
F-21
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In August 2001, the court ruled that the defendant was not entitled to any
additional compensation from the Company. The court also dismissed the
defendant's counterclaim against the Company.
The Company is a defendant in a suit brought by its former president in
connection with his termination and the termination of a severance agreement
between the former president and the Company. The former president seeks
restoration of one million stock options granted in connection with the
agreement and recovery of benefits and compensation. The Company terminated its
former president for cause and believes he is entitled to no further
compensation. Discovery is set to begin during the next 60 days. The Company
believes it has meritorious defenses to the individual's claims and,
accordingly, no provision for this matter has been made in the Company's
consolidated financial statements.
The Company is involved in certain other litigation matters in the normal
course of business which, in the opinion of management, will not result in any
material adverse effects on the financial position, results of operations, or
net cash flows of the Company.
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 its 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.
Prior to February 4, 1998, most of the Company's stockholders held
preemptive rights to acquire shares of the Company's common stock under certain
circumstances. In certain instances, the Company failed to properly offer
stockholders these preemptive rights. No shareholder has asserted any preemptive
rights to date. Should any stockholder do so, the Company plans to issue shares
of common stock at the price to which the stockholder was originally entitled.
OPERATING LEASES--The Company leases certain office and warehouse space.
Total expenserecorded under operating lease agreements in the accompanying
consolidated statements of operations is approximately $554,000, $388,000 and
$63,000 for the years ended June 30, 2001, 2000 and 1999, respectively.
At June 30, 2001, the future minimum payments required under the
noncancelable operating leases are as follows:
Year ending June 30:
2002...................................................... $ 547,180
2003...................................................... 429,267
2004...................................................... 203,170
2005...................................................... 198,385
2006...................................................... 133,604
----------
Total....................................................... $1,511,606
==========
F-22
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
With respect to one of the leases, the Company has a $110,000
cash-collateralized letter of credit to secure leasehold improvements made by
the lessor.
10. STOCK WARRANTS AND OPTIONS
WARRANTS--A summary of warrant activity for the period from July 1, 1999
through June 30, 2001 is as follows:
# OF
SHARES EXERCISE PRICE
---------- --------------
Balance at June 30, 1999............................ 4,600,583 $0.46-$3.72
Exercised (including cashless exercises).......... (2,084,747) $0.46-$3.72
Granted........................................... 6,368,360 $1.70-$7.25
----------
Balance at June 30, 2000............................ 8,884,196 $0.46-$7.25
Exercised (including cashless exercises).......... (353,398) $0.72-$5.00
----------
Balance at June 30, 2001............................ 8,530,798 $0.46-$7.25
==========
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 an
unrelated third party for services rendered. Each warrant entitles the holder
thereof, upon exercise, to one share of common stock at an exercise price of
$0.9375 per share.
As compensation for investment consulting services, the Company issued
200,000 warrants to Sutro & Company in April 2000. Each warrant was exercisable
through December 15, 2000 and entitled 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 with
a company 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-23
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
10. 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.
OPTIONS--The Company issues options and shares of restricted stock under the
1997 Stock Option and Restricted Stock Plan (the Plan). As of June 30, 2001, an
additional 400,000 shares are reserved for issuance under the Plan. The Company
may grant incentive stock options at prices not less than the fair market value
of the Company's common stock on the date of grant. The Company may also grant
nonqualified stock options at prices below fair market value. Options issued
under the Plan will generally have a term of ten years from the date of grant
and will generally vest over a period of three years from the date of grant.
During the year ended June 30, 2001, the Company recognized compensation
expense of approximately $394,000 from granting 1,330,000 options to directors
and officers with an exercise price less than fair value, approximately
$1,688,000 from extending 1,000,000 options held by a former chairman of the
board and approximately $3,637,000 from repricing 1,939,000 options held by
officers and key employees.
Changes in stock options issued to employees are as follows for the years
ended June 30:
2001 2000 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year......... 5,798,617 $1.56 4,850,000 $0.97 4,750,000 $0.97
Granted.................................. 3,119,627 2.08 983,617 4.41 100,000 0.76
Exercised................................ (310,052) 0.82 (35,000) 0.97
Forfeited................................ (150,346) 3.84
--------- ----- --------- ----- --------- -----
Outstanding at end of year............... 8,457,846 $1.73 5,798,617 $1.56 4,850,000 $0.97
========= ===== ========= ===== ========= =====
Options exercisable at year end.......... 6,386,357 4,789,583 4,750,000
========= ========= =========
Weighted average fair value of options
granted during year.................... $ 1.36 $ 2.05 $ 0.12
========= ========= =========
F-24
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
10. STOCK WARRANTS AND OPTIONS (CONTINUED)
The following table summarizes information about stock options issued to
employees outstanding at June 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- --------------- -------- ----------- --------
$0.70--$0.97 2,550,714 0.8 $0.77 2,517,380 $ 0.78
$1.25--$1.50 3,403,722 6.2 1.35 2,482,726 1.30
$2.06--$2.95 1,596,104 7.5 2.29 1,386,251 2.25
$3.00--$4.19 619,545 6.4 3.58
$4.55--$5.00 26,512 9.9 4.83
$7.72 261,249 1.9 7.72
--------------------- --------- --- ----- --------- ------
$0.70--$7.72 8,457,846 4.7 $1.73 6,386,357 $ 1.30
===================== ========= === ===== ========= ======
The Company accounts for stock options granted using APB Opinion 25.
Accordingly, no compensation cost has been recognized for some of the stock
options issued under the Plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with SFAS No. 123, the
Company's net loss and basic loss per common share would have changed to the pro
forma amounts indicated below:
2001 2000 1999
----------- ---------- ----------
Net loss:
As reported........................................... $26,112,584 $8,893,155 $5,025,841
Pro forma............................................. 25,476,420 9,191,024 5,161,411
Basic and diluted loss per common share:
As reported........................................... $ 0.32 $ 0.13 $ 0.09
Pro forma............................................. 0.32 0.13 0.09
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000, and 1999: dividend yield of zero for
all years; expected volatility of 1.64%, 1.64%, and 1.64%, respectively;
risk-free interest rate of between 4.27% and 6.71% depending upon the term of
the option; and expected lives of approximately five years.
F-25
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
10. STOCK WARRANTS AND OPTIONS (CONTINUED)
Changes in stock options issued to non-employees are as follows for
the years ended June 30:
2001 2000 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year......... 2,516,626 $1.12 2,000,000 $0.60 2,000,000 $0.60
Granted.................................. 516,626 3.09
Exercised................................ (105,659) 1.70
--------- ----- --------- ----- --------- -----
Outstanding at end of year............... 2,410,967 $1.09 2,516,626 $1.66 2,000,000 $0.60
========= ===== ========= ===== ========= =====
Options exercisable at year end.......... 2,410,967 2,516,626 2,000,000
========= ========= =========
The following table summarizes information about stock options issued to
non-employees outstanding at June 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- ----------- -------- ----------- --------
$0.60 2,000,000 1.4 $0.60 2,000,000 $ 0.60
$1.70 100,000 1.8 1.70 100,000 1.70
$9.06 310,967 1.7 9.06 310,967 9.06
--------------------- --------- --- ----- --------- ------
$0.60--$9.06 2,410,967 1.4 $1.09 2,410,967 $ 1.09
===================== ========= === ===== ========= ======
11. PROFIT SHARING PLAN
The Company sponsors a profit sharing plan (the Plan) under
Section 401(k) of the Internal Revenue Code. The Plan is designed to allow
participating employees to accumulate savings for retirement or other purposes.
Under the Plan, all employees who have completed at least three months of
service are eligible to participate. The Plan allows employees to make
contributions to the Plan from salary reductions each year up to a maximum
amount established by the Internal Revenue Service. The Company may, at the
discretion of the board of directors, match a percentage of employee
contributions with its common stock. Matching contributions vest ratably over
two years. The Plan commenced during the year ended June 30, 2000. During the
years ended June 30, 2001 and 2000, the Company expensed $52,751 and $43,236,
respectively, as contributions to the Plan.
12. RELATED PARTY TRANSACTIONS
Since its inception, the Company has been dependent upon certain
individuals, officers, stockholders, and other related parties 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.
F-26
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001 AND 2000
12. RELATED PARTY TRANSACTIONS (CONTINUED)
The related parties have generally provided services and incurred expenses on
behalf of the Company in exchange for shares of the Company's common stock.
During 2001 the Company determined that a note receivable from a shareholder
totaling $130,247 was uncollectible and wrote off the entire amount.
During 2000 the Company compensated a shareholder for services totaling
approximately $46,000 and granted options to acquire 3,038 shares of common
stock at a strike price of $1.70 per share.
In conjunction with the acquisition of Bales in 2000 (see Note 6), the
Company entered into a licensing agreement with the former owner of Bales and a
current shareholder of the Company whereby the Company would pay $250 for each
phonic stimulator manufactured by the Company. The agreement extends through
April 2003. Under the terms of the agreement, the Company paid $29,500 and
$2,250 during 2001 and 2000, respectively. Additionally, the Company paid rents
for office space to the same individual totaling $91,400 and $18,100 during 2001
and 2000, respectively.
The Company treated as compensation a subscription note receivable in the
amount of $525,000 to a shareholder in its fiscal year ended June 30, 1999. The
subscription receivable had originally been issued in exchange for a note from
the shareholder in the amount of $525,000 for 525,000 shares of the Company's
common stock sold during the year ended June 30, 1996.
13. SUBSEQUENT EVENTS
Subsequent to June 30, 2001 and through September 11, 2001, employees and
former officers have exercised options and purchased approximately 295,000
shares of common stock at prices ranging from $.75 to $1.50 a share. Total
proceeds form these exercises were approximately $347,000.
Subsequent to June 30, 2001 and through September 11, 2001, warrant holders
have purchased approximately 100,000 shares of our common stock at $2.50 a
share. On August 31, 2001, warrants to purchase approximately 1.9 million shares
of common stock at $2.50 per share expired.
******
F-27
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Fiscal Years ending June 30, 2000 and 2001 we changed accounting
firms twice, but have had no disagreements with them on accounting and financial
disclosure. On August 17, 1999 we dismissed our principal auditor, Ham,
Langston & Brezina, LLP at which time we engaged
HJ & Associates, LLC, as reported on Form 8-K filed with the Securities and
Exchange Commission on August 23, 1999, and amended on August 25, 1999. On
November 3, 2000, we dismissed
HJ & Associates, at which time we engaged Deloitte and Touche LLP as reported on
our Form 8-K filed with the Securities and Exchange Commission on November 3,
2000.
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 our
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.
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.
HJ & Associates, LLC (previously known as Jones, Jensen & Company L.L.C.),
Certified Public Accountants of Salt Lake City, Utah, were engaged by us on
August 17, 1999, to audit the financial statements of our fiscal year ended
June 30, 1999.
HJ & Associates, LLC, Certified Public Accountants, of Salt Lake City, Utah,
audited our consolidated balance sheets as of June 30, 2000 and 1999 and the
related statements of operations, stockholders' equity/(deficit), and cash flows
for the years then ended, and for the period from inception on June 10, 1987 to
June 30, 2000. These financial statements accompanied our Form 10-KSB filed with
the Securities and Exchange Commission on September 15, 2000. The report of
HJ & Associates on our financial statements, dated September 1, 2000, did not
contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. HJ &
Associates was dismissed on November 2, 2000.
There were no disagreements between us and HJ & Associates, 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.
Deloitte & Touche, LLP, Certified Public Accountants of Salt Lake City,
Utah, was appointed by the Company on November 3, 2000, to audit our financial
statements for our fiscal year ended June 30, 2001.
24
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
As of September 10, 2001 our directors and executive officers are:
NAME COMMITTEE AGE POSITION SINCE
---- --------- -------- ---------------------------------------------- ---------
Richard V. Secord.......... (1) 69 Chairman of the Board Sep. 2000
& Chief Executive Officer
John M. Brenna............. (1) 55 President & Chief Operating Officer Mar. 2001
Brent M. Pratley, M.D...... (2)(3) 66 Director Jun. 1994
Milton R. Geilmann......... (2)(3) 70 Director Jan. 1998
Harry C. Aderholt.......... (2) 81 Director Jan. 1998
Robert L. Simmons, M.D..... (3) 69 Director Jun. 2001
Bernard J. Brady........... (1) 44 Chief Financial Officer, Secretary & Treasurer Jun. 2001
------------------------
(1) Member of the Executive Committee
(2) Member of the 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.
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.
RICHARD V. SECORD DIRECTOR SINCE FEBRUARY 1996
General Secord, age 69, (Major General, United States Air Force, retired)
has served as our Chairman and Chief Executive Officer, and as Chairman of the
Executive Committee since September 22, 2000. General Secord served as our Vice
Chairman from July 1997 through September 2000, as our Secretary from July 1997
to June 2000, as our President from February 1996 to April 1997 and as our Chief
Operating Officer from June 1995 to December 1999. General Secord served in
numerous positions during his military service, and was the first military
officer to be appointed Deputy Assistant Secretary of Defense. General Secord
holds a Bachelor of Science degree from the United States Military Academy, a
Masters degree in International Affairs from George Washington University, and
is 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.
JOHN M. BRENNA DIRECTOR SINCE MARCH 2001
Mr. Brenna, age 55, was appointed as our President and Chief Operating
Officer in March 2001, and is a member of our Executive Committee. Prior to that
time, Mr. Brenna served as our Executive Vice President. From 1986 until 1996,
Mr. Brenna was employed by Phillips Medical Systems marketing cardiovascular and
general X-ray systems for Phillip's North America operations. During 1996-1999,
Mr. Brenna was Executive Vice President of Marketing of Trex Medical, a
Thermo-Electron company.
25
Mr. Brenna was also President and Chief Operating Officer of the LORAD division
of Trex Medical, which specializes in advanced Breast Imaging and Stereo Tactic
Biopsy systems. Following Mr. Brenna's employment with Trex Medical and up to
the time that he joined us, Mr. Brenna was an independent consultant.
Mr. Brenna received his Bachelor of Science degree from University of New Haven.
BRENT M. PRATLEY, M.D. DIRECTOR SINCE JUNE 1995
Dr. Pratley, age 66, serves as Chairman of our Compensation Committee and is
a member of our Audit Committee. Dr. Pratley served as Secretary from June 1994
to September 1997. Dr. Pratley is 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, and in Los Angeles, California. Dr. Pratley received his Doctor of
Medicine degree in Orthopedic Surgery from the College of Medicine at University
of California, Irvine.
MILTON R. GEILMANN DIRECTOR SINCE JANUARY 1998
Mr. Geilmann, age 70, retired, serves as a member of our Audit and
Compensation Committees. Mr. Geilmann has been associated with the medical field
for over 32 years. From 1965 to 1992, he worked at E. R. Squibb & Sons where he
held many positions including Nuclear Consultant for Diagnostic Medicine.
Mr. Geilmann received an Associates degree in dental science from State
University of New York.
HARRY C. ADERHOLT DIRECTOR SINCE JANUARY 1998
General Aderholt, age 81, (Brigadier General, United States Air Force,
retired) serves as Chairman of our Audit Committee. 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.
ROBERT L. SIMMONS, M.D. DIRECTOR SINCE JUNE 2001
Dr. Simmons, (F.A.C.S., F.A.C.C., F.C.C.P.), age 69, serves as Chairman of
our Medical Advisory Board and as a member of our Compensation Committee.
Dr. Simmons practices medicine as Vice President for Medical Affairs at
Providence Hospital in Washington, D.C., a position that he has held since 1987.
Dr. Simmons has served in many positions including Chief of
Cardiovascular/Thoracic Surgery, Providence Hospital (1984-1987); Chief of
Clinical Services, Providence Hospital (1983-1987) and Professor of Surgery and
Chief--Division of Thoracic Surgery, Howard University (1977-1983). Dr. Simmons
received his Bachelor of Science degree in Chemistry (with a minor in
Mathematics and Biology) from Morehouse College and his Doctor of Medicine from
Howard University. Dr. Simmons is a Candidate for Doctor of Philosophy in
Surgery from University of Minnesota Graduate School.
BERNARD J. BRADY SECRETARY/TREASURER /CHIEF FINANCIAL OFFICER SINCE JUNE 2001
Bernard J. Brady, age 44, was appointed Chief Financial Officer, Secretary,
and Treasurer in June 2001. From April 2000 to October 2000 he served as Chief
Financial Officer for Laser Power Corporation. From July 1995 to June 1999 he
served in various other positions with Laser Power, its predecessor company
Exotic Materials, Inc., a manufacturer of infrared and laser optics for military
and commercial applications; and with Atlas Telecom. From July 1999 to
April 2000, Mr. Brady was the chief financial officer for Decision Point
Applications, Inc., a provider of packaged data warehousing applications.
Mr. Brady has also served in senior financial positions with Vernors Inc., Four
Star Corporation, Manchester Plastics and MLX Corp. Mr. Brady received a Masters
of Business Administration degree from University of Utah.
26
ELECTION OF DIRECTORS
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. Richard V. Secord and John M. Brenna are the
only directors who are also officers.
COMMITTEES
We have an Executive Committee, an Audit Committee, and a Compensation
Committee. We do not have a nominating committee. The nominees were selected by
the entire Board.
EXECUTIVE COMMITTEE. The Executive Committee oversees operations and all
strategic planning. The Executive Committee held one meeting during our 2001
fiscal year.
AUDIT COMMITTEE. The Committee monitors the preparation of quarterly,
annual and other financial reports; is responsible for other maters concerning
the relationship between the Company and its independent accountants; and
oversees management's implementation of effective systems of internal controls.
During the fiscal 2001, the Board examined the composition of the Audit
Committee in light of rules promulgated by the American Stock Exchange. Based
upon the examination, the Board confirmed that all members of the Audit
Committee are "independent" as defined under Section 121(A) of the American
Stock Exchange's listing standard. The Audit Committee held three meetings
during our 2001 fiscal year.
COMPENSATION COMMITTEE. The Compensation Committee is charged with
reviewing the Company's general compensation strategy, establishing salaries and
reviewing benefit programs, administering the Company's 1997 Stock Option and
Restricted Stock Plan, and approving certain employment contracts. The functions
of the Compensation Committee and its activities during fiscal 2001 are
described below under Item 11: Executive Compensation. The Compensation
Committee held no meetings during our 2001 fiscal year but took action by
consent during that period.
FAMILY RELATIONSHIPS
There is no family relationship between or among any of our directors and
executive officers.
INVOLVEMENT IN OTHER PUBLIC COMPANIES
None of the Company's officers or directors is involved with any other
public company deemed to be a "reporting company."
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based on forms provided to us and representations of our directors, all of
our Board members, executive officers and 10% owners filed Forms 3, Forms 4 and
Forms 5 required by Section 16(a) of the Exchange Act for the most recent fiscal
year.
27
ITEM 11: 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 Dr. Simmons, all independent
directors. The committee assumes all responsibility for reviewing executive
compensation matters and administering our 1997 Stock Option and Restricted
Stock Plan.
The Company's compensation program for executives consists of three key
elements:
- A base salary;
- A performance-based annual bonus; and
- Periodic grants of stock options and/or restricted stock.
The Compensation Committee believes that this three-part approach best
serves the interests of the Company and its shareholders. It enables us to meet
the requirements of the highly competitive environment in which we operate while
ensuring that executive officers are compensated in a way that advances both the
short- and long-term interest of shareholders. Under this approach, compensation
for our executive officers involves a high proportion of pay that is "at
risk"--namely the annual bonus and stock options.
BASE SALARY. Base salaries for our executive officers, other than our Chief
Executive Officer, as well as changes in such salaries, are based upon
recommendations by our Chief Executive Officer, taking into account such factors
as competitive industry salaries, a subjective assessment of the nature of the
position, contribution, and experience of the officer and the length of the
officer's service with the Company. For fiscal 2001, under our Chief Executive
Officer's direction, the Compensation Committee reviewed all salary
recommendations. Such recommendations are subject to approval or disapproval by
the Compensation Committee.
ANNUAL BONUS. Annual bonuses for fiscal 2001 paid to our executive officers
were based upon recommendations by the Chief Executive Officer, taking into
account such factors as are considered in determining base salary as well as the
overall performance and contribution of each officer. In addition, consideration
is given to the need to keep the Company competitive in overall compensation.
For fiscal 2001, under our Chief Executive Officer's direction, the Compensation
Committee reviewed all bonus recommendations. Such recommendations are subject
to approval or disapproval by the Compensation Committee.
STOCK OPTIONS AND RESTRICTED STOCK. All decisions to grant stock options or
restricted stock are in the sole discretion of the Compensation Committee and
ratification of the Board of Directors.
EXECUTIVE COMPENSATION SUMMARY TABLE
The following table sets forth information concerning total compensation
earned or paid to our Chief Executive Officer and other of our executive
officers who received $100,000 or more in compensation during the fiscal year
for services rendered to the Company during each of the past three fiscal years
and who served in such capacities as of June 30, 2001 (the "named executive
officers"). On September 21, 2000, Mr. Johnston retired as our Chief Executive
Officer and Mr. Secord was thereafter appointed to fill the vacancy on
September 22, 2000. During the past three fiscal years, Mr. Johnston was not
paid a cash salary but instead was paid by the in-kind issuance of stock options
noted above under the caption "Employment Agreements" and by the in-kind relief
of indebtedness.
28
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED JUNE 30
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------------------
(1) (2) (3)
OTHER ANNUAL RESTRICTED SECURITIES (4)
NAME AND SALARY BONUS COMPENSATION STOCK AWARD UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS COMPENSATION ($)
------------------ -------- -------- -------- ------------ ----------- ---------- ----------------
Richard Secord, 2001 210,000 0 8,400 0 750,000 975,894
Chairman & Chief Executive 2000 175,000 0 6,000 0 0 0
Officer 1999 175,000 0 6,000 0 0 0
John Brenna, 2001 143,014 20,000 4,500 0 500,000 150,000
President & Chief Operating 2000 0 0 0 0 0 0
Officer 1999 0 0 0 0 0 0
David Johnston, 2001 0 0 3,288 0 0 150,547
Former Chairman & Chief 2000 0 0 15,000 0 0 0
Executive Officer 1999 0 0 15,000 0 0 0
David Packer, 2001 189,041 40,000 7,700 0 1,000,000 100,000
Former President & Chief 2000 163,285 0 6,000 0 0 0
Operating Officer 1999 135,000 0 6,000 0 0 0
Kevin Packard, 2001 135,501 30,000 0 137,000 0 150,000
Former Chief Financial Officer, 2000 30,780 0 0 0 100,000 0
Secretary & Treasurer 1999 0 0 0 0 0 0
------------------------------
(1) The Company provides the named executive officers with certain group life,
health, medical and other non-cash benefits generally available to all
salaried employees. Such amounts are not included in this column pursuant to
SEC rules. Included in "Other Annual Compensation" is automobile allowances
received by each of the named officers.
(2) Effective February 1, 2001, Mr. Packard was granted 50,000 shares of
restricted stock valued at $2.74 per share. As of the date hereof,
Mr. Packard is fully vested in the 50,000 shares.
(3) 375,000 of Mr. Secord's options on 750,000 shares are vested as of the date
hereof. 250,000 of Mr. Brenna's options on 500,000 shares are vested as of
the date hereof. In June 2001, the Company unilaterally cancelled
Mr. Packer's Separation Agreement and the options covering 1,000,000 shares.
The cancellation is presently being contested by Mr. Packer. Mr. Packard
relinquished all his rights on options covering 100,000 shares as of
February 1, 2001.
(4) Mr. Secord's 2001 amount reflects $975,894 of compensation attributable to
the exercise of "in-the-money" employee stock options. Mr. Brenna's 2001
amount reflects $150,000 signing bonus paid in connection with his
Employment Contract. Mr. Packer's 2001 amount reflects $100,000 paid in
connection with his Separation Agreement. Mr. Packard's 2001 amount reflects
a one-time payment of $150,000 in connection with the retention of his
employment. Mr. Johnston's 2001 amount reflects the forgiveness of $130,547
owed to the Company by Thermal Imaging, Inc., an affiliate of Mr. Johnston,
and $20,000 for the estimated fair value of a Company-owned vehicle
transferred to Mr. Johnston upon his retirement from the Company.
EMPLOYMENT AGREEMENTS
RICHARD V. SECORD, our Chairman and Chief Executive Officer, signed a new
employment agreement on April 27, 2001. The term of the agreement is three years
beginning September 18, 2000 and calls for compensation of $210,000 per year,
plus stock options covering 750,000 shares of Common Stock at an exercise price
of $1.50 per share. One-fourth (187,250) of the options vest immediately and
one-fourth of the options vest on each anniversary date of the agreement.
Notwithstanding the foregoing vesting schedule, the vesting of all options
accelerate to the date on which the Company's common stock price (after taking
into consideration all adjustments required to be accounted for as a result from
changes to the Company's stock, i.e., splits, reverse splits, mergers, etc.)
achieves and sustains a price of $12 for greater for 20 consecutive trading
days. The options granted Mr. Secord are governed by our 1997 Stock Option and
Restricted Stock Plan. If the employment agreement is terminated for "cause" as
defined in the agreement, or Mr. Secord voluntarily terminates the agreement,
all of the options granted to Mr. Secord, which have not vested, are forfeited.
The
29
agreement subjects Mr. Secord to a two-year non-compete restriction, the
obligation to give us the right to take advantage of any business opportunity,
and the duty not to reveal any confidential information about the business of
the Company.
JOHN M. BRENNA, our President and Chief Operating Officer, signed an
employment agreement on October 12, 2000. The term of the agreement is three
years beginning October 12, 2000 and calls for a signing bonus of $150,000,
compensation of $200,000 per year, plus stock options for 500,000 shares of
common stock at an exercise price of $3.60 per share. The exercise price of the
options was subsequently amended to $1.50 for options covering 250,000 shares
and $2.50 for options covering 125,000 shares. Options covering the remaining
125,000 shares remained unchanged. One-fourth (125,000) of the options vested
immediately and one-fourth of the options vest on each October 12 anniversary
date of the agreement. If the employment agreement is terminated for "cause" as
defined in the agreement, or Mr. Brenna voluntarily terminates the agreement,
all of the options granted to Mr. Brenna, which have not vested, are forfeited.
The agreement subjects Mr. Brenna to a non-compete restriction for two years
after he leaves employment with the Company, the obligation to give us the right
to take advantage of any business opportunity, and the duty not to reveal any
confidential information about our business.
BERNARD J. BRADY, our Chief Financial Officer, Secretary, and Treasurer,
signed an employment agreement on June 6, 2001. The term of the agreement is one
year beginning June 6, 2001 and calls for compensation of $140,000 per year,
plus stock options covering 16,667 shares of common stock at an exercise price
of $3.00 per share, stock options covering 16,667 shares of common stock at an
exercise price of $4.00 per share, and stock options covering 16,666 shares of
common stock at an exercise price of $5.00 per share. One-third of the options
vest on each June 6 anniversary date of the agreement. If the employment
agreement is terminated for "cause" as defined in the agreement, or Mr. Brady
voluntarily terminates the agreement, all of the options granted to Mr. Brady,
which have not vested, are forfeited. The agreement subjects Mr. Brady to a
non-compete restriction for two years after he leaves employment with the
Company, the obligation to give us the right to take advantage of any business
opportunity, and the duty not to reveal any confidential information about our
business.
DAVID B. JOHNSTON, our former Chairman and Chief Executive Officer, retired
September 21, 2000. Prior to his retirement, Mr. Johnston was compensated
pursuant to an employment agreement that provided no mandatory annual cash
compensation. In connection with the agreement, Mr. Johnston was granted
1,000,000 stock options at a $.75 exercise price with a three-year vesting
period. 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.
Pursuant to the terms of the stock option agreement, the stock options were
scheduled to expire 90 days following Mr. Johnston's retirement, or
December 18, 2000. On December 17, 2000, the Board of Director extended the
exercise date of Mr. Johnston's 1,000,000 stock options through September 18,
2001. As of the date hereof, all of Mr. Johnston's stock options have been
exercised.
DAVID A. PACKER, our former President and Chief Operating Officer, signed an
employment agreement on September 29, 2000. The term of the agreement was three
years beginning April 30, 2000 and called for compensation of $200,000 per year,
plus stock options for 1,000,000 shares of Common Stock at an exercise price of
$3.625 per share. One-fourth (250,000) of the options vested on September 29,
2000 and one-fourth of the options were scheduled to vest on each anniversary
date of the agreement. On March 19, 2001, Mr. Packer executed a Separation
Agreement with the Company. Pursuant to the Separation Agreement, Mr. Packer was
to remain employed with us through December 31, 2001 to assist in the completion
of Module 5 and provide other services as requested. In connection with the
Separation Agreement, stock options for 1,000,000 shares of common stock
previously granted under the September 29, 2000 employment agreement were
repriced from a $3.625
30
per share exercise price to a $2.15 per share exercise price. The vesting of
such options were accelerated so that 750,000 options, previously scheduled to
vest over a two-year period beginning April 30, 2001, were scheduled to vest no
later than December 31, 2001. On June 13, 2001, we dismissed Mr. Packer and
terminated the Separation Agreement, including any rights which Mr. Packer
possessed over options covering the 1 million shares noted above. Mr. Packer
filed a lawsuit in connection with such dismissal and termination.
KEVIN L. PACKARD, our former Chief Financial Officer, Secretary, and
Treasurer, signed a six-month employment agreement effective February 1, 2001 in
contemplation of his resignation on June 6, 2001. The agreement calls for
compensation of $138,000 per year (reduced to $100,000 after his successor was
found), plus 50,000 shares of restricted stock that vested at the conclusion of
the six-month agreement. In consideration, Mr. Packard relinquished all rights
that he had in 100,000 stock options granted to him in May 2000. The restricted
stock granted to Mr. Packard is governed by our 1997 Stock Option and Restricted
Stock Plan. The agreement subjects Mr. Packard to a two-year non-compete
restriction, the obligation to give us the right to take advantage of any
business opportunity, and the duty not to reveal any confidential information
about the business of the Company.
EXECUTIVE SEVERANCE AGREEMENTS
At its regular meeting in April 2000, the Board of Directors approved an
Executive Severance Agreement that provides certain "Severance Benefits" as
defined in the Agreement for our executive officers (each an "Executive") in the
event the employment of the Executive is terminated subsequent to a "Change in
Control" of the Company under the circumstances described in the Agreement. The
Agreement, once executed, continues from year to year until terminated at the
end of any year by written notice from the Company, unless a Change in Control
of the Company 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.
Pursuant to the Agreement, a Change in Control of the Company is deemed 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 has occurred, 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.
Pursuant to 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.
31
If, following a Change of Control, the Executive's employment by the Company
is terminated other than for cause, disability, death, normal retirement, or
early retirement, the Executive shall, subject to the provisions of the
Agreement be entitled to:
1. Compensation at his or her full annual base salary at the rate in effect
immediately prior to the termination of the employment of the Executive,
and short-term and long-term bonuses at the target levels pursuant to the
Company's annual incentive plan, if any, for the period of two years
following actual involuntary termination or Constructive Involuntary
Termination (the "Salary Continuance Period");
2. All medical and dental benefits and all long-term disability benefits in
which the Executive was entitled to participate immediately prior to the
date of termination, to the same extent as if the Executive had continued
to be an employee of the Company during the Salary Continuance Period,
provided that such continued participation is feasible under the general
terms and provisions of such plans and programs;
3. An immediate vesting of all outstanding stock options, stock
appreciation rights, restricted stock, performance plan awards and
performance shares granted by the Company to the Executive;
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; and
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 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, Severance Agreements have been executed and are
effective for Messrs. Secord, Brenna and Brady.
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, 2001, our independent directors each received $20,000 or
a prorated equivalent thereof for the length of time the director served on the
board during the year. Also for the year ended June 30, 2001, our directors each
received 20,000 options to purchase our common stock at $3.50 per share.
32
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to option grants to
our named executive officers during fiscal 2001. The Potential Realized Value of
the options as of their respective dates of grant has been calculated using the
Black-Scholes option pricing model as permitted by SEC rules based upon a set of
assumptions set forth in the footnote to the table. The Black-Scholes model is
only one method of valuing options and our use of the model should not be
interpreted as an endorsement of its accuracy. The actual value of the options
may be significantly different and the value actually realized, if any, on the
exercise of such options will depend upon the excess of the market value of the
common stock over the option exercise price at the time of exercise.
OPTION GRANTS TABLE
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE ($)
APPRECIATION FOR OPTION GRANT DATE
INDIVIDUAL GRANTS TERM VALUE
----------------------------------------------- ------------------------- ----------
(1) % OF TOTAL
# OF OPTIONS
SECURITIES GRANTED TO GRANT DATE
UNDERLYING EMPLOYEES EXERCISE PRESENT
OPTIONS IN FISCAL PRICE EXPIRATION VALUE
NAME OF OFFICER GRANTED YEAR ($/SH) DATE 5% ($) 10% ($) ($)
--------------- ---------- ---------- -------- ---------- ----------- ----------- ----------
Richard Secord............. 750,000 24.21% $ 1.50 04/02/11 $ 457,875 $ 533,250 $ 817,500
John Brenna................ 500,000 16.14% See (2) 10/12/10 $ 994,000 $1,095,500 $1,015,000
Bernard Brady.............. 50,000 1.61% See (3) 06/06/11 $ 8,426 $ 18,351 $ 80,500
David Packer............... 1,000,000 32.27% See (4) 04/30/10 $1,656,250 $1,837,500 $1,630,000
Kevin Packard.............. -- -- -- -- -- -- --
David Johnston............. -- -- -- -- -- -- --
------------------------
(1) The Compensation Committee of the Board of Directors which administers our
stock option and restricted stock plan has general authority to accelerate,
extend, or otherwise modify benefits under option grants in certain
circumstances within overall plan limits.
(2) Mr. Brenna's options were originally granted at a $3.60 exercise price. In
June 2001, our Board of Directors adjusted the exercise price of the options
downward to reflect the sustained decrease in our stock price. As of the
date hereof, 250,000 options have a $1.50 per share exercise price, 125,000
options have a $2.50 per share exercise price and 125,000 options remain
unchanged from their original issuance with an exercise price of $3.60 per
share.
(3) Of the 50,000 options granted to Mr. Brady, 16,667 options possess an
exercise price per share of $3.00, 16,667 options possess an exercise price
of $4.00 per share, and 16,666 options possess an exercise price per share
of $5.00.
(4) Mr. Packer's options covering 1,000,000 shares were granted in August 2000
in connection with his employment agreement at an exercise price per share
of $3.625. In March 2001, Mr. Packer entered into a Separation Agreement
which accelerated the vesting of such options and reduced the exercise price
of such options to $2.15. In June 2001, the Company unilaterally cancelled
Mr. Packer's Separation Agreement and the options covering 1,000,000 shares.
The cancellation is presently being contested by Mr. Packer.
(5) The estimated present value at grant date of options granted during the
fiscal year 2001 has been calculated using the Black-Scholes Option Pricing
Model, based on the following assumptions: a) estimated time to exercise of
ten years; b) risk free interest rates representing the interest rates
33
on U.S. Government Treasuries as of the date of grant with maturities
corresponding to the estimated time until exercise; c) volatility rate of
1.64%; and d) a dividend yield of 0%. The approach used in developing the
assumptions upon which the Black-Scholes valuations were calculated is
consistent with the requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
OPTIONS EXERCISED AND VALUES FOR FISCAL 2001
The following table below sets forth information with respect to option
exercises during fiscal 2001 for each of our named executive officers and the
status of their options at June 30, 2001 including:
- The number of shares of Computerized Thermal Imaging, Inc. common stock
acquired upon exercise of options during fiscal year 2001;
- The aggregate dollar value realized upon the exercise of those options;
- The total number of exercisable and non-exercisable stock options held at
June 30, 2001;
- The aggregate dollar value of in-the-money exercisable options at
June 30, 2001.
AGGREGATE OPTION EXERCISES DURING FISCAL 2001
AND OPTION VALUES ON JUNE 30, 2001
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ON VALUE OPTIONS IN-THE-MONEY OPTIONS
NAME OF OFFICER EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
--------------- -------- -------- ------------------------- ----------------------------
Richard V. Secord, Chairman &
Chief Executive
Officer(2).................. 264,286 $676,644 3,138,214/562,500 $12,087,410/$1,940,625
John M. Brenna, President &
Chief Operating
Officer(3).................. 0 $ 0 125,000/375,000 $ 334,375/$1,003,125
Bernard J. Brady, Chief
Financial Officer, Secretary
& Treasurer(4).............. 0 $ 0 0/50,000 $ 0/$48,334
David B. Johnston, Former
Chairman & Chief Executive
Officer(5).................. 0 $ 0 1,000,000/0 $ 4,200,000/$0
David A. Packer, Former
President & Chief Operating
Officer(6).................. 0 $ 0 1,250,000/250,000 $ 4,090,000/$700,000
------------------------
(1) In accordance with SEC rules, the values of the unexercised in-the-money
options at June 30, 2001 was determined by calculating the difference
between the exercise price per share of common stock, as set forth in the
respective stock option agreements, and the closing price per share of
common stock on June 30, 2001, which was $4.95.
(2) Options granted to Mr. Secord for 2,000,000 shares of common stock have an
exercise price of $1.25 per share; options granted for 1,250,000 shares of
common stock (299,286 of which have been exercised as of June 30, 2001) have
an exercise price of $0.70 per share; and options granted for 750,000 shares
of common stock have an exercise price of $1.50 per share.
(3) Options granted to Mr. Brenna for 250,000 shares of common stock have an
exercise price of $1.50 per share; options for 125,000 shares of common
stock have an exercise price of $2.50 per share; and options for 125,000
shares of common stock have an exercise price of $3.60 per share.
Mr. Brenna's options were originally granted at a $3.60 exercise price. In
June 2001, our Board of
34
Directors adjusted the exercise price of the options downward to reflect the
sustained decrease in our stock price.
(4) Options granted to Mr. Brady for 16,667 shares of common stock have an
exercise price of $3.00 per share; options for 16,667 shares of common stock
have an exercise price of $4.00 per share; and options for 16,666 shares of
common stock have an exercise price of $5.00 per share.
(5) The options granted to Mr. Johnston for 1,000,000 shares of common stock
have an exercise price of $0.75 per share.
(6) Options granted to Mr. Packer for 500,000 shares of common stock have an
exercise price of $0.97 per share; and options for 1,000,000 shares of
common stock have an exercise price of $2.15 per share. Originally,
Mr. Packer's options covering 1,000,000 shares were granted in August 2000
in connection with his employment agreement at an exercise price per share
of $3.625. In March 2001, Mr. Packer entered into a Separation Agreement
which accelerated the vesting of such options and reduced the exercise price
of such options to $2.15. In June 2001, the Company unilaterally cancelled
Mr. Packer's Separation Agreement and the options covering 1,000,000 shares.
The cancellation is presently being contested by Mr. Packer in a litigation.
We have no long-term incentive plans or defined benefit plans for the
benefit of our executive officers or directors.
35
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information regarding the beneficial
ownership of all shares of Common Stock at September 28, 2001 for each of our
named executive officers and directors, for each person known to us who owns
beneficially more than 5% of the outstanding Common Stock, and our named
executive officers and directors as a group. The percentage ownership is based
on 80,548,763 common shares issued and outstanding at September 28, 2001 and
ownership by these persons of options or warrants exercisable within 60 days of
such date. Unless otherwise indicated, each person has sole voting and
investment power over the shares.
SCHEDULE OF BENEFICIAL OWNERSHIP OF DIRECTORS,
MANAGEMENT, AND MORE THAN 5% SHAREHOLDERS
NUMBER OF SHARES
OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED PERCENT OF CLASS
------------------------------------- ---------------- ----------------
David B. Johnston, 6105 Macadam, Portland, Oregon 97201..... 14,217,761(1) 17.651%
Daron Dillia, 1147 Manhattan Avenue #134, Manhattan Beach,
CA 90266.................................................. 5,303,228(2) 6.383%
Richard V. Secord, 515 Pocahontas Dr., Ft. Walton Beach, Fl
52347..................................................... 3,741,000(3) 4.460%
John M. Brenna, 5 Lanthorne Road, Monroe, Connecticut
08468..................................................... 250,000(4) *
Harry C. Aderholt, 23 Miracle Strip Parkway N.E., Ft. Walton
Beach, Florida 32548...................................... 160,500(5) *
Robert L. Simmons, Two Centerpointe Drive, Suite 450, Lake
Oswego, OR 97035.......................................... 18,600 *
Milton R. Geilmann, 20660 SW, Shoshone Drive Tualatin,
Oregon 97062.............................................. 25,000 *
Brent M. Pratley, 1055 North 300 West, Provo, Utah 84604.... 21,125 *
---------- ------
OFFICERS AND DIRECTORS AS A GROUP OF (SEVEN PERSONS)........ 4,216,225 5.048%
========== ======
------------------------
* Less than 1%.
(1) Includes 1,000,000 shares held by Mr. Johnston and 13,217,761 shares of
common stock owned by Thermal Imaging, Inc., an affiliate of Mr. Johnston.
All common stock and common stock underlying options held by Mr. Johnston
and Thermal Imaging, Inc. are subject to a 3-year voting agreement whereby
the shares are voted in the same proportion as those shares voted by all
shareholders other than (i) David B. Johnston, individually, (ii) Daron C.
Dillia, individually, and Daron C. Dillia, doing business as Manhattan
Financial Group, and (iii) Thermal Imaging, Inc.
(2) Includes 2,003,038 shares of common stock underlying options that are
immediately exercisable, 536,250 shares of common stock underlying warrants
that are immediately exercisable, 30,575 shares of common stock held by
Daron Dillia and 2,733,365 shares of common stock held by Manhattan
Financial Group. All common stock and common stock underlying options and
warrants held by Daron Dillia and Manhattan Financial Group are subject to a
3-year voting agreement whereby the shares are voted in the same proportion
as those shares voted by all shareholders other than (i) David B. Johnston,
individually, (ii) Daron C. Dillia, individually, and Daron C. Dillia, doing
business as Manhattan Financial Group, and (iii) Thermal Imaging, Inc.
(3) Includes 1,000 shares of common stock in the name of Jo Anne Secord, 150,000
shares of common stock in the name of Richard V. Secord Revocable Trust and
3,325,714 shares of common stock underlying options that are immediately
exercisable.
36
(4) Includes 250,000 shares of common stock underlying options that are
immediately exercisable.
(5) Includes 3,000 shares of common stock in the name of Harry C. Aderholt &
Jessie Y. Aderholt JTWROS, 5,000 shares of common stock in the name of
Pornpimon Kirdpirote & Harry C. Aderholt JTWROS, and 142,500 shares of
common stock in the name of Harry C. Aderholt.
We know of no arrangement or understanding that may, at a subsequent date,
result in a change of control.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management believes that all prior related-party transactions are on terms
no less favorable to us as could be obtained from unaffiliated third parties.
Management's 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, if any,
including any loans or compensation to such persons, will be approved by a
majority of disinterested, independent outside members of the Board of
Directors.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K
(a) The following reports are filed with this report:
(1) Financial Statements.
The financial statements as set forth under Item 8 of this report are
incorporated by reference.
(2) Exhibits.
a. Lease agreement dated June 13, 2001, between Company and Silver
Creek Engineering, LLC.
b. Consent from Deloitte & Touche LLP.
(b) Reports on Form 8K filed during the fiscal year ended June 30, 2001.
Form 8-K dated March 26, 2001 and filed April 4, 2001 reporting complaint
for libel in the United StatesDistrict Court for the District of Utah,
Northern Division, Case No. 1:00CV00098K against Bloomberg, L.P. (the
"Defendant").
Form 8-K dated November 3, 2000 and filed November 3, 2000 reporting
changes in registrant certifying accountants.
Form 8-K dated October 11, 2000 and filed Octeober 13, 2000 reporting the
cancellation of our agreement to establish a consortium in Latin America
to market and deploy our Breast Imaging System throughout Central and
South America.
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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.
By: /s/ JOHN M. BRENNA
-----------------------------------------
John M. Brenna
DIRECTOR, PRESIDENT & CHIEF OPERATING
Date: September 15, 2001 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.
/s/ RICHARD V. SECORD Director, Chairman of the
------------------------------------------- Board and Chief Executive September 15, 2000
Richard V. Secord Officer
/s/ JOHN M. BRENNA
------------------------------------------- Director, President & Chief September 15, 2000
John M. Brenna Operating Officer
------------------------------------------- Director
Brent M. Pratley, M.D.
------------------------------------------- Director
Milton R. Geilmann
------------------------------------------- Director
Harry C. Aderholt
------------------------------------------- Director
Robert L. Simmons, M.D.
------------------------------------------- Chief Financial Officer,
Bernard Brady Treasurer & Secretary
38