SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended: December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to ___________
Commission File Number: 0-21015
HUMASCAN INC.
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(Name of small business issuer in its charter)
Delaware 22-3345046
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
125 Moen Avenue, Cranford, New Jersey 07016
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (908) 709-3434
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $582,496.
As of March 23, 1998, the aggregate market value of the issuer's Common Stock
(based upon its reported last sale price on the Nasdaq SmallCap market) held by
non-affiliates of the issuer was $44,000,170. At March 23, 1998 there were
7,783,094 shares of Common Stock outstanding.
The Index to Exhibits appears on page 39.
Documents Incorporated by Reference
None
Transitional small business disclosure format (check one): Yes ___ No _X_ .
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Part I
Item 1. BUSINESS
Overview
HumaScan Inc. (the "Company"), a development stage company, owns under
license the exclusive rights in the United States and Canada to manufacture and
market a device called the BreastAlert(TM) Differential Temperature Sensor (the
"BreastAlert device"). On December 29, 1997, HumaScan commenced shipments of the
BreastAlert device. The BreastAlert device is a non-invasive, easy to use,
low-cost, adjunctive test to be used by primary care physicians, gynecologists
and other medical specialists as part of a breast disease monitoring program
along with breast self-examination ("BSE"), palpation and (depending on a
patient's age, family history and other factors) mammography and other
established clinical procedures including ultrasound and/or biopsy. An important
feature of the BreastAlert device is that the results are immediately available
to the physician while the patient is "on site" at the point of care in the
physician's office, clinic, hospital and/or mammography center. If the
BreastAlert device indicates that one breast is emitting more heat than the
other, the physician is alerted to the possibility of a physiological condition,
including proliferating heat-emitting cancer cells or certain types of
heat-emitting breast disease that may require medical treatment. The BreastAlert
device was cleared by the United States Food and Drug Administration ("FDA") in
January 1984 under Section 510(k) of the Food, Drug and Cosmetic Act (the "FDC
Act") to be marketed for use by physicians as an adjunct to routine physical
examination, including palpation, mammography and other established procedures
for the detection of breast disease ("510(k) Market Rights").
When early-stage breast cancer advances, metabolic activity increases,
producing excessive heat. In many cases, this heat will be detectable at the
surface of the breast. BreastAlert records the skin temperature of each breast.
A 2F or greater temperature difference may indicate the possibility of either
proliferating heat-emitting breast cancer cells, or certain other types of
heat-emitting breast disease that may require medical treatment.
The BreastAlert Device
The BreastAlert device consists of a pair of mirror-image, non-invasive,
lightweight, disposable soft pads, each of which has three wafer-thin, specially
designed conductive foil sensors. Each sensor contains 18 columns of
heat-sensitive chemical sensor dots that change color from blue to pink
reflecting an 8.5 degree temperature range from approximately 90(Degree) to
98.5(Degree) Fahrenheit (in 0.5 increments). When placed over a woman's breasts
inside the bra for a period of 15 minutes, the BreastAlert device records skin
temperature variations due to heat conducted from within the breast tissue to
the surface of the skin. By comparing the mirror-image temperature differences
between the two breasts registered by the BreastAlert device, the physician can
objectively quantify if there is abnormal unilateral breast heat, which may be
significant if there is a 2(Degree) Fahrenheit or more temperature difference
between each breast in the same mirror-image location. This, in turn, alerts the
physician to the possibility of a physiological condition, including
heat-emitting cancer.
Clinical Trials
The Company commenced post-marketing clinical trials in the first quarter
of 1998. The primary objective of these trials is to provide health care
professionals with additional clinical data for application in the clinical
setting for screening of breast disease, including breast cancer.
Marketing and Distribution
General. The Company believes that the target market for the BreastAlert
device are primary care physicians such as gynecologists, internists and general
practitioners, both in their own practices and as participants in groups such as
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs"). Because interpretation of existing diagnostic imaging modalities for
breast cancer is difficult and subjective, additional target market segments
include other health care providers who can legally order and perform clinical
tests, such as physician groups that have mammography systems, breast cancer
surgeons and mammographers.
The Company believes that market acceptance of the BreastAlert device will
depend, in part, upon the Company's ability to demonstrate to physicians the
clinical benefits (including ease of use and utility), safety and
cost-effectiveness of the BreastAlert device. To achieve this, the Company will
seek to (i) arrange for the publication of articles summarizing actual test
results to appear in selected medical journals and (ii) present papers and make
presentations at large medical symposiums. The Company currently advertises in
several professional and consumer journals with national circulation. Training
videos are distributed to both physicians and consumers.
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The Company markets the BreastAlert device to physicians as an adjunctive
test which can alert the physicians before diagnosis to the possible existence
of some type of physiological condition which may be due to various pathological
conditions, including heat-emitting cancers.
Distribution Agreement with PSS. In February 1996, the Company entered into
an exclusive supply and distribution agreement (as amended, the "Distribution
Agreement" ) with Physician Sales and Service, Inc. ("PSS"), a publicly traded
company and one of the leading distributors of medical supplies, diagnostic
equipment and pharmaceuticals to office-based medical professionals in the
United States. PSS assists the Company in developing marketing collaterals such
as training videos and sales materials (with all costs of materials to be paid
by the Company) coordinates attendance at medical device conventions with the
goal of (i) locating the Company's booth near the PSS booth or sponsoring the
BreastAlert device at the PSS booth and (ii) helps the Company at conventions
not normally attended by PSS by having local sales representative attend and
staff the Company's booth during convention hours. PSS devotes a full-time
management level marketing executive designated as a "Product Champion" to work
exclusively with the Company and assist with the launch of the BreastAlert
device. PSS is responsible for selling the BreastAlert device directly to
physicians at their offices. The Company focuses its own efforts on marketing
the BreastAlert device to physicians at hospitals, to breast cancer
organizations, to government organizations, to insurance company convention
activities and in similar promotional venues.
Under the Distribution Agreement, over a two-year period beginning in 1998,
PSS is to receive volume discount price incentives from the Company to the
extent PSS exceeds sales targets of 1.0 million units in 1998 and 3.5 million
units in 1999. If sales by PSS are less than 50% of such targets, the Company
and PSS will each have the right to terminate the Distribution Agreement upon
three months' notice. The term of the Distribution Agreement continues until
terminated by either party for failure to meet such sales targets or for certain
material breaches which are not cured within prescribed time limits. Also,
pursuant to the distribution agreement, PSS purchased an aggregate of 56,250
shares of Common Stock and warrants to purchase an additional 11,250 shares of
Common Stock at $2.93 per share and was issued warrants (the "PSS Warrants") to
purchase 125,000 shares of Common Stock at $4.00 per share.
The Company sells the BreastAlert device to physicians and other medical
specialists for approximately $25 per unit and recommends that the BreastAlert
unit be made available to patients by physicians and other medical specialists
for a cost ranging from $40 to $50.
License Agreement
In October 1995, the Company and Scantek Medical, Inc. ("Scantek") entered
into a license agreement (the "License Agreement"), pursuant to which Scantek
granted the Company an exclusive license (the "License") to manufacture and sell
the BreastAlert device in the United States and Canada. The License Agreement
covers the 510(k) Market Rights and Scantek's know-how, trade secrets, patent
rights and trademarks relating to the BreastAlert device. The BreastAlert device
is the subject of two United States patents expiring May 22, 1998 and Canadian
patent expiring August 24, 1999. The License Agreement provides for a cash
payment (the "Cash Portion of the Licensing Fee") to Scantek of $1,600,000,
$550,000 of which has already been funded. $175,000 of the balance is payable on
December 31, 1997, $175,000 on March 31, 1998, $350,000 on October 31, 1998 and
$350,000 on January 31, 1999, provided, however, that any Surplus Cash Flow (one
half of net income, as defined in the License Agreement, subject to certain
adjustments) after the Company begins operations is to be applied as prepayments
to unpaid installments of the Cash Portion of the Licensing Fee in inverse order
of maturity. The Company has not remitted the payment due December 31, 1997, and
intends not to remit the payment due March 31, 1998, as a result of a dispute
with Scantek. "See Legal Proceedings". Contemporaneously with the execution of
the License Agreement, the Company issued to Scantek 675,000 shares of Common
Stock. Scantek received an additional 329,063 shares of Common Stock upon the
closing of a private placement in May 1996 (the "May Private Placement") in
exchange for the termination of its right, pursuant to the License Agreement, to
maintain a specified ownership interest in the Company.
Pursuant to the License Agreement, Scantek is entitled to additional
payments as follows: (i) $100,000 (to be applied to unpaid installments of the
Cash Portion of the Licensing Fee in order of maturity) upon the later of (x)
the investment at any time by PSS of $500,000 in the Company by exercising the
PSS Warrant and (y) the shipment by the Company of the first order of the
BreastAlert device to PSS; and (ii) $300,000 (of which $100,000 is to be applied
to unpaid installments of the Cash Portion of the Licensing Fee in order of
maturity and $200,000 is to be applied to unpaid installments of the Cash
Portion of the Licensing Fee in inverse order of maturity) upon the earlier to
occur of (a) the extension of the relevant patents at least through January 1,
2003 or (b) Scantek's obtaining a new United States patent on the product. The
License Agreement also provides for minimum annual royalty payments of $150,000,
$300,000, $400,000, and $500,000, respectively, in the first four years in which
the product is sold and $600,000 in the fifth and subsequent years (the "Minimum
Royalties") and maximum royalty payments ranging from 3% of annual net sales up
to $2,000,000 to 10% of the annual net product sales if annual net product sales
exceed $10,000,000 (the "Percentage Royalties"). In addition, the License
Agreement will terminate automatically if the aggregate earned royalties for the
first three years the product is sold do not exceed $950,000 (the "Threshold
Earned Royalties"). In the event the Company fails to pay the Minimum Royalties
for any calendar quarter Scantek will have the right,
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subject to the Company's right to cure such default within 30 days of
receipt of notice of such default from Scantek, (i) to convert the License to a
nonexclusive license or (ii) terminate the License Agreement by purchasing the
machinery used to manufacture and assemble the BreastAlert device from the
Company for the greater of 50% or the unamortized cost thereof or $100,000. The
Minimum Royalties and Threshold Earned Royalties terminate automatically at any
time after May 22, 1998 (the date the relevant patents expire) if a competitor
introduces a product that would have infringed upon such patents. In addition,
the Percentage Royalties are reduced if the Company reduces the price of its
product below certain preset amounts. The License Agreement also provides that,
if Scantek places an order with the Company prior to the date which is 60 days
prior to the Company's acceptance of the Production Line from Zigmed, Scantek
may purchase from the Company $1,000,000 worth of BreastAlert devices at a per
unit price equal to the greater of 150% of the Company's Costs of Production (as
defined in the License Agreement) or $2.50.
Manufacturing
The Company leases a fully air-conditioned facility of approximately 30,000
square feet to house its manufacturing, assembly and packaging machinery (the
"Production Line") and provide warehouse space. The Company's executive offices
are also located in this facility.
The Production Line became fully operational in December 1997 and the
Company began shipping BreastAlert product to PSS in December 1997. The
Production Line consists of three parts: a sensor web machine, which
manufactures the sensor components of the BreastAlert device, an assembly line,
in which three sensor segments are applied to foam backing material manufactured
to the Company's specifications by an outside vendor, and a packaging line, in
which pairs of BreastAlert devices are wrapped and labeled as units and the
units are boxed.
Currently, the Production Line is operating at a capacity of approximately
1,300,000 units annually, based on two shifts per day, which is substantially
less than was originally expected. The Company believes that capacity can be
increased to approximately 5,600,000 units annually, based on two shifts per
day, but that to do so it will be necessary to construct an additional sensor
web machine and possibly expand the assembly and packaging lines. The Company
expects that these improvements will cost approximately $1,000,000. See
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation."
The Company believes that there are several sources from which it may
purchase the raw materials and components used in the manufacture of the
BreastAlert device. The Company obtains certain of the raw materials and
components from a single or limited number of sources of supply. Although the
Company believes it will be able to continue to negotiate satisfactory supply
agreements, failure to do so may have a material adverse effect on the Company.
Furthermore, there can be no assurance that suppliers will dedicate sufficient
production capacity to satisfy the Company's requirements within scheduled
delivery times or at all. Failure or delay by the Company's suppliers in
fulfilling its anticipated needs may adversely affect the Company's ability to
market the BreastAlert device.
Patents; Proprietary Information
Scantek, the licensor of the BreastAlert device, holds two United States
patents and one Canadian patent covering the use of the BreastAlert device as a
device for adjunctive use in the early detection of breast disease. Although the
patents are licensed to the Company for the United States and Canada pursuant to
the License Agreement, both United States patents expire on May 22, 1998 and the
Canadian patent expires on August 24, 1999. There can be no assurance that the
patents will provide meaningful protection from competition. The Company's
policy is to attempt to protect its technology by, among other things, obtaining
patent rights for technology that it considers important to the development of
its business and requiring each employee and key consultant to execute a
confidentiality agreement. There can be no assurance that the Company's
confidentiality agreements and other safeguards will protect its proprietary
information and trade secrets or provide adequate remedies for the Company in
the event of unauthorized use or disclosure of such information, or that others
will not be able to develop such information independently. In addition, in the
event the Company becomes involved in litigation to enforce its proprietary
rights, such litigation can be a lengthy and costly process causing diversion of
effort and resources by the Company and its management with no guarantee of
success. Other parties may be issued patents that may prevent the sale of the
Company's products or require licenses and the payment of royalties by the
Company. It is possible that after the patents expire, other companies, inside
and outside the United States, may adopt the concept and/or design embodied in
the BreastAlert device and seek to compete with the Company. In the event such
competition is encountered, the Company would have to rely on name recognition,
product acceptance, quality and the distribution network of PSS in order to
compete successfully, and there can be no assurance that the Company will be
able to so compete. Moreover, the Company could be put at a competitive
disadvantage by the payment of any royalties, which may have a material adverse
effect on its ability to market its product successfully.
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Although to date no claims have been brought against the Company alleging
that the BreastAlert device infringes intellectual property rights of others,
there can be no assurance that such claims will not be brought against the
Company in the future, or that, if made, such claims will not be successful. In
addition to any potential monetary liability for damages, the Company could be
required to obtain a license in order to continue to manufacture or market the
BreastAlert device or could be enjoined from making or selling the BreastAlert
device if such license were not made available on acceptable terms. If the
Company becomes involved in such litigation, it may require the expenditure of
significant Company resources and, if such a claim were successful, the
Company's business could be materially adversely affected.
The HumaScan Inc. logo is a registered trademark of HumaScan Inc. The
Company has filed an application with the United States Patent and Trademark
office for a trademark for the term "BreastAlert."
Government Regulation
The Company's products and manufacturing activities are subject to
extensive regulation by FDA and, in some instances, by state, local, and foreign
authorities. Pursuant to the FDC Act and the regulations promulgated thereunder,
FDA regulates the development, clinical testing, manufacture, packaging,
labeling, storage, distribution and promotion of medical devices.
In the United States, medical devices intended for human use are classified
into three categories (Class I, II, or III), on the basis of the controls deemed
necessary by FDA reasonably to assure their safety and effectiveness. Class I
devices are subject to general controls (for example, labeling and adherence to
FDA's Quality Systems Regulations "QSR") and Class II devices are subject to
general and special controls (for example, performance standards, post-market
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those which must receive pre-market approval from FDA to ensure
their safety and effectiveness (for example, life sustaining, life-supporting
and implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices).
Breast thermographic devices (such as the BreastAlert device) intended to
be used by physicians as an adjunct to other established clinical detection
methods for breast disease are currently classified as Class I devices. On
January 17, 1984, FDA granted 510(k) Market Rights to the then owner of the
technology underlying the BreastAlert device. The BreastAlert device may be
marketed by the owner of the 510(k) Market Rights without further FDA
authorization when used adjunctively by the physician. Scantek assigned the
510(k) Market Rights for the BreastAlert device to the Company in October 1995.
The Company is aware of a number of health care reform initiatives recently
adopted or currently being considered by several states and the United States.
On the federal level, in 1996, Congress enacted the Health Insurance Portability
and Accountability Act of 1996, Pub. L. 104-191. The legislation endeavors to
improve portability and continuity of health insurance, prevent health care
fraud and abuse, protect the confidentiality of patient information, and
simplify the administration of health insurance.
Various forms of health care and insurance reform legislation also are
pending or have been considered in recent years in a number of states,
including, for example, the Kentucky Health Care Reform Act of 1996, the New
York Health Care Reform Act of 1996, and several reform initiatives passed in
Maine, including legislation that would regulate managed care companies, allow
the formation of private health purchasing alliances, allow longer maternity
hospital stays, mandate coverage for Pap smears, and expand mandated coverage
for women. In addition, in 1996, Maryland's governor signed more than
twenty-five health care-related bills, including measures that prohibit
restrictions on health care providers' communications with patients, mandate
coverage for a minimum 48-hour hospital stay for a mother and newborn, and
require hospitals to offer mammography education materials to female patients
when medically appropriate. Finally, some states are adopting insurance reforms
based on the Health Insurance Portability and Accountability Act of 1996. For
example, a group of health insurance reforms in insurance portability, small
group coverage, and individual coverage became effective in Oregon on October 1,
1996.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company. There can be no assurance that
the Company will not be required to incur significant costs to comply with laws
and regulations in the future or that laws or regulations will not have a
material adverse effect upon the Company.
Subject to the potential changes in regulatory status discussed above, the
Company believes that it is in substantial compliance with Section 510(k) of the
FDC Act and that its ownership of the 510(k) Market Rights permits immediate
marketing of the BreastAlert device once the production line is operational.
Competition
The Company is not aware of any low-cost devices currently on the market
which compete with the BreastAlert device. Nevertheless, the Company's potential
competitors may succeed in developing products that are more effective or less
costly
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than the Company's products and such competitors may also prove to be more
successful than the Company in manufacturing, marketing and sales. Some of the
Company's potential competitors may be large, well-financed and established
companies that have greater resources for research and development,
manufacturing and marketing than the Company and, therefore, may be better able
than the Company to compete for a share of the market even in areas in which the
Company may have superior technology. The Company's potential competitors may
include one or more of the approximately 3,000 other manufacturers represented
by PSS. Pursuant to the Distribution Agreement, PSS has agreed not to distribute
a product substantially identical to the BreastAlert device during the term of
the agreement unless PSS determines that the BreastAlert device is not
competitive with such other products on the basis of sales, pricing, quantity,
verifiable results or customer acceptance.
The Company believes that the BreastAlert device incorporates a combination
of features and benefits that are not found in any other single product
available in the marketplace today. The Company believes that the BreastAlert
device augments BSE, clinical examination and screening and diagnostic
techniques such as mammography, ultrasound, transillumination, diaphanography,
magnetic resonance imaging, surgical biopsy and stereotactic fine needle
aspiration. The market for products such as the BreastAlert device is
characterized by rapid changes and evolving industry standards often resulting
in product obsolescence or short product lifecycles. There can be no assurance
that the Company will be able to compete successfully, that its competitors or
future competitors will not develop technologies or products that render the
BreastAlert device obsolete or less marketable or that the Company will be able
to enhance its proposed products or technology successfully or adapt them
satisfactorily.
Product Liability and Insurance
The nature of the Company's products may expose the Company to product
liability risks. The Company currently maintains product liability insurance
coverage in the amount of $5,000,000. Such insurance is becoming increasingly
expensive and there can be no assurance that the Company will be able to
maintain such insurance on acceptable terms or that such insurance will provide
adequate coverage against product liability claims.
The BreastAlert device has received 510(k) Market Rights from FDA. The
grant of such rights reflects FDA's determination that the BreastAlert device
was substantially equivalent to other medical devices marketed prior to May 28,
1976, the date the Medical Device Amendments Act of 1976 was enacted. The fact
that the BreastAlert device received 510(k) Market Rights from FDA may not be
sufficient to defend successfully against product liability lawsuits. While no
product liability claims have been brought against the Company to date, a
successful product liability claim against the Company in excess of its
insurance coverage could have a material adverse effect on the Company.
Reimbursement
Hospitals, medical clinics and physicians' offices that purchase medical
devices like the BreastAlert device generally rely on third-party payors, such
as Medicare, Medicaid and private health insurance plans, to pay for some or all
of the costs of the screening and diagnostic procedures performed with these
devices. Whether a particular procedure qualifies for third-party reimbursement
depends upon such factors as the safety and effectiveness of the procedure, and
reimbursement may be denied if the medical device is investigational or was used
for a non-approved indication. In some cases, reimbursement amounts are based on
the provider's costs associated with the procedure, including materials costs.
In such a situation, the cost of an instrument used in the procedure likely
would be covered by the reimbursement payment. In other cases, payment is a
fixed amount per procedure, per hospital day or per hospital stay. Such a
payment might not specifically cover the cost of materials such as a device used
in the procedure.
There can be no assurance that the full or any part of the cost of the
BreastAlert device would be covered by third-party reimbursement. During the
past several years, the major third-party payors for hospital services have
revised substantially their payment methodologies to contain healthcare costs.
The Company believes that the current pressures for medical cost containment
have resulted in uncertainty in the healthcare industry. Reimbursement standards
and rates may change in the future. The failure of users of the BreastAlert
device to obtain adequate reimbursement from third-party payors could have a
material adverse effect on the Company.
Several states and the United States government are investigating a variety
of alternatives to reform the health care delivery system and further reduce and
control health care spending. These reform efforts include proposals to limit
spending on health care items and services, limit coverage for new technology
and limit or control the prices health care providers and drug and device
manufacturers may charge for their services and products, respectively. If
adopted and implemented, such reforms could have a material adverse effect on
the Company's business, financial condition and results of operations.
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Employees
As of the date of this report, the Company employed 46 full-time persons,
all of whom are sales, administrative, production and professional personnel.
None of the Company's employees are subject to collective bargaining agreements
with labor unions. Management believes that its relations with the Company's
current employees are satisfactory.
Risk Factors
Absence of Operating History; Development Stage; Continuing Losses. The
Company was incorporated in December 1994, has only a brief operating history
and is in the development stage. As such, the Company is subject to all of the
business risks associated with a new enterprise, including constraints on the
Company's resources, lack of established creditor relationships and
uncertainties regarding product development and future revenues. The Company has
incurred losses since inception. The Company anticipates incurring significant
additional costs in connection with the launch of the BreastAlert device. The
Company's ability to operate its business successfully will depend, in part, on
a variety of factors, many of which are outside the Company's control, including
changes in governmental programs and requirements or in physician or consumer
preferences, changes in FDA and similar regulatory requirements, plant and
equipment repair and maintenance requirements, competition and changes in raw
material supplies and suppliers. The likelihood of success of the Company must
be considered in light of the expenses, difficulties and delays frequently
encountered in connection with the formation and early phase of operation of a
new business and the competitive environment in which it will operate. There can
be no assurance regarding whether or when the Company will successfully
implement its business plan or that the Company will achieve profitability by
generating sufficient revenues to offset anticipated costs.
Significant Capital Requirements; Need for Additional Financing. The
Company's capital requirements in connection with its product development and
marketing activities will be significant. The Company has been dependent upon
the proceeds of sales of its securities to fund its development activities. The
Company's future liquidity and capital funding requirements will depend on
numerous factors, including the results of clinical studies, the extent to which
the BreastAlert device gains market acceptance, the costs and timing of
expansion of sales, marketing and manufacturing activities and competition.
There can be no assurance that additional capital, if needed, will be available
on terms acceptable to the Company, or at all. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, will likely include restrictive covenants, including financial
maintenance covenants restricting the Company's ability to incur additional
indebtedness and to pay dividends. The failure of the Company to raise capital
on acceptable terms when needed could have a material adverse effect on the
Company.
Dependence Upon a Single Product. The BreastAlert device is currently the
Company's only product and will account for substantially all of the Company's
revenue, if any, for the foreseeable future. The BreastAlert device has only
recently been commercially introduced. There can be no assurance that the
BreastAlert device will be more effective than competing products or
technologies or capable of being successfully marketed. If the BreastAlert
device is not successfully commercialized, it is likely that the Company's
business operations would cease.
Uncertainty of Market Acceptance; Certain Thermographic Applications Not
Accepted. The Company's success will be substantially dependent upon, among
other factors, the market acceptance of the BreastAlert device. The Company
believes that market acceptance of the BreastAlert device will depend, in part,
upon the Company's ability to demonstrate to physicians the clinical benefits,
safety, efficacy and cost-effectiveness of the BreastAlert device. Prior
thermographic devices, which, unlike the BreastAlert device, involved imaging
rather than measurement of temperature differences, did not perform as intended.
In 1983, OHTA issued a report stating that thermography needed further
development and should not be used alone for diagnostic screening for breast
cancer. In 1984, HCFA withdrew coverage for thermography under Medicare as a
diagnostic screening method for breast disease. In 1991, based upon reports
which addressed the use of thermography in neurological and musculoskeletal
conditions, the AMA passed a resolution stating that the thermography had not
been proven to have value as a medical diagnostic test. In 1992, HCFA withdrew
Medicare reimbursement for all other uses of thermography. In 1993, the AMA
adopted a resolution stating that use of thermography for diagnostic purposes
could not be recommended at that time. Although the BreastAlert device is
adjunctive and is not to be used for diagnosis of breast disease, the OHTA, HCFA
and AMA positions against the use of thermography as a diagnostic tool may cause
confusion among physicians. The Company must continue to demonstrate that the
BreastAlert device is an effective adjunct to diagnostic procedures. In the
event that the BreastAlert device fails to achieve significant market
acceptance, it is likely that the Company's business operations would cease.
Termination of License Agreement if Certain Royalties are not Paid or
Earned. The Company has licensed the rights to the BreastAlert device from
Scantek pursuant to the License Agreement, which provides that the Company is to
pay minimum royalties of $150,000, $300,000, $400,000, and $500,000,
respectively, in the first four years in which the BreastAlert device is
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sold and $600,000 in the fifth and subsequent years. In the event the
Company fails to pay the minimum royalties for any calendar quarter Scantek will
have the right, subject to the Company's right to cure such default within 30
days of receipt of notice of the default from Scantek, (i) to convert the
License to a nonexclusive license or (ii) terminate the License Agreement by
purchasing the machinery used to manufacture and assemble the BreastAlert device
from the Company for the greater of 50% of the unamortized cost thereof or
$100,000. It also provides for the automatic termination of the License
Agreement if earned royalties for the first three years in which the product is
sold do not exceed an aggregate of $950,000. There can be no assurance that the
BreastAlert device will be commercialized successfully, that the Company will be
able to pay the minimum royalties or that threshold royalties will be earned.
Any such termination of the License Agreement for failure to earn threshold
royalties could have a material adverse effect on the Company's business
operations. The Company has not remitted to Scantek the license fee payment due
December 31, 1997, and intends not to remit a license fee payment due March 31,
1998, as a result of a dispute with Scantek. See "Legal Proceedings."
Dependence on Physician Sales & Service, Inc. The Company's ability to
generate revenue from the sale of the BreastAlert device is dependent upon,
among other things, its ability to manage an effective sales organization. The
Company has entered into an exclusive distribution agreement with PSS and is
significantly dependent on PSS for distribution and sales. Failure by PSS to
continue to perform under the distribution agreement would have a material
adverse effect on the Company's operations. In addition, there can be no
assurance that the Company will be able to market or sell its products
effectively through independent sales representatives, through arrangements with
some other outside sales force, or through strategic partners.
Government Regulation. The Company's products and manufacturing activities
are subject to extensive government regulation, both in the United States and
abroad. In the United States, the development, manufacture, marketing and
promotion of medical devices are regulated by FDA under the FDC Act. Unless
exempted by regulation, the FDC Act and the regulations implemented thereunder
require that all products meeting the statutory definition of "device" receive
FDA clearance or approval prior to marketing in the United States. The
BreastAlert device obtained 510(k) Market Rights from the FDA in 1984. The
Company has not obtained clearance or approval to market its products in any
foreign country.
Based upon reservations about the use of thermography for diagnostic
purposes expressed by OHTA, HCFA and AMA, there is a risk that FDA could
reevaluate the bases upon which it granted the Company's 510(k) Market Rights in
1984 and classified devices such as the BreastAlert device as Class I devices in
1988. If FDA were to reevaluate these decisions and conclude that additional
data were necessary to support authorization to market the BreastAlert device,
it could endeavor to 510(k) Market Rights for breast thermographic devices
and/or reclassify these devices from Class I medical devices to Class III
medical devises (which would effectively vitiate the Company's 510(k) Market
Rights and require filing of a new application for premarket approval prior to
marketing). In either event, the Company would be required to cease marketing
the BreastAlert device until it filed a PMA with FDA and received a new approval
to market the BreastAlert device.
The FDC Act requires manufacturers to obtain new FDA clearance or approval
when, among other things, there is a major change in the intended use of a
legally marketed device that could significantly affect its safety or
effectiveness. Manufacturers are responsible for making the initial
determination regarding the significance of these changes. There can be no
assurance that FDA will agree with a decision that changes to a device are not
significant, and thus, do not require FDA review and clearance or approval. In
the event FDA were to require the filing of a new 510(k) notification or a PMA
for a change it regarded as significantly affecting the safety or effectiveness
of the device, the Company may be prohibited from marketing the modified device
until FDA reviews and clears the new 510(k) notification or PMA. FDA also
requires that manufacturing conform to strict quality assurance standards
required by QSR regulations which require that medical device manufacturers
comply with various requirements pertaining to design control; organization and
personnel; buildings, environmental control, cleaning and sanitation; equipment
and calibration of equipment; medical device components; manufacturing
specifications and processes; reprocessing of devices; labeling and packaging;
finished device inspection; device failure investigations, and recordkeeping
requirements including complaint files. There can be no assurance that the
Company will maintain compliance with these standards.
Noncompliance with applicable FDA requirements can result in, among other
things, rejection or withdrawal of premarket clearance or approval for devices,
recall or seizure of products, total or partial suspension of production, fines,
injunctions and civil and criminal penalties. FDA also has the authority to
request repair, replacement or refund of the cost of any devices manufactured or
sold by the Company. Any of these sanctions may have a material adverse effect
on the Company's business, financial condition or results of operations.
Patents and Proprietary Information; Effect of Expiration of Patents on
Competitive Pricing. Scantek, the licensor of the BreastAlert device, holds two
United States patents and one Canadian patent (the "Patents") covering the use
of the BreastAlert device as a device for adjunctive use in the early detection
of breast cancer. Although the Patents are licensed to the Company for the
United States and Canada pursuant to the License Agreement, both United States
patents expire on May 22, 1998 and the Canadian patent expires on August 24,
1999. It is possible that after the Patents expire, other companies, inside and
outside
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the United States, may adopt the concept and/or design embodied in the
BreastAlert device and seek to compete with the Company. In the event such
competition is encountered, the Company would have to rely on name recognition,
product acceptance, quality and the distribution network of PSS in order to
compete successfully, and there can be no assurance that the Company will be
able to so compete. Moreover, the Company could be put at a competitive
disadvantage by the payment of any royalties, which may have a material adverse
effect on its ability to market its product successfully. See "Business -
Patents: Proprietary Information."
Competition. The Company is not aware of any low-cost devices currently on
the market which compete with the BreastAlert device. Nevertheless, the
Company's potential competitors may succeed in developing products that are more
effective or less costly that the Company's products, and such competitors may
also prove to be more successful than the Company in manufacturing, marketing,
and sales. Some of the Company's potential competitors may be large,
well-financed and established companies that have greater resources for research
and development, manufacturing and marketing than the Company, and, therefore,
may be better able than the Company to compete for a share of the market even in
areas in which the Company may have superior technology. The Company's potential
competitors may include one or more of the approximate 3,000 other manufacturers
represented by PSS. Pursuant to the Distribution Agreement, PSS has agreed not
to distribute a product substantially identical to the BreastAlert device during
the term of the agreement unless PSS determines that the BreastAlert device is
not competitive with such other products on the basis of sales, pricing,
quantity, verifiable results or customer acceptance.
Technological Obsolescence. The market for products such as the BreastAlert
device is characterized by rapid changes and evolving industry standards often
resulting in product obsolescence or short product lifecycles. Accordingly, the
ability of the Company to compete will depend on its ability to introduce the
BreastAlert device to the marketplace in a timely manner, and to enhance and
improve it. There can be no assurance that the Company's competitors or future
competitors will not develop technologies or products that render the
BreastAlert device obsolete or less marketable or that the Company will be able
to successfully enhance its proposed products or technology or adapt them
satisfactorily.
Dependence on Qualified Personnel. The success of the Company is dependent
on the continued efforts of Donald B. Brounstein and Kenneth Hollander, the
Company's President and Chief Executive Officer and Chief Financial Officer,
respectively. The loss of Mr. Brounstein's, and/or Mr. Hollander's services
could have a material adverse effect on the Company's operations. The Company
has employment agreements with Messrs. Brounstein and Hollander, each of which
agreements prohibits any such employee from (i) competing with the Company for
one year following his termination of employment with the Company and (ii)
disclosing confidential information or trade secrets in any unauthorized manner.
Mr. Hollander's employment agreement is terminable at will by Mr. Hollander and
is not for a definite term. The Company has obtained $1,000,000 of key person
life insurance on Mr. Brounstein.
Uncertainties Regarding Third-Party Reimbursement and Health Care Reform.
Hospitals, medical clinics and physician's offices that purchase medical devices
like the BreastAlert device generally rely on third-party payors, such as
Medicare, Medicaid and private health insurance plans, to pay for some or all of
the costs of the screening and diagnostic procedures performed with these
devices. Whether a particular procedure qualifies for third-party reimbursement
depends upon such factors as the safety and effectiveness of the procedure, and
reimbursement may be denied if the medical device is experimental or was used
for a non-approved indication. In 1984, HCFA withdrew coverage for thermography
under Medicare and Medicaid as a diagnostic screening method. In 1992, HCFA
withdrew Medicare and Medicaid reimbursement for all other uses of thermography.
There can be no assurance that third-party reimbursement will be available for
the BreastAlert device or that the full or any part of the cost of the
BreastAlert device would be covered by such reimbursement. During the past
several years, the major third-party payors for hospital services have
substantially revised their payment methodologies to contain healthcare costs.
The Company believes that the current pressures for medical cost containment
have resulted in uncertainty in the healthcare industry. Reimbursement standards
and rates may change in the future. The failure of users of the BreastAlert
device to obtain adequate reimbursement from third-party payors could have a
material adverse effect on the Company. Several states and the United States
government are investigating a variety of alternatives to reform the health care
delivery system and further reduce and control health care spending. These
reform efforts include proposals to limit spending on health care items and
services, limit coverage for new technology and limit or control the price
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Risk of Product Liability Claims. The nature of the Company's products may
expose the Company to product liability risks. The Company currently maintains
product liability insurance coverage in the amount of $5,000,000. Such insurance
is becoming increasingly expensive and there can be no assurance that the
Company will be able to maintain such insurance on acceptable terms or that such
insurance, will provide adequate coverage against product liability claims.
While no product liability claims have been brought against the Company to date,
a successful product liability claim against the Company in excess of its
insurance coverage could have a material adverse effect on the Company.
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Dependence on Third-Party Suppliers. The Company believes that there are
several sources from which it may purchase the components of the BreastAlert
device. The Company anticipates that it will obtain certain components of the
BreastAlert device from a single or limited number of sources of supply.
Although the Company believes it will be able to negotiate satisfactory supply
agreements, failure to do so may have a material adverse effect on the Company.
Furthermore, there can be no assurance that suppliers will dedicate sufficient
production capacity to satisfy the Company's requirements within scheduled
delivery times or at all. Failure or delay by the Company's suppliers in
fulfilling its anticipated needs may adversely affect the Company's ability to
market the BreastAlert device.
Potential Volatility of Stock Price. The market prices for securities of
companies engaged primarily in medical technology have at times in the past been
volatile. The announcement of technological innovations or new commercial
products by the Company or its competitors, governmental regulations, regulatory
approvals or developments relating to patents or proprietary rights, publicity
regarding actual or potential clinical results with respect to products under
development by the Company or others, as well as period-to-period fluctuations
in financial results and general economic, political and market conditions, may
have a significant impact on the market price of the Common Stock.
Anti-Takeover Provisions. The Company's Board of Directors has the
authority to issue up to 1,825,000 shares of undesignated preferred stock and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the stockholders. The rights of holders of Common
Stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future. There are
presently no shares of undesignated preferred stock outstanding. Although the
Company has no present intention to issue shares of undesignated preferred
stock, any issuance of undesignated preferred stock, while potentially providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. Additionally, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Section 203 could have the effect of delaying or preventing
a change of control of the Company.
Item 2. PROPERTIES.
The Company's principal executive offices are located at 125 Moen Avenue,
Cranford, New Jersey 07016, where the Company subleases a total of 30,000 square
feet under a six-year lease that commenced in October 1996. Rental under the
lease is $124,015 for the first two years of the lease, $145,900 for the third
year of the lease, and $160,490 for each of the fourth through sixth years of
the lease. The Company has the option to renew the lease for one additional
five-year period. The leased space also houses the production equipment for the
BreastAlert device and provides the Company with warehouse space.
Item 3. LEGAL PROCEEDINGS.
On January 9, 1998, the Company received a letter from Scantek alleging
that HumaScan was in default of certain payments aggregating between $175,000
and $375,000 due to Scantek under the License Agreement. The Company paid
Scantek $100,000 towards the payments Scantek claims are due without prejudice
to the Company's claims that such amounts are not due and owing. Scantek agreed
to extend the period for the Company to make the payments until April 17, 1998
and the parties are currently pursuing a resolution through non-binding
mediation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the completion of the Company's initial public offering on August
19, 1996, there was no established public trading market for the Company's
Common Stock. The Company's Common Stock commenced quotation on the Nasdaq
SmallCap Market on August 14, 1996. The following table sets forth, for the
periods indicated, the high and low sale prices for the Common Stock as reported
by the Nasdaq SmallCap Market:
High Low
---- ---
Year Ended December 31, 1996:
Third Quarter (beginning 8/14/96) 6-1/2 6
Fourth Quarter 6-3/8 5-5/8
Year Ended December 31, 1997
First Quarter 16-3/4 5-5/8
Second Quarter 11-3/4 6-1/2
Third Quarter 12-1/2 5-1/2
Fourth Quarter 12 8-3/8
On March 23, 1998, the last sale price of the Common Stock as reported by
the Nasdaq SmallCap Market was 8-5/8.
Holders
On March 23, 1998, there were 139 holders of record of the Company's Common
Stock. The Company believes that there are in excess of 1,500 beneficial owners
of the Company's Common Stock.
Dividends
The Company has paid no dividends on its Common Stock since its inception
and does not plan to pay dividends on its Common Stock in the foreseeable
future. The payment of dividends in the future will depend on the evaluation by
the Company's Board of Directors of such factors as it deems relevant at the
time and restrictions imposed by the terms of the Company's debt obligations, if
any. As of the date of this report, the Company has no debt obligations that
impose restrictions on the payment of dividends. Currently, the Board of
Directors believes that all of the Company's earnings, if any, should be
retained for the development of the Company's business.
Recent Sales of Unregistered Securities
Since September 30, 1997, the Company has granted options to certain
officers, employees and consultants to purchase an aggregate of 15,500 shares of
Common Stock. Options for 13,000 of such shares were granted on November 17,
1997, all of which have an exercise price of $9.1875. These options have a
ten-year term and vest at the rate of 20 percent per year over five years.
Options for 2,500 of such shares were granted on February 3, 1998, all of which
have an exercise price of $7.75. These options have a ten-year term and vest at
the rate of 20 percent per year over five years. The issuances of all of these
options are claimed to be exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933 as transactions by an issuer not involving a public
offering.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATION.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the audited financial statements of the Company and notes
thereto.
Results of Operations
The Company's revenues, and hence profitability, if any, may vary
significantly from fiscal quarter to fiscal quarter as well as in comparison to
the corresponding quarter of the previous year as a result, among other factors,
of the timing of any significant shipments and the inventory requirements of
PSS.
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The Company expects to incur substantial additional costs, including
additional marketing expenses, clinical development expenses, manufacturing cost
expenditures and administrative expenditures as it continues to launch the
BreastAlert device. The Company does not expect, however, to incur substantial
additional costs for raw materials.
Year Ended December 31, 1997 and 1996
The Company's net loss for the year ended December 31, 1997 was $4,150,325,
or $0.54 per share, compared to $1,632,102, or $0.35 per share, for the period
ended December 31, 1996. The increased loss for the year was the result of
expenditures incurred in connection with the U.S. launch of the BreastAlert
device on December 29, 1997.
The Company had revenues of $582,496 in 1997 compared to $256,883 in 1996,
an increase of 44%. Revenues in 1997 consisted primarily of interest income and
included the first shipments of the BreastAlert device. Operating expenses were
$4,732,821 for the year ended December 31, 1997 as compared to $1,888,985 for
the year ended December 31, 1996 primarily related to planned increases in
staffing, overhead levels, continued development costs for manufacturing, and
expanded marketing for the launch of the BreastAlert device.
Year Ended December 31, 1996 and Period From Inception (December 27, 1994)
through December 31, 1995
The Company's net loss for the year ended December 31, 1996 was $1,632,102,
or $.0.35 per share, compared to $211,251, or $0.05 per share, for the period
from December 27, 1994 (date of inception) to December 31, 1995. Such losses are
attributable to the fact that the Company had not derived any revenues from
operations to offset the development stage expenses.
Interest income for the year ended December 31, 1996 was $256,883 compared
to $899 for the period from December 27, 1994 (date of inception) to December
31, 1995, an increase of $255,984. This increase was due to higher balances of
cash and cash equivalents and investments as a result of the August 1996 initial
public offering. Operating expenses were $1,888,985 for the year ended December
31, 1996 as compared to $212,251 for the period from December 27, 1994 (date of
inception) to December 31, 1995, primarily due to the increased salary expenses
related to the hiring of management and other personnel, interest expenses
related to a bridge financing done by the Company and preparations to commence
the manufacture and sale of the BreastAlert device.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily by the
issuance of equity securities, interest earned on cash, cash equivalents and
short-term investments, and equipment leasing arrangements.
The Company's combined cash and cash equivalents totaled $1,443,839 at
December 31, 1997, a decrease of $4,969,223 from December 31, 1996. This
decrease resulted from the net cash used in operating activities of $4,091,588
and net cash used in investing activities of $1,027,669 offset by an increase in
financing activities of $150,034. Total liquid resources, including investments,
as of December 31, 1997 were $7,887,398 compared to $12,509,511 at December 31,
1996.
In November 1995, the Company sold an aggregate of $350,000 principal
amount of secured convertible promissory notes (the "November Bridge Notes") to
certain accredited investors. The November Bridge Notes bore interest at the
rate of 10% per annum, matured on May 15, 1996, and were secured by all of the
assets of the Company. Certain of the November Bridge Notes were also secured by
the shares of the Company's common stock owned by Donald Brounstein, the
Company's President. In connection with the May Private Placement, the November
Bridge Notes were converted into shares of Series A Preferred Stock and warrants
("Private Warrants") at the rate of one share of Series A Preferred Stock and
one fifth of a Private Warrant for each $1.33 principal amount of November
Bridge Notes, resulting in the issuance of 262,500 shares of Series A Preferred
Stock and 52,500 Private Warrants. The November Bridge Investors also received
payment from the Company of an aggregate of $16,488 in accrued interest on such
notes.
In March 1996, the Company sold an aggregate of $460,000 principal amount
of secured promissory notes (the "March Bridge Notes") and warrants to purchase
224,250 shares of the Company's common stock (the "March Bridge Warrants") to 15
accredited investors (the "March Bridge Investors") for an aggregate
consideration of $460,000. The proceeds received from the March Bridge Investors
were allocated between the March Bridge Notes and March Bridge Warrants. The
$343,485 difference between the principal amount of the March Bridge Notes and
the amount allocated was accreted and charged to operations over the term of the
March Bridge Notes. The March Bridge Notes bore interest at the rate of 10% per
annum and matured on May 15, 1996, were secured by all of the assets of the
Company and were senior in right of payment and security to the November Bridge
Notes. In connection with the May Private Placement, $434,800 in principal
amount of March Bridge Notes (plus an additional $25,200 in principal amount,
representing subscription funds in excess of the initial subscription amounts
due from four March Bridge Investors, which was refunded to such four March
Bridge Investors) was canceled and
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applied to the initial purchase price of an aggregate of 11.75 Units in the
May Private Placement. The March Bridge Investors also received payment from the
Company of an aggregate of $8,171 in accrued interest on such notes.
The Company sold 71.5 Units in the May Private Placement, each Unit consisting
of 37,500 shares of Series A Preferred Stock and 7,500 Private Warrants, for an
aggregate initial payment of $2,645,500 representing 37% of the total purchase
price for the Units which includes $434,800 aggregate principal amount of March
Bridge Notes surrendered in payment of the initial purchase price for 11.75
Units (including $40,000 in aggregate principal amount of March Bridge Notes
exchanged by Mr. Brounstein in partial consideration for two Units purchased by
him) and the cancellation of $34,000 in principal amount of certain loans made
by Mr. Brounstein to the Company in 1995 (the "1995 Loans") in payment of the
balance of the purchase price for the Units purchased by him, but not including
$350,000 aggregate principal amount of November Bridge Notes converted into one
share of Series A Preferred Stock and one fifth of a Private Warrant for each
$1.33 principal amount of November Bridge Warrants so converted. The Company
issued one quarter of one Unit to Haythe & Curley, the law firm that represented
Burnham Securities Inc., the placement agent for the May Private Placement, and
one tenth of one Unit to James J. Whidden, the Company's former Senior Vice
President of Clinical Development (who was a consultant to the Company at the
time of such issuance), in exchange for services rendered. The balance of the
purchase price was automatically reduced by 63%, an amount equal to the
installments not yet due and payable as of August 9, 1996, the date the
registration statement relating to the Company's initial public offering was
declared effective under the Securities Act. The Series A Preferred Stock
automatically converted into Common Stock on a share-for-share basis and the
shares of Common Stock issued upon conversion of the Series A Preferred Stock
was deemed fully paid and nonassessable.
On August 19, 1996, the Company sold 2,700,000 shares of its common stock
in an initial public offering at a price of $6.00 per share, resulting in net
proceeds to the Company of approximately $14.0 million after deducting
underwriting discounts and commissions and offering expenses.
The net proceeds from the loans, private placements and the initial public
offering were used for product license fees, capital expenditures, marketing
expenses and general working capital purposes, including the repayment to Mr.
Brounstein of $91,000 in principal amount of the 1995 Loans (plus accrued
interest relating to his March Bridge Notes of $711).
In October 1995, the Company and Scantek entered into the License
Agreement, pursuant to which Scantek granted the Company the exclusive license
to manufacture and market the BreastAlert device in the United States and Canada
for a cash payment of $1,600,000, $550,000 of which has already been funded.
$175,000 of the balance is payable on December 31, 1997, $175,000 on March 31,
1998, $350,000 on October 31, 1998 and $350,000 on January 31, 1999. Surplus
Cash Flow, as defined in the License Agreement, is to be applied as prepayments
to unpaid installments of the Cash Portion of the Licensing Fee in inverse order
of maturity. The Company has not remitted the payment due December 31, 1997, and
intends not to remit the payment due March 31, 1998, as a result of a dispute
with Scantek. See "Legal Proceedings."
In November 1995, the Company arranged for the construction of the
Production Line at a fixed price of $1,750,680 pursuant an agreement with Zigmed
Inc ("Zigmed"). $1,330,230 of such amount has been paid to Zigmed as of the date
of this report. In October 1997 the Company assumed responsibility for
completion of the Production Line and since then no payments have been remitted
to Zigmed.
The Company intends to construct additional production equipment to bring
capacity to 5,600,000 units annually based upon two shifts per day. The Company
expects that these improvements will cost approximately $1,000,000 and expects
to fund this expense from its current liquid assets and operations.
The Company has incurred negative cash flows from operations since
inception. The Company has expended, and will continue to expend, substantial
funds for manufacturing, marketing and clinical development programs. The
Company expects that its existing capital resources will be adequate to fund its
capital requirements for the foreseeable future. However, no assurance can be
given that there will be no change in the Company's business, financial
condition or results of operations that would consume available resources
significantly before such time. The Company's future liquidity and capital
funding requirements will depend on numerous factors, including results of
clinical trials, the extent to which the BreastAlert device gains market
acceptance, the costs and timing of expansion of sales, marketing and
manufacturing activities and competition. There can be no assurance that
additional capital, if needed, will be available on terms acceptable to the
Company, or at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, will likely include
restrictive covenants and provide for security interest in the Company's assets.
The failure of the Company to raise capital on acceptable terms when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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Forward-looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speaks only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include, among others, the factors set forth
under the caption "Risk Factors" in this report. The Company has no obligation
to release publicly the results of any revisions that may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
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Item 7. FINANCIAL STATEMENTS.
HUMASCAN INC.
(A Development Stage Enterprise)
Index to Financial Statements
Independent Auditors' Report 16
Financial Statements:
Balance Sheets - December 31, 1997 and 1996 17
Statements of Operations - For the period from December 27, 1994
(date of inception) to December 31, 1997, and the years ended
December 31, 1997 and 1996 and the period from December 27,
1994 (date of inception) to December 31, 1995 18
Statements of Stockholders' Equity (Deficit) - For the period from
December 27, 1994 (date of inception) to December 31, 1997 19
Statements of Cash Flows - For the period from December 27, 1994
(date of inception) to December 31, 1997, and the years ended
December 31, 1997 and 1996 and the period from December 27,
1994 (date of inception) to December 31, 1995 20
Notes to Financial Statements 22
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
HumaScan Inc.:
We have audited the accompanying balance sheets of HumaScan Inc. (a development
stage enterprise) as of December 31, 1997 and 1996, and the related statements
of operations, stockholders' equity (deficit), and cash flows for the period
from December 27, 1994 (date of inception) to December 31, 1997, and the years
ended December 31, 1997 and 1996 and the period from December 27, 1994 (date of
inception) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HumaScan Inc. (a development
stage enterprise) as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the period from December 27, 1994 (date of
inception) to December 31, 1997, and the years ended December 31, 1997 and 1996
and the period from December 27, 1994 (date of inception) to December 31, 1995
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 23, 1998
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HUMASCAN INC.
(A Development Stage Enterprise)
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,443,839 $ 6,413,062
Investments 6,443,559 6,096,449
Accounts receivable 8,396 0
Inventory 337,754 0
Prepaid expenses 63,829 115,557
------------ ------------
Total current assets 8,297,377 12,625,068
Property, plant and equipment, net 2,282,873 480,756
Other assets 132,780 1,363,206
============ ============
Total assets $ 10,713,030 $ 14,469,030
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable 355,245 215,603
Accrued expenses 1,305,553 1,200,904
Obligations under capital lease 9,563 8,283
------------ ------------
Total current liabilities 1,670,361 1,424,790
------------ ------------
Obligations under capital lease, noncurrent portion 26,094 35,657
Stockholders' equity:
Common Stock, $0.01 par value, 25,000,000 shares authorized;
in 1997, 7,738,313 shares issued and outstanding;
in 1996, 7,720,313 shares issued and outstanding 77,384 77,204
Additional paid-in capital 14,932,869 14,774,732
Deficit accumulated during the development stage (5,993,678) (1,843,353)
------------ ------------
Total stockholders' equity 9,016,575 13,008,583
============ ============
Total liabilities and stockholders' equity $ 10,713,030 $ 14,469,030
============ ============
</TABLE>
See accompanying notes to financial statements
17
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Statements of Operations
For the period from December 27, 1994 (date of inception) to December 31, 1995
and the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
For the Period For the Period
from December 27, 1994 from December 27, 1994
(date of inception) For the year ended For the year ended (date of inception)
to December 31, 1997 December 31, 1997 December 31, 1996 to December 31, 1995
---------------------- ------------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 7,580 $ 7,580 $ -- $ --
Interest income 832,699 574,916 256,883 899
----------- ----------- ----------- -----------
840,279 582,496 256,883 899
Operating expenses:
Facility costs 1,270,919 1,169,144 101,775 --
Marketing expenses 1,548,881 1,223,616 325,265 --
General and administrative expenses 2,646,956 1,555,516 889,510 205,109
Clinical development expenses 983,616 778,629 204,987 --
Interest expense 383,585 5,916 367,448 7,041
----------- ----------- ----------- -----------
6,833,957 4,732,821 1,888,985 212,150
=========== =========== =========== ===========
Net loss ($5,993,678) ($4,150,325) ($1,632,102) $( 211,251)
=========== =========== =========== ===========
Net loss per share ($ 1.09) ($ 0.54) ($ 0.35) ($ 0.05)
=========== =========== =========== ===========
Shares used in computing
net loss per share 5,496,430 7,721,813 4,654,640 4,112,835
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
18
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Statements of Stockholders' Equity (Deficit)
For the period from December 27, 1994 (date of inception) to December 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Preferred Stock Additional during Stockholders'
--------------- ------------------ Paid-in Development Subscription Equity
Shares Amount Shares Amount Capital Stage Receivable (Deficit)
------ ------ ------ ------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares of
common stock upon
incorporation 825,000 $ 8,250 -- $ -- $ 53,750 $ -- $ -- $ 62,000
Issuance of shares of
common stock pursuant
to subscription agreements 247,500 2,475 -- -- 151,125 -- -- 153,600
Issuance of shares of
common stock in connection
with license agreement 675,000 6,750 -- -- (1,606,750) -- -- (1,600,000)
Net loss -- -- -- -- -- (211,251) -- (211,251)
--------- ------- ---------- ---------- ----------- ----------- ---------- ----------
Balance, December 31, 1995 1,747,500 17,475 -- -- (1,401,875) (211,251) 0 (1,595,651)
Issuance of common stock
warrants in connection
with bridge financing -- -- -- -- 343,485 -- -- 343,485
Issuance of shares of common
stock in connection with
license agreement 329,063 3,291 -- -- (3,291) -- -- 0
Issuance of shares of
preferred stock
in connection with
private placement -- -- 2,943,750 6,421,133 -- -- (4,504,500) 1,916,633
Sale of shares in public
offering, net 2,700,000 27,000 -- -- 13,974,418 -- -- 14,001,418
Conversion of preferred to
common shares, net 2,943,750 29,438 (2,943,750) (6,421,133) 1,861,995 -- 4,504,500 (25,200)
Net loss -- -- -- -- -- (1,632,102) -- (1,632,102)
--------- ------- ---------- ----------- ----------- ----------- ---------- -----------
Balance, December 31, 1996 7,720,313 $77,204 0 $ 0 $14,774,732 ($1,843,353) $ 0 $13,008,583
Issuance of common stock in
connection with the exercise
of employee options 18,000 180 -- -- 107,820 -- -- 108,000
Issuance of stock options to
non-employees -- -- -- -- 50,317 -- -- 50,317
Net loss -- -- -- -- -- (4,150,325) -- (4,150,325)
========= ======= ========== ========== =========== =========== ========== ===========
Balance, December 31, 1997 7,738,313 $77,384 0 $ 0 $14,932,869 $(5,993,678) $ 0 $ 9,016,575
========= ======= ========== ========== =========== =========== ========== ===========
</TABLE>
19
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Statements of Cash Flows
For the period from December 27, 1994 (date of inception) to December 31, 1995
and the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Period from Period from
December 27, 1994 December 27, 1994
(date of inception) For the year ended For the year ended (date of inception)
to December 31, 1997 December 31, 1997 December 31, 1996 to December 31, 1995
-------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(5,993,678) $(4,150,325) $(1,632,102) $( 211,251)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Noncash miscellaneous expenses 17,000 -- (23,350) 40,350
Issuance of stock options
to non-employees 50,317 50,317 -- --
Noncash interest expense 343,485 -- 336,444 7,041
Depreciation expense 167,101 142,354 24,747 --
Changes in operating
assets and liabilities:
Increase in inventory (337,754) (337,754) -- --
Increase in other assets (132,780) (33,486) (99,294) --
Increase (decrease)
in prepaid expenses (63,829) 51,728 (110,557) (5,000)
Increase in accounts receivable (8,396) (8,396) -- --
Increase in accounts payable 355,245 139,642 215,603 --
Increase in accrued expenses 245,553 104,649 137,724 3,180
----------- ----------- ----------- -----------
Net cash used in
operating activities (5,357,736) (4,041,271) (1,150,785) (165,680)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Decrease (increase)
in other assets -- -- 40,000 (40,000)
Purchase of property,
plant and equipment (2,399,985) (680,559) (451,114) (4,400)
Payments for production line -- -- (1,158,912) (105,000)
Payments in connection
with license agreement (550,000) -- (400,000) (150,000)
Purchase of investments (6,443,559) (347,110) (6,096,449) --
----------- ----------- ----------- -----------
Net cash used in investing
activities $(9,393,544) $(1,027,669) $(8,066,475) $ (299,400)
----------- ----------- ----------- -----------
</TABLE>
20
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Statements of Cash Flows, continued
<TABLE>
<CAPTION>
Period from Period from
December 27, 1994 December 27, 1994
(date of inception) For the year ended For the year ended (date of inception)
to December 31, 1997 December 31, 1997 December 31, 1996 to December 31, 1995
-------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Cash flows from financing
activities:
Proceeds from issuance of
common stock $ 208,600 $ -- $ -- $ 208,600
Proceeds from issuance of
common stock in connection
with exercise of employee
options 108,000 108,000 -- --
Proceeds from officer
loan 125,000 -- -- 125,000
Payments on officer loan (91,000) -- (91,000) --
Proceeds from borrowings of
notes payable 810,000 -- 460,000 350,000
Principal payments on
obligation under
capital lease (14,332) (8,283) (6,049) --
Proceeds from Initial
Public Offering, net 14,001,418 -- 14,001,418 --
Proceeds from Private
Placement, net 1,047,433 -- 1,047,433 --
------------ ------------ ------------ ------------
Net cash provided by
financing activities 16,195,119 99,717 15,411,802 683,600
------------ ------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 1,443,839 (4,969,223) 6,194,542 218,520
Cash and cash equivalents,
beginning of period -- 6,413,062 218,520 --
============ ============ ============ ============
Cash and cash equivalents
end of period $ 1,443,839 $ 1,443,839 $ 6,413,062 $ 218,520
============ ============ ============ ============
Supplemental disclosure of
noncash transactions:
Amounts due in connection
with license agreement $ 1,050,000 $ 1,050,000 $ 1,450,000
============ ============ ============
Value of common stock
issued in connection with
license agreement $ 12,300 $ 3,291 $ 9,000
============ ============ ============
Value of equipment acquired
under capital lease $ 49,989 $ 49,989 --
============ ============ ============
Conversion of notes payable
to preferred stock $ 810,000 $ 810,000 --
============ ============ ============
Conversion of officer loan
to preferred stock $ 34,000 $ 34,000 --
============ ============ ============
</TABLE>
See accompanying notes to financial statements
21
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements
(1) Organization and Significant Accounting Policies
Organization:
HumaScan Inc. (the Company), a development stage company, owns under
license the exclusive rights in the United States and Canada to manufacture
and market a device called the BreastAlertTM Differential Temperature
Sensor (the BreastAlert device). On December 29, 1997, HumaScan commenced
shipments of the BreastAlert device. The BreastAlert device is a
non-invasive, easy to use, low cost, adjunctive test to be used by primary
care physicians, gynecologists and other medical specialists as part of a
breast disease monitoring program along with breast self-examination,
palpation and (depending on a patient's age, family history and other
factors) mammography and other established clinical procedures, including
ultrasound and/or biopsy.
Basis of Presentation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
Income Taxes:
Certain expense items are included in one reporting period for financial
reporting purposes and another for income tax purposes. Deferred income
taxes are provided in recognition of these temporary differences which
relate primarily to organization costs.
Organization Costs:
All organization costs are expensed as incurred.
Cash and Cash Equivalents and Investments:
The Company considers all highly liquid investments with maturities of
three months or less, at the time of purchase, to be cash equivalents.
Investments consist of commercial paper with original maturities between
three and twelve months.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
using the standard costing method for all inventories.
Property, Plant and Equipment:
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
respective assets ranging from five to seven years.
The cost of repairs and maintenance is charged to operations as incurred;
significant renewals and betterments are capitalized.
Other Assets:
Payments for equipment made to a vendor in accordance with contract terms
are included in other assets as of December 31, 1996 as the machine was not
yet received. In 1997, the cost was transferred to property, plant and
equipment upon the machine being placed into service.
Facility Costs:
Costs incurred to start up new facilities are included in facility costs in
the accompanying statements of operations and expensed as incurred.
22
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements (Continued)
(1) Organization and Significant Accounting Policies (Continued)
Reverse Stock Split:
The Company effected a four-to-three reverse stock split of its common
stock on July 23, 1996. All common share and per share amounts in the
accompanying financial statements have been retroactively adjusted to
reflect this reverse stock split.
Concentration of Credit Risks:
The Company invests its excess cash in deposits with major U.S. financial
institutions and money market funds.
Stock Option Plan:
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosure in accordance with the provisions of SFAS No. 123 (see
note 7).
Net Loss Per Share:
SFAS No. 128, Earnings per Share, which became effective in 1997, requires
presentation of two calculations of earnings per common share. "Basic"
earnings per common share equals net income divided by weighted average
common shares outstanding during the period. "Diluted" earnings per common
share equals net income divided by the sum of weighted average common
shares outstanding during the period plus common stock equivalents. Common
stock equivalents are shares assumed to be issued if outstanding stock
options were exercised. All prior period amounts have been restated to
reflect these calculations. Net loss per share is presented using only the
basic calculation as the effect of stock options is anti-dilutive under the
dilutive approach. Net loss per share gives effect to certain adjustments
described below.
Pursuant to Securities and Exchange Commission (SEC) Staff Accounting
bulletins and SEC Staff policy, common equivalent shares issued during the
twelve-month period prior to the initial public offering at prices below
the initial public offering price are presumed to have been issued in
contemplation of the initial public offering and have been included in the
calculation as if they were outstanding for all periods presented (using
the treasury stock method and the initial public offering price of $6.00
per share).
Pursuant to the policy of the SEC Staff, the calculation of shares used in
computing net loss per share in 1996, the fiscal year the initial public
offering became effective, also includes calculation of stock options and
warrants as if they were outstanding throughout the interim period (March
1996) contained in the prospectus.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of:
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of, on January 1, 1996. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
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 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. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this
statement did not have any impact on the Company's financial position,
results of operations, or liquidity.
23
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements (Continued)
(2) Inventory
1997 1996
---- ----
Inventory consists of the
following:
Raw Materials $ 316,745 --
Work-in-process 9,689 --
Finished Goods 11,320 --
--------- ---------
$ 337,754 --
========= =========
(3) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31,
1997 and 1996:
1997 1996
---- ----
Production equipment $ 1,781,657 $ 72,053
Office equipment 246,476 109,764
Furniture and fixtures 121,368 63,952
Leasehold improvements 300,473 259,734
---------- --------
2,449,974 505,503
Less - accumulated depreciation (167,101) (24,747)
---------- --------
Property, plant and equipment, net $2,282,873 $480,756
========== ========
(4) License Agreement
In October 1995, the Company entered into an exclusive license agreement
with Scantek Medical, Inc. (Scantek) which grants the Company the right to
manufacture and sell the BreastAlert device in the United States and
Canada. The device is protected by United States patents that expire on May
22, 1998. The license agreement, as amended, in addition to providing for
the issuance of 675,000 shares of common stock, provides for a cash payment
to Scantek of $1,600,000, of which $550,000 has already been paid at
December 31, 1997 and 1996. Thereafter, $175,000 was payable on December
31, 1997, $175,000 on March 31, 1998, $350,000 on October 31, 1998 and
$350,000 on January 31, 1999. The Company has not remitted the payment due
December 31, 1997, and intends not to remit the payment due March 31, 1998,
as a result of a dispute with Scantek (see note 9). Surplus cash flow (one
half of net income, as defined in the license agreement, subject to certain
adjustments) after the Company begins operations is to be applied to unpaid
installments of the cash portion of the licensing fee in inverse order of
maturity. Scantek is entitled to advance payments as follows: (i) $100,000
(applied to unpaid installments of the cash portion of the licensing fee in
direct order of maturity) upon the later of (a) the investment at any time
by a distributor of $500,000 in the Company by exercising its warrant for
125,000 shares of the Company's common stock (see note 7) and (b) the
shipment by the Company of the first order of the BreastAlert device to the
distributor; (ii) $300,000 (of which $100,000 is to be applied to unpaid
installments of the cash portion of the licensing fee in direct order of
maturity and the other $200,000 to be applied in inverse order of maturity)
upon the earlier to occur of (a) the extension of the relevant patents at
least through January 1, 2003 or (b) Scantek's obtaining a new United
States patent on the product; and (iii) if the circumstances described in
the preceding clause (ii) have not occurred and if Scantek had filed an
application for a new United States patent on the product at least one week
prior to the first road show for the initial public offering of the
Company's securities, Scantek would have been entitled to an advance
payment of $100,000 from the proceeds of the closing of the public offering
(which would have been deemed a partial advance of the $300,000 payable
pursuant to such clause (ii) and which would have been applied to the
unpaid installments of the cash portion of the licensing fee in direct
order of maturity). The license agreement also provides for minimum annual
royalty payments ranging from $150,000 in the first year in which the
product is sold to $600,000 in the fifth and subsequent years (the Minimum
Royalties) and maximum royalty payments ranging from 3% of annual net
product sales of up to $2,000,000 to 10% of the annual net product sales if
annual net product sales exceed $10,000,000 (the Percentage Royalties). In
addition, the license agreement will automatically terminate if the
aggregate earned royalties for the first three years the product is sold do
not exceed $950,000 (the Threshold Earned Royalties). In the event the
Company fails to pay the Minimum Royalties for any calendar quarter Scantek
will have the right, subject to the Company's right to cure such default
24
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements (Continued)
(4) License Agreement (Continued)
within 30 days of receipt of notice of such default from Scantek, (i) to
convert the License to a nonexclusive license or (ii) terminate the License
Agreement by purchasing the machinery used to manufacture and assemble the
BreastAlert device from the Company for the greater of 50% of the
unamortized cost therof or $100,000. The Minimum Royalties and Threshold
Earned Royalties automatically terminate after February 26, 1997 (the date
the relevant patents expire) if a competitor introduces a product which
would have infringed upon such patents. In addition, the Percentage
Royalties are reduced if the Company reduces the price of its product below
certain preset amounts. In connection with the closing of a private
placement, the Company issued 329,063 additional shares of common stock to
Scantek in exchange for the termination of its right, pursuant to the
license agreement, to maintain a 15% beneficial ownership interest in the
Company upon the completion of the initial public offering, as defined in
the license agreement, by December 31, 1996.
The Company has recorded the entire consideration for the license given to
Scantek in accordance with published SEC rules and regulations regarding
transfers of non-monetary assets by promoters and stockholders, against
additional paid-in capital in the accompanying financial statements. The
reduction in paid-in capital reflects the equivalent of a return of capital
to be paid in accordance with the terms of the license out of the proceeds
of the initial public offering.
(5) Due to Officer
In 1995, the chief executive officer of the Company agreed to loan the
Company up to $200,000 prior to the initial closing of a private placement
(see note 7), at which time he agreed to purchase two of the units offered;
any outstanding amount due from the Company pursuant to the loans was
applied to such purchase and the amount in excess of the first installment
(which aggregated $74,000) of the purchase price for the units (which
aggregated $200,000) was repaid to him.
(6) Leases
The Company leases its facility under a six-year operating lease expiring
on September 30, 2002. Future minimum lease payments under this lease
agreement as of December 31, 1997 are as follows:
For the Year Ending
December 31, Amount
------------------- ------
1998 $129,489
1999 149,544
2000 160,488
2001 160,488
2002 120,366
The lease includes a renewal option for up to a five-year period. Rent
expense charged to operations was $144,180, $24,030 and $0 in 1997, 1996
and 1995, respectively.
The Company has an obligation under a capital lease with total payments
through February 25, 2001 which aggregate $35,700.
(7) Stockholders' Equity
At its inception, the Company issued 750,000 shares of its common stock at
$.067 per share to its chief executive officer and 75,000 shares at $.16
per share to certain other investors. The Company also issued 22,500 and
225,000 shares of its common stock at $.16 and $.67 per share,
respectively, in March 1995 pursuant to various subscription agreements. On
March 22, 1995, the Company authorized the issue of 5,000,000 shares of
common stock, par value $.01 per share, and amended its certificate of
incorporation to increase the authorized number of shares of common stock.
On July 23, 1996, the authorized common stock was increased to 25,000,000
shares. In March 1995, the Company issued 675,000 shares of its common
stock, valued at $.067 per share, in conjunction with a license agreement
with Scantek (see note 4). Scantek received an additional 329,063 shares of
common stock on May 15, 1996.
25
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements (Continued)
(7) Stockholders' Equity (Continued)
On November 30, 1995, the Company sold an aggregate of $350,000 principal
amount of secured convertible promissory notes (the November Bridge Notes)
to certain accredited investors. The November Bridge Notes bore interest at
the rate of 10% per annum, matured on May 15, 1996, and were secured by all
of the assets of the Company. Certain of the November Bridge Notes were
also secured by the shares of the Company's common stock owned by the
Company's chief executive officer and one of its founders.
On March 19, 1996, the Company sold an aggregate of $460,000 principal
amount of secured promissory notes (the March Bridge Notes) and warrants
for 224,250 shares of the Company's common stock (the March Bridge
Warrants) to 15 accredited investors (the March Bridge Investors) for an
aggregate consideration of $460,000. The March Bridge Notes bore interest
at the rate of 10% per annum and matured on May 15, 1996, were secured by
all of the assets of the Company and were senior in right of payment and
security to the November Bridge Notes. The proceeds received from the March
Bridge Investors were allocated between the March Bridge Notes and the
March Bridge Warrants. The $343,485 difference between the principal amount
of the March Bridge Notes and the amount allocated was accreted and charged
to operations over the term of the March Bridge Notes. Each March Bridge
Investor was required to surrender its March Bridge Note to the Company on
May 15, 1996 in exchange for the application of the outstanding principal
amount of such March Bridge Note against the purchase price of the units
then purchased by such March Bridge Investor and for a cash payment from
the Company of the accrued interest due on such March Bridge Note.
In May 1996, the authorized capital stock of the Company was increased to
14,000,000 shares of common stock, 4,175,000 shares of Series A Convertible
Preferred Stock and 1,825,000 shares of undesignated preferred stock.
On May 15, 1996, the Company completed a private placement for 71.5 units
for committed gross proceeds of $7,150,000 before commissions and related
expenses of approximately $1,000,000. Each unit consisted of 37,500 shares
of the Company's Series A Convertible Preferred Stock and warrants to
purchase 7,500 shares of the Company's common stock for $2.93 per share.
The $7,150,000 included 37% of the purchase price for each unit, which was
paid at the time the unit was purchased. The balance of the purchase price
was automatically reduced by an amount equal to the installments not yet
due and payable on August 9, 1996, the date the registration statement
relating to the Company's initial public offering was declared effective
under the Securities Act of 1933. The Series A Preferred Stock
automatically converted into common stock on a share-for-share basis for a
total of 2,943,750 shares of common stock and the shares of common stock
issued upon conversion of the Series A Preferred Stock were deemed fully
paid and nonassessable. The November Bridge Notes were automatically
converted into .75 share of Series A Convertible Preferred Stock and one
fifth of a warrant to purchase a share of common stock at $2.93 for each
$1.00 principal amount of such note for a total of 262,500 shares of Series
A Convertible Preferred Stock and warrants to purchase 70,000 shares of
common stock.
In connection with the private placement, the Company also issued
additional private warrants to certain investors to purchase an aggregate
of 198,750 shares of common stock at a price of $2.93 per share. These
include 161,250 warrants which (i) may be exercised in full if the common
stock had been trading in the public market at a price per share of at
least $7.33 before a date which is six months after the initial public
offering closing, (ii) may be exercised for an aggregate of only 52,500
shares of common stock if the common stock has been trading publicly at a
price per share of at least $7.33 more than six months but less than nine
months from the initial closing, and (iii) may not be exercised at all if
the common stock does not trade in the public market at a price per share
of at least $7.33 within nine months after the initial closing. Pursuant to
the placement agreement, the Company also issued to the placement agent
warrants to purchase 400,000 shares of common stock at $2.93 per share.
On July 23, 1996, in connection with the aforementioned stock split, the
authorized common stock was increased to 25,000,000 shares.
On August 19, 1996, the Company sold 2,700,000 shares of its common stock
in a public offering at a price of $6.00 per share, resulting in net
proceeds to the Company of approximately $14.0 million after deducting
underwriting discounts and commissions and offering expenses.
Simultaneously, each share of Series A Convertible Preferred Stock was
converted into one share of common stock for a total of 2,943,750 shares of
common stock.
26
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements (Continued)
(8) Stock Options
In June 1996, the Company adopted the 1996 Stock Incentive Plan (the Plan)
pursuant to which the Company's Board of Directors may grant stock options
to officers, key employees, and consultants. The Plan authorizes grants of
options to purchase up to 700,000 shares of authorized but unissued common
stock. Stock options are granted with an exercise price equal to the
stock's fair market value at the date of grant. The Company's options have
ten-year terms and generally vest over a five-year period. The stock option
activity is as follows:
Shares Price
------ -----
Outstanding, December 31, 1995 0 -
Granted 188,000 5.75- 6.00
------- ----------
Outstanding, December 31, 1996 188,000 5.75- 6.00
Granted 105,700 6.00-13.13
Expired (2,250) 6.00- 9.19
Exercised (18,000) 6.00
------- ----------
Outstanding, December 31, 1997 273,450 5.75-13.13
======= ==========
The above options have a weighted average remaining contractual life of 9.3
years.
In addition to the options provided for in the aforementioned Plan, in
early 1996, 142,500 options were issued to certain officers, employees and
consultants at an exercise price of $5.33 per share, each with a five-year
term, and 7,500 options were granted to certain former directors on
September 25, 1996 to replace certain options which terminated upon
resignation of such directors in connection with the Company's initial
public offering. These 7,500 options have an exercise price of $6.00 per
share and a ten-year term. All of these options remain outstanding at
December 31, 1997 and have a weighted average remaining contractual life of
3.4 years.
The per share weighted-average fair value of stock options granted during
1997 was between $1.35 and $5.25 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions: no expected dividend yield, risk-free interest rate of 5.5%,
and an expected life of either 5 or 10 years.
The Company applies APB Opinion No. 25 in accounting for the Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
1997 1996
---- ----
Net loss As reported ($4,150,325) ($1,632,102)
Pro forma ($4,359,132) ($1,978,444)
Net loss per share As reported ($0.54) ($.35)
Pro forma ($0.56) ($.43)
(9) Commitments
The Company has arranged for the construction of an automated production
line for the assembly of the BreastAlert device pursuant to a $1,750,680
fixed-price turnkey construction contract (the Turnkey Construction
Contract). Payments in accordance with the terms of this agreement
aggregated $1,330,230 and $1,263,912 as of December 31, 1997 and 1996,
respectively. In October 1997, the Company assumed responsibility for
completion of the production line and since then no payments have been
remitted to Zigmed. The vendor's president is the son of the Chairman of
the Board of Scantek.
27
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements (Continued)
(9) Commitments (Continued)
On January 9, 1998, the Company received a letter from Scantek alleging
that HumaScan was in default of certain payments aggregating between
$175,000 and $375,000 due to Scantek under the License Agreement. The
Company paid Scantek $100,000 towards the payments Scantek claims are due
without prejudice to the Company's claims that such amounts are not due and
owing. Scantek agreed to extend the period for the Company to make the
payments until April 17, 1998 and the parties are currently pursuing a
resolution through non-binding mediation.
The Company signed, effective January 1, 1996, a three-year employment
agreement with its chief executive officer, with a rolling one-year
renewal. In addition, options to purchase 37,500 shares of common stock at
an exercise price of $5.33 per share have been issued to the Company's
Chief Executive Officer.
The Company entered into an exclusive distribution agreement (Distribution
Agreement) in February 1996. The Distribution Agreement covers exclusive
United States rights and provides for the parties to cooperate on plans and
preparations for the regional and national introduction of the BreastAlert
device prior to the first production, sales and deliveries to physicians.
The term of the Distribution Agreement continues until terminated by either
party for certain material breaches which are not cured within prescribed
time limits. A representative of the distributor is a member of the Board
of Directors of the Company. In connection with the Distribution Agreement,
the Company also has issued to the distributor warrants to purchase 166,667
shares of common stock at an exercise price of $5.33 per share (aggregating
$500,000), and the distributor is obligated to exercise such warrants
within 90 days after both (i) the first 50,000 saleable BreastAlert device
units have been provided to the distributor and (ii) an officer of the
Company certifies in good faith to the distributor that the Company has no
reason to believe it will be unable to supply sufficient product to the
distributor to achieve the Distribution Agreement's first operating year
objective. The Distribution Agreement restricts such $500,000 solely for
use by the Company for advertising and promotion of the BreastAlert device.
(10) Income Taxes
The Company has adopted SFAS No. 109 to account for income taxes. Pursuant
to the accounting standard, the tax effects of temporary differences that
give rise to significant portions of the Company's deferred tax assets as
of December 31, 1997 and 1996 are presented below:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $2,491,104 $ 569,280
Property and equipment (22,431) (2,101)
Other 108,666 77,994
---------- ---------
Total 2,577,339 645,173
Valuation allowance (2,577,339) (645,173)
---------- ---------
Net deferred tax asset $ 0 $ 0
========== =========
The valuation allowances for fiscal year 1997 and 1996 have been applied to
offset the deferred tax assets in recognition of the uncertainty that such
tax benefits will be realized. The valuation allowances as of December 31,
1997 and 1996 include $1,932,166 and $571,235 relating to fiscal years 1997
and 1996 operations, respectively.
At December 31, 1997, the Company has available net operating loss
carryforwards for Federal income tax reporting purposes of approximately
$7,117,000 which expire beginning in fiscal year 2011. The Company's
ability to use such net operating loss carryforwards may be subject to
certain limitations due to ownership changes as defined by rules enacted
with the Tax Reform Act of 1986. The Company made no payments of Federal or
state income taxes during fiscal years 1997 and 1996.
28
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements (Continued)
(11) Retirement Benefits
On January 1, 1997, the Company began sponsoring a Savings Incentive Match
Plan for Employees in which all employees may participate. The Company
matches each employee's contributions on a dollar-for-dollar basis up to 3%
of the employee's compensation. Total contributions in 1997 amounted to
$28,107.
29
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Part III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
As of March 23, 1998, the Company's directors and executive officers and
their ages and positions are as follows:
Name of Individual Age Position with Company
- ------------------ --- ---------------------
Donald B. Brounstein 46 President, Chief Executive Officer and Director
Kenneth S. Hollander 32 Chief Financial Officer
Jack L. Rivkin 57 Director
John F. Sasen, Sr. 55 Director
Elizabeth E. Tallett 49 Director
Udi Toledano 47 Director
Donald B. Brounstein has served as President and Chief Executive Officer of
the Company since its inception. In 1978, Mr. Brounstein founded Lee Surgical
Co., Inc. ("Lee Surgical"), a company which specialized in sales and service of
medical supplies and equipment to physicians throughout New Jersey and New York.
He was Chief Executive Officer of Lee Surgical until February 1994 when Lee
Surgical was acquired by PSS. Mr. Brounstein served as General Manager of PSS
until January 1995. In 1989, Mr. Brounstein serves as Chairman of the Board of
Directors of Hi-Tec Financial Inc., a medical equipment leasing company. Mr.
Brounstein devotes all of his business time to the Company's affairs.
Kenneth S. Hollander has been Chief Financial Officer of the Company since
June 1996. From 1989 to May 31, 1996, Mr. Hollander was Controller of Sidmak
Laboratories, Inc., a company engaged in the generic pharmaceutical industry.
From 1987 to 1989, Mr. Hollander was employed by the accounting firm of Arthur
Andersen & Co. Mr. Hollander serves as Treasurer of the Board of Trustees of The
Richmond Fellowship, a private, non-profit, psychiatric transitional residence.
Jack L. Rivkin has been a director of the Company since May 1996. Mr.
Rivkin has been a Senior Vice President of Travelers Group Inc., the parent
company of TIC, and Smith Barney Inc., since January 1, 1996. He is currently
responsible for the management of venture capital and public equity partnerships
for several insurance subsidiaries of Travelers Group Inc. He also is a director
and member of the Investment Committee of Greenwich Street Capital Partners,
Inc., a merchant banking fund affiliated with Travelers Group Inc. From May 1993
to October 1995, he was Vice Chairman and Director of Global Research at Smith
Barney Inc. From August 1992 to May 1993, he was an independent consultant. From
1990 to August 1992, Mr. Rivkin was Director of the Equities Division and
Director of Research of Lehman Brothers. From 1987 to 1990, he was Director of
Research at Shearson Lehman Brothers. From 1984 to 1987, Mr. Rivkin was
President of PaineWebber Capital, Inc., the merchant banking arm of PaineWebber
Group, and Chairman of Mitchell Hutchins Asset Management. He is the co-author
of a book on the venture capital industry, "Risk and Reward, Venture Capital and
the Making of America's Great Industries," published by Random House. He also is
a guest lecturer on venture capital at Columbia University.
John F. Sasen, Sr. has been a director of the Company since May 1996. Mr.
Sasen has been Chief Executive Officer of PSS since March 1997 and President of
PSS since August 1995, Chief Operating Officer of PSS since December 1993 and a
director of PSS since July 1993. Mr. Sasen also was Executive Vice President of
PSS from August 1993 to August 1995. From August 1990 to December 1992, he was
Vice President--Sales and Marketing of PSS, and from January 1993 to July 1993
he was Regional Vice President of PSS. Prior to joining PSS, Mr. Sasen was Vice
President--Sales, Marketing and Distributor Relations of Becton, Dickinson &
Co., a manufacturer of health care products. Mr. Sasen was employed by Becton,
Dickinson & Co. for over 20 years.
Elizabeth E. Tallett has been a director of the Company since March 1998.
Ms. Tallett is President and Chief Executive Officer of Dioscor Inc., a
biotechnology management company, and is currently also President and Chief
Executive Officer of Ellard Pharmaceuticals Inc., a pharmaceutical business
involved in the anti-ulcer field. Ms. Tallett was President and Chief Executive
Officer of Transcell Technologies Inc. from 1992 to 1996, President of Centocor
Pharmaceuticals, where she worked from 1987 to 1992, Director of Marketing
Operations and member of the Parke-Davis Executive Committee from 1984 to 1987,
and Director of Worldwide Strategic Planning for Warner-Lambert Company, where
she worked from 1973 to 1987.
30
<PAGE>
Ms. Tallett also serves on the Board of Directors of Principal Life
Insurance Company, Varian Associates Inc., Prosperity New Jersey Inc., a
not-for-profit corporation, and is a founding member of the Biotechnology
Council of New Jersey.
Udi Toledano has been a director of the Company since May 1996. Mr.
Toledano has been the President of Andromeda Enterprises, Inc., a private
investment company, since December 1993. Prior to that, he was the President of
CR Capital Inc., a private investment company, for more than five years. He has
also been an advisor to various public and private corporations, none of which
is affiliated with or competes with the Company. Mr. Toledano is a director and
Chairman of the Board of Alyn Corporation, a producer of advanced materials, and
is a director of Global Pharmaceutical Corporation, a generic pharmaceuticals
manufacturer; Universal Stainless & Alloy Products, Inc., a specialty steel
producer; each of which is a public company.
The directors serve until the next annual meeting of stockholders and until
their respective successors are elected and qualified. Officers serve at the
discretion of the Board of Directors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities ("ten-percent
stockholders") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and The Nasdaq Stock Market, Inc. Officers,
directors and ten-percent stockholders also are required to furnish the Company
with copies of all Section 16(a) forms they file. Based on its review of the
copies of such forms furnished to it, and written representations that no other
reports were required, the Company believes that during the Company's fiscal
year ended December 31, 1997, all of its officers, directors and ten-percent
stockholders complied with the Section 16(a) reporting requirements.
Item 10. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation
The following table shows compensation paid by the Company to certain of
its executive officers for the fiscal years ended December 31, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal
Position Year Salary ($) Bonus ($) Compensation ($) Options (#)
- ------------------ ---- ---------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Donald B. Brounstein, 1997 $152,574 $14,980 $12,726 (1) 0
President and Chief 1996 $145,000 $ 0 $ 7,380 (2) 37,500
Executive Officer
Kenneth S. Hollander, 1997 $94,414 $17,325 $11,139 (3) 0
Chief Financial Officer
</TABLE>
(1) Represents an automobile allowance of $7,950 and a retirement plan
contribution in the amount of $4,776.
(2) Represents an automobile allowance.
(3) Represents an automobile allowance of $7,950 and a retirement plan
contribution in the amount of $3,189.
AGGREGATE YEAR-END OPTION VALUES
(December 31, 1997)
<TABLE>
<CAPTION>
Number of unexercised options at fiscal Value of unexercisable in-the-money
year-end options at fiscal year-end
--------------------------------------- -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Donald B. Brounstein 37,000 0 $118,875 $ 0
Kenneth S. Hollander 27,250 29,000 $ 75,663 $72,500
</TABLE>
31
<PAGE>
Employment Agreements
The Company has an employment agreement with Donald B. Brounstein, dated
January 1, 1996 and expiring January 1, 1999, pursuant to which Mr. Brounstein
serves as the Company's President and Chief Executive Officer. Mr. Brounstein's
employment agreement provides for a base annual salary of $145,000 with annual
cost of living increases and a customary benefits package. The agreement has a
term of three years, with automatic one-year extensions thereafter unless either
party gives notice of termination. Mr. Brounstein's employment agreement
prohibits him from competing with the Company for one year following his
termination of employment with the Company and disclosing confidential
information or trade secrets in any unauthorized manner. The Company has
purchased a key person insurance policy on the life of Mr. Brounstein in the
amount of $1,000,000.
The Corporation has an employment agreement with Kenneth S. Hollander,
dated June 3, 1996, pursuant to which Mr. Hollander serves as the Company's
Chief Financial Officer. Mr. Hollander's employment agreement provides for a
base annual salary of $90,000 with annual cost of living increases and a
customary benefits package. The agreement has no definite term and is terminable
at will by Mr. Hollander. The agreement prohibits Mr. Hollander from competing
with the Company for one year following termination of his employment with the
Company and disclosing confidential information of trade secrets in any
unauthorized manner.
Stock Options
1996 Plan. The Company's 1996 Stock Incentive Plan ("1996 Plan") was
adopted by the Company's Board of Directors in June 1996 for the purpose of
securing for the Company and its stockholders the benefits arising from the
ownership of restricted shares of Common Stock ("Restricted Stock"), stock
appreciation rights ("SARs") and options to purchase Common Stock ("Options") by
directors who are not employees ("Eligible Directors") (Messrs. Elbaum, Rivkin,
Sasen and Toledano are currently Eligible Directors), officers, other key
employees and consultants ("Key Employees") of the Company (and any subsidiary
companies) who are expected to contribute to the Company's future growth and
success. No shares of Restricted Stock or SARs have been granted under the 1996
Plan. Options for 296,200 shares have been issued under the 1996 Plan as of
March 23, 1998. No award may be granted under the 1996 Plan after June 2006.
Under the 1996 Plan, the maximum number of shares with respect to which
Options or SARs may be granted or which may be awarded as restricted stock is
700,000 shares of Common Stock. The Company may in its sole discretion grant
shares of Restricted Stock, SARs and Options to Key Employees and shall grant
Options to the Company's Eligible Directors subject to specified terms and
conditions and in accordance with a specified formula ("Formula") as discussed
below. The 1996 Plan is administered by the Board of Directors, which, subject
to the terms of the 1996 Plan, determines the Key Employees who will receive
grants of Options, SARs or Restricted Stock, the number of shares of Common
Stock subject to each Option or SAR or awarded as Restricted Stock, the grant
date, the expiration date, and other terms and conditions.
Under the Formula, each Eligible Director was granted in June 1996 Options
to purchase 15,000 shares of Common Stock at an exercise price equal to the
initial public offering price per share, all of which vested immediately upon
grant ("Initial Director Options"). On the first business day following the
Annual Meeting, and thereafter on the first business day following each
successive annual meeting of stockholders, so long as Options remain available
to grant to Eligible Directors, each person who is elected as a director after
that meeting and is an Eligible Director, and each person who continues to serve
as a director after that meeting and is an Eligible Director, shall be granted
10,000 Options ("Director Options") in recognition of service as a director,
subject to vesting, for the year ending on the day prior to the next annual
meeting of stockholders of the Company to elect directors. Director Options
expire ten years from the date of grant and vest as follows (except for the
Initial Director Options, which vest immediately upon grant): 33 1/3% upon the
grant of such Options, 66 2/3% one year after the date of grant and 100% two
years after the date of grant, in each case assuming the recipient continuously
serves as a director during that time.
Other Options. The Company has issued options outside of the 1996 Plan to
certain officers, directors, employees and consultants to purchase a total of
157,500 shares of Common Stock. Options for 131,250 shares were granted on
February 9, 1996 and have a five-year term and an exercise price of $5.33 per
share. All of such options were fully vested on the date of grant. Options for
11,250 shares were granted as of June 3, 1996, have an exercise price of $5.33
per share and vested in full on April 30, 1997. Options for 15,000 shares were
granted on March 13, 1998, have a ten year term and an exercise price of $8.44
per share and were vested in full on the date of grant.
Five former directors of the Company each were granted 1,500 options
outside the 1996 Plan in September 1996 in replacement of options granted under
the Company's former Nonemployee Director Stock Incentive Plan which expired as
a consequence of such directors' resignation from the Board in connection with
the Company's initial public offering.
32
<PAGE>
Director Compensation
Non-employee members of the Board of Directors are paid $500 (plus
reasonable expenses) for each attended meeting of the Board of Directors or
committee thereof. Non-employee members of the Board of Directors of the Company
also are eligible for the grant of Options under the 1996 Plan which currently
provides for each Eligible Director (currently Messrs. Rivkin, Sasen and
Toledano and Ms. Tallett) to receive the Director Options. Mr. Rivkin is a
nominee of TIC. Mr. Rivkin has waived the $500 fee for attendance at meetings of
the Board of Directors or committees thereof and the Initial Director Options
and the 1997 Director Options. In lieu thereof, the Board of Directors in June
1996 granted TIC options outside the 1996 Plan to purchase 15,000 shares of
Common Stock at an exercise price equal to the initial public offering price and
in June 1997 granted TIC options outside the 1996 Plan to purchase 10,000
shares. The Board granted 15,000 options outside the 1996 Plan to Elizabeth E.
Tallett in March 1998 in connection with her election as a director of the
Company. All of such options have a ten year term, an exercise price of $8.44
per share and were vested in full on the date of grant.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 23, 1998 by (i) each
stockholder known by the Company to be the beneficial owner of 5% or more of the
outstanding Common Stock, (ii) each of the Company's directors, (iii) each
executive officer listed in the tables in Item 10 and (iv) all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable. Shares of Common Stock issuable upon exercise of options and
warrants that are currently exercisable or exercisable within 60 days of March
23, 1998 have been included in the table.
<TABLE>
<CAPTION>
Number of Shares of Common Percentage
Name and Address Stock Beneficially Owned Beneficially Owned
- ---------------- -------------------------- ------------------
<S> <C> <C>
Donald B. Brounstein(1).............................. 914,000(2) 11.6%
Kenneth S. Hollander(1)(3).......................... 34,750(3) *
Jack L. Rivkin
388 Greenwich Street
New York, NY 10013................................ 0 *
John F. Sasen, Sr.
7800 Belfort Parkway, Suite 250
Jacksonville, FL 32256............................ 210,834(4) 2.7%
Elizabeth E. Tallett
48 Federal Twist Road
Stockton, NJ 08559................................ 15,000(5) *
Udi Toledano
545 Madison Avenue, Suite 800
New York, NY 10022................................ 174,370(6) 2.2%
Travelers Group Inc.
388 Greenwich Street
New York, NY 10013................................ 2,123,854(7) 25.9%
Scantek Medical, Inc.
26 Merry Lane
East Hanover, NJ 07936............................ 1,015,088(8) 13.0%
OppenheimerFunds, Inc.
Two World Trade Center
New York, NY 10048................................ 700,500 9.0%
All directors and executive officers as a group
(6 persons)(2)(3)(4)(5)(6)(9)..................... 1,348,954 16.6%
</TABLE>
* Less than 1%.
(1) c/o HumaScan Inc., 125 Moen Avenue, Cranford, New Jersey 07016.
(2) Includes an aggregate of 17,000 shares of Common Stock held by Mr.
Brounstein's wife and son and 72,000 shares issuable upon exercise of
immediately exercisable options and warrants held by Mr. Brounstein.
33
<PAGE>
(3) Includes 34,250 shares of Common Stock issuable upon exercise of
immediately exercisable options held by Mr. Hollander. Does not include
22,000 shares issuable upon exercise of options held by Mr. Hollander that
are not currently exercisable.
(4) Includes 18,334 shares of Common Stock issuable upon exercise of
immediately exercisable options held by Mr. Sasen. Also includes 56,250
shares held by Physician Sales & Service, Inc. ("PSS") and 136,250 shares
issuable upon exercise of immediately exercisable warrants held by PSS.
Does not include 6,666 shares issuable upon exercise of options held by Mr.
Sasen that are not currently exercisable. Mr. Sasen disclaims beneficial
ownership of the securities held by PSS.
(5) Includes 15,000 shares of Common Stock issuable upon exercise of
immediately exercisable options and warrants.
(6) Includes 42,018 shares issuable upon exercise of immediately exercisable
options and warrants held by Mr. Toledano. Also includes 50,000 shares of
Common Stock held by Mr. Toledano's wife and 50,477 shares issuable upon
exercise of immediately exercisable warrants held by Mr. Toledano's wife
and a certain trust for the benefit of their minor children ("Toledano
Trust"). Does not include 6,666 shares issuable upon exercise of options
held by Mr. Toledano that are not currently exercisable. Mr. Toledano
disclaims beneficial ownership of all of the securities held by members of
his family other than his wife and the Toledano Trust.
(7) Includes 1,440,000 shares of Common Stock held by Travelers Insurance
Company ("TIC"), 333,156 shares issuable upon exercise of immediately
exercisable options and warrants held by TIC, 219,875 shares held by Smith
Barney Worldwide Special Fund, N.V. ("Smith Barney Fund"), 44,135 shares
issuable upon exercise of immediately exercisable warrants held by Smith
Barney Fund, 41,125 shares held by Smith Barney Worldwide Securities, Ltd.
("Smith Barney Securities"), 8,063 shares issuable upon exercise of
immediately exercisable warrants held by Smith Barney Securities and 37,500
shares issuable upon exercise of immediately exercisable warrants held by
Smith Barney Inc. Does not include 6,666 shares issuable upon exercise of
options held by TIC that are not currently exercisable. Smith Barney Inc.
and TIC are both subsidiaries of Travelers Group Inc., and Smith Barney
Securities and Smith Barney Fund are investment funds domiciled outside the
United States for which Smith Barney Inc. acts as sponsor and adviser. None
of Travelers Group Inc., TIC, Smith Barney Inc. or their respective
affiliates has assumed or has any responsibility for the management,
business or operations of the Company or for the statements contained in
this Proxy Statement (other than the limited information regarding the
stock ownership of such entities under the caption "Principal
Stockholders").
(8) Includes 5,625 shares of Common Stock issuable upon exercise of immediately
exercisable warrants held by Scantek Medical, Inc. ("Scantek"), 213,750
shares of Common Stock owned by Zsigmond L. Sagi ("Dr. Sagi"), the Chairman
of the Board and a principal stockholder of Scantek, 750 shares issuable
upon exercise of immediately exercisable options owned by Dr. Sagi and
15,900 shares held by Patricia B. Furness, Vice President and a stockholder
of Scantek. Does not include 750 shares issuable upon exercise of options
held by Dr. Sagi that are not immediately exercisable.
(10) Includes 368,329 shares of Common Stock issuable upon exercise of
immediately exercisable options and warrants held by directors and
executive officers of the Company. Does not include 35,332 shares issuable
upon exercise of options held by executive officers of the Company that are
not immediately exercisable.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Physician Sales and Service, Inc. In February 1996, the Company entered
into an exclusive supply and distribution agreement (as amended, "Distribution
Agreement") with PSS. Pursuant to the Distribution Agreement, PSS purchased an
aggregate of 56,250 shares of Common Stock and warrants to purchase an
additional 11,250 shares of Common Stock at $2.93 per share and was issued
warrants to purchase 125,000 shares of Common Stock at $4.00 per share. John F.
Sasen, Sr., President and Chief Executive Officer of PSS, is a director of the
Company. See "Business - Marketing and Distribution."
Scantek Medical, Inc. In October 1995, the Company and Scantek entered into
a license agreement ("License Agreement") pursuant to which Scantek granted the
Company an exclusive license to manufacture and sell the BreastAlert device in
the United States and Canada. Contemporaneously with the execution of the
License Agreement, the Company issued to Scantek 675,000 shares of Common Stock.
Scantek received an additional 329,063 shares of Common Stock upon the closing
of a private placement in May 1996 ("May 1996 Private Placement") in exchange
for the termination of its right, pursuant to the License Agreement, to maintain
a specified ownership interest in the Company. See "Business - License
Agreement."
34
<PAGE>
Zigmed, Inc. In January 1995, the Company and Zigmed entered into an
agreement for the turnkey construction of the Production Line at a fixed price
of $1,750,680. $1,330,230 of such amount has been paid to Zigmed as of the date
of this report. In October 1997 the Company assumed responsibility for
completion of the Production Line and since then no payments have been remitted
to Zigmed. The president of Zigmed, Zsigmond L. Sagi, is the son of Zsigmond G.
Sagi, the President of Scantek.
Donald B. Brounstein. During 1995, Donald B. Brounstein, the Company's
President, Chief Executive Officer and a director, loaned the Company an
aggregate of $125,000 on an interest-free basis ("1995 Loans"). Mr. Brounstein
received no consideration for the 1995 Loans. Mr. Brounstein also purchased
$40,000 principal amount of 10% promissory notes from the Company ("March 1996
Bridge Notes") in connection with a private placement of notes and warrants to
purchase Common Stock effected by the Company in March 1996. In connection with
the May 1996 Private Placement, Mr. Brounstein applied such $40,000 principal
amount of March 1996 Bridge Notes and $34,000 of the 1995 Loans to the initial
purchase price for two Units, each consisting of 37,500 shares of Series A
Preferred Stock (which converted automatically on a one-for-one basis into
Common Stock upon consummation of the Company's initial public offering in
August 1996) and warrants to purchase 7,500 shares of Common Stock for $2.93 per
share. The remaining $91,000 of the 1995 Loans, plus accrued interest of $711 on
Mr. Brounstein's March 1996 Bridge Notes, was repaid to Mr. Brounstein from the
proceeds of the May 1996 Private Placement.
Travelers Group Inc. In connection with the May 1996 Private Placement,
the Company issued warrants to purchase 37,500 shares of Common Stock for $2.93
per share to Smith Barney Inc., a subsidiary of Travelers Group Inc.
Udi Toledano. In connection with the May 1996 Private Placement, the
Company issued warrants to purchase an aggregate of 80,625 shares of Common
Stock to Udi Toledano, a director of the Company, and members of his family
("Toledano Warrants"). Pursuant to their terms, in 1997 the number of shares for
which Toledano Warrants could be exercised was reduced to 26,250 shares. The
Toledano Warrants are exercisable at a price of $2.93 per share. Toledano
Warrants to purchase 5,860 shares have been exercised.
The Company believes that the terms of each of the foregoing transactions
were at least as favorable to the Company as could have been obtained from third
parties in arms' length transactions. In connection with the Company's initial
public offering, the Company adopted a policy whereby all future transactions
between the Company and its officers, directors, principal stockholders or
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested members of the Board of Directors
or, if required by law, a majority of disinterested stockholders, and will be on
terms no less favorable to the Company than could be obtained in arm's length
transactions from unaffiliated third parties.
35
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference from No. in
Number Description Document Document
------ ----------- --------------- --------
<S> <C> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended A 3.1
3.2 By-Laws of the Company A 3.2
4.1 Form of Common Stock Certificate A 4.1
4.2 Form of Representative's Warrant Agreement between the A 4.3
Representative and the Company, including Form of
Representative's Warrant Certificate
4.3 Form of Warrant Certificate for March Bridge Warrants A 4.4
4.4 Form of Private Warrants issued in connection with May A 4.5
Private Placement
4.5 Options issued to Certain Officers on February 9, 1996 A 4.6
and June 3, 1996
10.1 Distribution Agreement, dated as of February 27, 1996, A 10.1
between the Company and Physician Sales & Service, Inc.,
as amended
10.2 License Agreement, dated as of October 20, 1995, between A 10.2
the Company and Scantek Medical, Inc., as amended
10.3 Turnkey Construction Contract, dated as of October 31, A 10.3
1995, between the Company and Zigmed, Inc.
10.4 Agreement, dated March 19, 1996, between the Company and A 10.5
Udi Toledano
10.5 Agreement, dated March 19, 1996, between the Company and A 10.6
Herbert V. Turk
10.6 Warrant Agreement between the Company and Physician A 10.7
Sales & Service, Inc.
10.7 Employment Agreement between the Company and Donald B. A 10.8
Brounstein, dated as of January 1, 1996
10.9 Employment Agreement between the Company and Kenneth S. A 10.10
Hollander, dated as of June 3, 1996
10.10 1996 Stock Incentive Plan A 10.11
10.11 Financial Services Agreement, dated as of November 16, A 10.13
1995, between the Company and Burnham Securities Inc.,
as amended
10.12 Lease, dated June 11, 1996, between the Moen A 10.14
Organization, Inc. and the Company
36
<PAGE>
10.15 Form of Indemnification Agreement between the Company B 10.15
and its Executive Officers and Directors
23.1 Consent of KPMG Peat Marwick LLP, independent accountants
*
27.1 Financial Data Schedule *
27.2 Restated Financial Date Schedule for Year Ended December
31, 1996
</TABLE>
- -------------------
A. Issuer's Form SB-2 Registration Statement (No. 333-6607), declared
effective August 9, 1996.
B. Issuer's Annual Report on Form 10-KSB for the year ended December 31, 1996.
* Filed herewith
(b) Reports on Form 8-K.
None.
37
<PAGE>
Signature
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HUMASCAN INC.
Dated: March 27, 1998 By: /s/ DONALD B. BROUNSTEIN
----------------------------------------
Donald B. Brounstein, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: March 27, 1998 By: /s/ DONALD B. BROUNSTEIN
----------------------------------------
Donald B. Brounstein, President and
Chief Executive Officer
Dated: March 27, 1998 /s/ KENNETH S. HOLLANDER
----------------------------------------
Kenneth S. Hollander, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
Dated: March 27, 1998 /s/ JACK L. RIVKIN
----------------------------------------
Jack L. Rivkin, Director
Dated: March 27, 1998 /s/ JOHN F. SASEN, SR.
----------------------------------------
John F. Sasen, Sr., Director
Dated: March 27, 1998 /s/ UDI TOLEDANO
----------------------------------------
Udi Toledano, Director
Dated: March 27, 1998
----------------------------------------
Elizabeth E. Tallett, Director
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference from No. in
Number Description Document Document
------ ----------- --------------- --------
<S> <C> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended A 3.1
3.2 By-Laws of the Company A 3.2
4.1 Form of Common Stock Certificate A 4.1
4.2 Form of Representative's Warrant Agreement between the A 4.3
Representative and the Company, including Form of
Representative's Warrant Certificate
4.3 Form of Warrant Certificate for March Bridge Warrants A 4.4
4.4 Form of Private Warrants issued in connection with May A 4.5
Private Placement
4.5 Options issued to Certain Officers on February 9, 1996 A 4.6
and June 3, 1996
10.1 Distribution Agreement, dated as of February 27, 1996, A 10.1
between the Company and Physician Sales & Service, Inc.,
as amended
10.2 License Agreement, dated as of October 20, 1995, between A 10.2
the Company and Scantek Medical, Inc., as amended
10.3 Turnkey Construction Contract, dated as of October 31, A 10.3
1995, between the Company and Zigmed, Inc.
10.4 Agreement, dated March 19, 1996, between the Company and A 10.5
Udi Toledano
10.5 Agreement, dated March 19, 1996, between the Company and A 10.6
Herbert V. Turk
10.6 Warrant Agreement between the Company and Physician A 10.7
Sales & Service, Inc.
10.7 Employment Agreement between the Company and Donald B. A 10.8
Brounstein, dated as of January 1, 1996
10.9 Employment Agreement between the Company and Kenneth S. A 10.10
Hollander, dated as of June 3, 1996
10.10 1996 Stock Incentive Plan A 10.11
10.11 Financial Services Agreement, dated as of November 16, A 10.13
1995, between the Company and Burnham Securities Inc.,
as amended
10.12 Lease, dated June 11, 1996, between the Moen A 10.14
Organization, Inc. and the Company
10.15 Form of Indemnification Agreement between the Company B 10.15
and its Executive Officers and Directors
39
<PAGE>
23.1 Consent of KPMG Peat Marwick LLP, independent accountants *
27.1 Financial Data Schedule *
27.2 Restated Financial Data Schedule for Year Ended December
31, 1996 *
</TABLE>
- ----------
A. Issuer's Form SB-2 Registration Statement (No. 333-6607), declared
effective August 9, 1996.
B. Issuer's Annual Report on Form 10-KSB for the Year Ended December 31, 1996.
* Filed herewith.
Exhibit 23
Independent Auditors' Consent
The Board of Directors
HumaScan Inc.:
We consent to incorporation by reference in the registration statement (No.
333-40655) on Form S-8 of HumaScan Inc. of our report dated January 23, 1998,
relating to the balance sheets of HumaScan Inc. as of December 31, 1997 and
1996, and the related statements of operations, stockholders' equity (deficit),
and cash flows for the period from December 27, 1994 (date of inception) to
December 31, 1997 the years ended December 31, 1997 and 1996 and the period from
December 27, 1994 (date of inception) to December 31, 1995, which report appears
in the December 31, 1997 annual report on Form 10-KSB of HumaScan Inc.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,443,839
<SECURITIES> 6,443,559
<RECEIVABLES> 8,396
<ALLOWANCES> 0
<INVENTORY> 337,754
<CURRENT-ASSETS> 8,297,377
<PP&E> 2,449,974
<DEPRECIATION> 167,101
<TOTAL-ASSETS> 10,713,030
<CURRENT-LIABILITIES> 8,297,377
<BONDS> 0
0
0
<COMMON> 77,384
<OTHER-SE> 8,939,191
<TOTAL-LIABILITY-AND-EQUITY> 10,713,030
<SALES> 7,580
<TOTAL-REVENUES> 832,699
<CGS> 0
<TOTAL-COSTS> 4,726,908
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,916
<INCOME-PRETAX> (4,150,325)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,150,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,150,325)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
