UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED JUNE 30,1998
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ to _________.
Commission File Number
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0-21015
HUMASCAN INC.
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(Exact name of registrant as specified 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)
(908) 709-3434
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 14, 1998, the
issuer had outstanding 7,789,070 shares of common stock, par value $.01 per
share.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying unaudited financial statements of HumaScan Inc. (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
rule 10-01 of Regulation S-X. All adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial condition and
results operations have been included. Operating results for the six month
period ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
These interim consolidated financial statements should be read in conjunction
with the Company's latest Annual Report on Form 10-KSB for the year ended
December 31, 1997.
<PAGE>
HumaScan Inc.
(A Development Stage Enterprise)
Condensed Balance Sheet
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
6/30/98 12/31/97
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 63,107 $ 1,443,839
Investments 2,987,375 6,443,559
Accounts Receivable 0 8,396
Inventory 901,777 337,754
Prepaid expenses 214,325 63,829
------------ ------------
Total current assets 4,166,584 8,297,377
Property, plant and equipment, net 2,447,186 2,282,873
Other assets 223,111 132,780
------------ ------------
Total assets $ 6,836,881 10,713,030
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 374,620 355,245
Accrued expenses 831,575 1,305,553
Obligations under capital lease 0 9,563
------------ ------------
Total current liabilities 1,206,195 1,670,361
Obligations under capital lease, noncurrent portion 0 26,094
Stockholders' Equity:
Common Stock, $0.01 par value, 25,000,000 shares authorized;
in 1998, 7,789,070 shares issued and outstanding; in 1997,
7,738,313 shares issued and outstanding 77,891 77,384
Additional paid-in capital 15,494,286 14,932,869
Deficit accumulated during the development stage (9,941,491) (5,993,678)
Total stockholders' equity 5,630,686 9,016,575
------------ ------------
Total liabilities and stockholders' equity $ 6,836,881 $ 10,713,030
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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<PAGE>
HumaScan Inc.
(A Development Stage Enterprise)
Condensed Statements of Operations
For the Six Months Ended June 30, 1998 and 1997
and for the period from December 27, 1994 (date of inception) to June 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
Three Months Ended Six Months Ended from 12/27/94
---------------------------- ---------------------------- (date of inception)
6/30/98 6/30/97 6/30/98 6/30/97 to 6/30/98
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 57,481 $ 0 $ 120,395 $ 0 $ 127,975
Operating Expenses:
Facility costs 486,869 329,177 954,853 507,501 2,225,772
Marketing expenses 973,198 179,353 1,799,147 335,204 3,348,028
General and administrative expenses 420,979 338,539 851,259 633,599 3,498,215
Clinical development expenses 415,381 143,947 581,737 276,918 1,565,353
Interest expense 9,561 1,493 10,823 3,156 394,408
------------ ------------ ------------ ------------ ------------
2,305,988 992,509 4,197,819 1,756,378 11,031,776
------------ ------------ ------------ ------------ ------------
Income from operations (2,248,507) (992,509) (4,077,424) (1,756,378) (10,903,801)
Interest income 54,454 160,825 129,611 321,049 962,310
------------ ------------ ------------ ------------ ------------
Net loss ($ 2,194,053) ($ 831,684) ($ 3,947,813) ($ 1,435,329) ($ 9,941,491)
============ ============ ============ ============ ============
Net loss per common share ($ 0.28) ($ 0.11) ($ 0.51) ($ 0.19) ($ 1.52)
============ ============ ============ ============ ============
Shares used in computing
net loss per share 7,786,082 7,720,313 7,763,692 7,720,313 6,556,549
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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<PAGE>
HumaScan Inc.
(A Development Stage Enterprise)
Condensed Statements of Cash Flows
For the six months ended June 30, 1998 and 1997
and for the period from December 27, 1994 (date of inception)
to June 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Six months Period from
ended June 30, December 27, 1994
---------------------------- (date of inception)
1998 1997 to June 30, 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 3,947,813) ($ 1,435,300) ($ 9,941,491)
Adjustments to reconcile net losse to net cash used in
operating activities:
Noncash miscellaneous expenses -- -- 17,000
Issuance of stock options to non-employees -- -- 50,317
Noncash interest expense -- -- 343,485
Depreciation expense 196,302 52,800 363,403
Changes in operating assets and liabilities:
Increase in inventory (564,023) -- (901,777)
Increase in other assets (90,331) (23,300) (223,111)
(Increase) decrease in prepaid expenses (150,496) 68,800 (214,325)
Decrease (increase) in accounts receivable 8,396 -- 0
Increase (decrease) in accounts payable 19,375 (184,200) 374,620
(Decrease) increase in accrued expenses (273,978) (40,300) 496,575
------------ ------------ ------------
Net cash used in operating activities (4,802,568) (1,561,500) (9,635,304)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (360,615) (227,500) (2,760,600)
Payments for production line 0 (22,900) --
Payments in connection with license agreement (200,000) -- (1,275,000)
Sale (purchases) of investments 3,456,184 (171,000) (2,987,375)
------------ ----------- ------------
Net cash provided by (used in) investing activities 2,895,569 (421,400) (7,022,975)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- -- 208,600
Proceeds from issuance of common stock in connection with
exercise of employee options 561,924 -- 669,924
Proceeds from officer loan -- -- 125,000
Payments on officer loan -- -- (91,000)
Proceeds from borrowings of notes payable -- -- 810,000
Principal payments on obligation under capital lease (35,657) (4,000) (49,989)
Proceeds from initial public offering -- -- 14,001,418
Proceeds from private placement -- -- 1,047,433
------------ ------------ ------------
Net cash provided by (used in) financing activities 526,267 (4,000) 16,721,386
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,380,732) (1,986,900) 63,107
Cash and cash equivalents, beginning of period 1,443,839 6,413,062 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 63,107 $ 4,426,162 $ 63,107
============ ============ ============
Supplemental disclosure of noncash transactions:
Amounts due in connection with license agreement $ 1,050,000 $ 1,050,000
============ ============
Dollar value of common stock issued in connection with license agreement $ 3,291 $ 3,291
============ ============
Dollar 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
============ ============
Issuance of warrants in connection with license agreement $ 315,000
============
Issuance of warrants in connection with purchase of equipment $ 23,625
============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
- 5 -
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(UNAUDITED)
(1) Basis of Presentation
The unaudited condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited financial statements should be read in conjunction
with the 1997 financial statements and notes thereto included in the Company's
annual report on Form 10-KSB.
In the opinion of the Company's management, the accompanying unaudited condensed
financial statements have been prepared on a basis substantially consistent with
the audited financial statements and contain adjustments, all of which are of a
normal recurring nature, necessary to present fairly its financial position as
of June 30, 1998 and its results of operations and cash flows for the six months
ended June 30, 1998 and 1997 and for the period December 27, 1994 (date of
inception) to June 30, 1998. Interim results are not necessarily indicative of
results for the full fiscal year.
Net loss per share was calculated by dividing the net loss by the weighted
average number of common shares outstanding for the period adjusted for the
dilutive effect of common stock equivalents which consist of stock options and
warrants using the treasury stock method.
(2) Net Loss Per Share
Basic loss per share is determined based on the weighted average number of
common shares assumed to be outstanding during each period. Dilutive loss per
share is the same as basic loss per share as all common share equivalents are
excluded from the calculation as their effect is anti-dilutive. The weighted
average number of common shares assumed to be outstanding for the six month
periods ended June 30, 1998 and 1997 is 7,763,692 and 7,720,313, respectively.
(3) Inventory
Inventory consists of the following:
1998 1997
---- ----
Raw Materials $ 852,071 $ 316,74
Work-in-process 10,000 9,689
Finished Goods 39,706 11,320
------ ------
$ 901,777 $ 337,754
(4) Stock Options and Warrants
On May 15, 1998, the Company agreed to issue warrants to purchase 400,000 shares
and 30,000 shares of common stock at a price of $4.725 per share to Scantek
Medical, Inc. ("Scantek") and Zigmed, Inc. ("Zigmed"), respectively, in
connection with the settlement of certain disputes with Scantek and Zigmed. The
warrants to be issued to Scantek vest as to 175,000 shares as of May 15, 1998,
as to 100,000 shares on September 30, 1998, as to 75,000 shares on December 31,
1998 and as to the remaining 50,000 shares on March 31, 1999. The warrants
issued to Zigmed vest in full as of May 15, 1998. All of the warrants have a
five year term.
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<PAGE>
On May 19, 1998, the Company granted an officer stock options to purchase an
aggregate of 50,000 shares of common stock under the Company's 1996 Stock
Incentive Plan ("Plan") at an exercise price of $3.28 per share. These options
vest immediately and have a ten year term.
On July 30, 1998, the Company granted options for an aggregate of 20,000 shares
under the Plan to two directors, all of which have an exercise price of $1.75
per share and a ten year term. Such shares vest 33-1/3 percent upon grant and
33-1/3 percent each year for two years. Options for 10,000 shares were granted
on July 30, 1998 outside the Plan to Travelers Insurance Company in lieu of
options not granted under the Plan to Jack L. Rivkin, a director of the Company.
Such options have an exercise price of $1.75 per share and a ten year term and
vest 33-1/3 percent upon grant and 33-1/3 percent each year for two years.
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<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations for the Six Month Periods Ended June 30, 1998 and 1997
- ----------------------------------------------------------------------------
Revenues
- --------
Net sales for the three and six month periods ended June 30, 1998 were $57,481
and $120,395 as compared to $0 in the same periods in 1997. The Company
commenced shipments of its BreastAlert Differential Temperature Sensor
("BreastAlert") on December 29, 1997 to the distribution facilities of Physician
Sales & Service Inc., the national distributor of BreastAlert.
Operating Expenses:
- -------------------
Operating expenses consist of product and facility costs, sales and marketing
expenses, general and administrative expenses, clinical development expenses and
interest expense. These expenses increased $1,313,479, or 132% and $2,441,441,
or 139% for the three and six month periods ending June 30, 1998, due to planned
increases for the production ramp-up, expanded marketing for the launch of
BreastAlert and for the continuing post-marketing clinical studies.
Interest Income
- ---------------
Interest income for the three and six month period ended June 30, 1998 decreased
$106,371, or 66%, and $191,438, or 60%, from the same period in 1997. This
decrease is due to the Company's use of proceeds from the Company's August 1996
initial public offering to fund operations during 1996, 1997 and 1998.
Liquidity and Capital Resources
- -------------------------------
On August 19, 1996, the Company completed an initial public offering of
2,700,000 shares of its common stock at a price of $6.00 per share, which
generated net proceeds to the Company of approximately $14.0 million after
underwriting fees and offering expenses. At June 30, 1998, the Company had cash
and cash equivalents of $63,107 and investments of $2,987,375. Cash balances in
excess of those required to fund operations have been invested in
interest-bearing government securities or short-term investment grade
securities. The Company's working capital of $3.0 million at June 30, 1998
reflected a decrease of $6.5 million from June 30, 1997.
As of June 30, 1998, no lines of credit were outstanding.
The Company anticipates, based on its currently proposed plans and assumptions
relating to its operations, that its existing cash resources will be sufficient
to satisfy its contemplated cash requirements through December 1998. The Company
is currently exploring various financing alternatives. The Company's future
liquidity and capital funding requirements will depend on numerous factors,
including the following: the progress of manufacturing activities, results of
clinical trials, the extent to which the BreastAlert device gains market
acceptance, the costs and timing of expansion of sales and marketing and
competition. If the Company's operations do not generate sufficient cash to fund
continuing business activities after December 1998, the Company will need to
obtain additional financing. There can be no assurances that any required
additional financing can be obtained, or if obtained, will be on reasonable
terms.
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. This report contains a forward-looking
statement regarding the effect of certain objections the FDA has raised
regarding, primarily, the Company's product labeling and advertising. 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
-8-
<PAGE>
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. These factors include the uncertain effect of
governmental regulation on the Company and the other factors set forth under the
caption "Risk Factors" in the Company's annual report on Form 10-KSB and other
filings with the Securities and Exchange Commission. 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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 15, 1998, the Company and Scantek Medical, Inc. ("Scantek"), the licensor
of the technology relating to the BreastAlert, entered into a settlement
agreement (the "Scantek Settlement Agreement") pursuant to which the license
agreement between the Company and Scantek was amended to resolve certain matters
that were the subject of a mediation between the parties. Pursuant to the
Scantek Settlement Agreement, the Company continues to have the exclusive rights
to manufacture and distribute the BreastAlert in the United States and Canada.
In addition, the original requirement for minimum royalty payments of $150,000
and $300,000, respectively, for the first two years of BreastAlert production
has been eliminated, and, while the Company remains obligated to pay Scantek
royalties ranging from 3% to 10% on product sold, Scantek will credit the
Company for 50% of such royalties up to an aggregate of $550,000. The Scantek
Settlement Agreement also amended the license agreement between the parties to
reduce the Company's cash license fee payable to Scantek by $375,000 in exchange
for the issuance of warrants to purchase 400,000 shares of the Company's common
stock at $4.725 per share.
Also on May 15, 1998, the Company and Zigmed, Inc. ("Zigmed"), the contractor
hired to construct the BreastAlert production machinery, entered into a
settlement agreement (the "Zigmed Settlement Agreement") pursuant to which the
construction agreement was amended to reduce the purchase price to be paid by
the Company by approximately $200,000 in exchange for the issuance of warrants
to purchase 30,000 shares of the Company's common stock at $4.725 per share.
Item 2. Changes in Securities and Use of Proceeds
Since April 28, 1998, the Company has granted options to an officer and
directors to purchase an aggregate of 70,000 shares of Common Stock. Options for
50,000 shares were granted on May 19, 1998, vest immediately and have a ten year
term. Options for 20,000 shares were granted on July 30, 1998 and vest 33-1/3
percent upon grant and 33-1/3 percent each year for two years and have a ten
year term. 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. Options for 10,000
shares were granted on July 30, 1998 outside the Plan to Travelers Insurance
Company in lieu of options not granted under the Plan to Jack L. Rivkin, a
director of the Company. Such options have an exercise price of $1.75 per share
and a ten year term and vest 33-1/3 percent upon grant and 33-1/3 percent each
year for two years.
On May 15, 1998, the Company agreed to issue warrants to purchase 400,000 shares
and 30,000 shares of common stock at a price of $4.725 per share to Scantek and
Zigmed, respectively, in connection with the Scantek Settlement Agreement and
the Zigmed Settlement Agreement. The warrants to be issued to Scantek vest as to
175,000 shares as of May 15, 1998, as to 100,000 shares on September 30, 1998,
as to 75,000 shares on December 31, 1998 and as to the remaining 50,000 shares
on March 31, 1999. The warrants to be issued to Zigmed vest in full as of May
15, 1998. All of the warrants have a five year term. The issuances of these
warrants 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.
On August 9, 1996, the Securities and Exchange Commission declared the Company's
registration statement on Form SB-2, File No. 333-6607, effective, and the
offering commenced on August 14, 1996. On August 19, 1996, the Company sold
2,700,000 shares of the Company's common stock for an aggregate of $16,200,000.
Of the approximately $14.0 million of net proceeds to the Company from the
offering, $4.1 million has been spent on capital equipment and facility costs,
$3.3 million on sales and marketing expenses, $1.5 million for clinical studies,
$0.9 for inventory, and $3.0 for working capital. Approximately $1.2 million of
the proceeds have been temporarily invested in short-term investment grade
securities. Except for amounts paid to officers and directors as compensation
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<PAGE>
for services in such capacities, none of the net proceeds were paid, directly or
indirectly, to directors or officers of the Company or to any person owning 10%
or more of any class of equity securities of the Company or to any affiliates of
the Company.
Item 5. Other Information
Correspondence with the Food and Drug Administration.
On June 29, 1998, the Company received a letter from the Office of Compliance,
Promotion and Advertising Policy Staff of the Food and Drug Administration
("FDA") responding to correspondence from the Company relating to the warning
letter received from the FDA on April 24, 1998 which raised objections to
statements in the Company's labeling and advertising materials. The FDA's June
29, 1998 letter acknowledged certain corrective actions the Company had taken
but objected to some of the proposed changes to the Company's labeling and
advertising materials. The Company has responded to the FDA's June 29, 1998
letter and does not expect the FDA's objections to the Company's labeling and
advertising, or the changes sought by the FDA, to have a significant effect on
the Company.
Notice to Stockholders Regarding 1999 Annual Meeting of Stockholders.
Pursuant to Rule 14a-4 promulgated under the Securities Exchange Act of 1934,
stockholders are advised that the Company's management shall be permitted to
exercise discretionary voting authority under proxies it solicits and obtains
for the Company's 1999 Annual Meeting of Stockholders with respect to any
proposal presented by a stockholder at such meeting, without any discussion of
the proposal in the Company's proxy statement for such meeting, unless the
Company receives notice of such proposal at its principal office in Cranford,
New Jersey no later than May 22, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.16 Settlement Agreement, dated May 15, 1998, between Scantek
Medical, Inc. and the Company.
10.17 Settlement Agreement, dated May 15, 1998, between Zigmed, Inc.
and the Company.
27. Financial Data Schedule (6/30/98).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report on Form 10-Q is filed.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HUMASCAN INC.
Registrant
August 14, 1998 /s/ Kenneth S. Hollander .
-------------------------------------
Kenneth S. Hollander
Chief Financial Officer (Principal
Financial and Accounting Officer)
Settlement Agreement
(Scantek/HumaScan)
WHEREAS, the undersigned parties Scantek Medical Inc. ("Scantek" or
"Licensor") and HumaScan Inc. ("HumaScan" or "Licensee") are parties to a
License Agreement dated March 17, 1995, an Amended License Agreement dated July
31, 1995, a Second Amended License Agreement dated as of October 20, 1995, and
three extensions to the Second Amended License Agreement dated respectively,
February 26, 1996, March 17, 1996, and April 29, 1996, and the Further Amendment
to the Second Amended License Agreement dated May 31, 1996, (hereinafter
together with this Settlement Agreement collectively the "License Agreement"), a
true dated and initialed copy of which is next hereto as Exhibit A and which
comprises a complete and authentic record of the License Agreement; and
WHEREAS, certain disputes have arisen under the License Agreement and the
parties wish to resolve all such disputes and to modify and amend the License
Agreement as hereinafter set forth but in all other respects to have the License
Agreement, as amended, continue to be binding and enforceable in accordance with
its terms; and
NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth, the mutual release of certain claims and resolution of disputes as
hereinafter indicated, the parties agree as follows, using Defined Terms as
defined in the License Agreement except to the extent otherwise defined herein:
1. Licensee acknowledges that its rights to manufacture or sell the
Invention or other products based on any of the licensed patents, know-how,
Authorization, the Licensed Product or the Licensed Process (collectively
sometimes herewith referred to as the "Products"), or to otherwise exploit such
patents, know-how, Authorization, the Licensed Products or the Licensed Process
or information identified in the License Agreement as proprietary or
confidential information, are solely within the territories and possessions of
the United States and Canada. HumaScan shall not knowingly directly or
indirectly cause, or assist others to directly or indirectly sell or distribute
the Products outside of the Exclusive Territory, and Scantek shall not knowingly
directly or indirectly cause, or assist others to directly or indirectly sell or
distribute
<PAGE>
the Products within the Exclusive Territory. Any violation of this provision
shall be a default under the term of the License Agreement.
2. Licensee agrees that to the extent it has not already done so, it will
promptly require Physician Sales & Service, Inc. ("PSS") or any other
distributor or sub-licensee engaged in sales and marketing of the Products to
others, to execute the agreement required pursuant to paragraph II(A) of the
License Agreement prior to delivery of any substantial quantities of the
Products to such distributors, sub-licensees or marketers. Licensee hereby
acknowledges that any entity to whom it sells in excess of 50,000 units on an
annual calendar year basis shall be required to execute the agreement required
by Paragraph II(A) of the License Agreement
<PAGE>
promptly after the receipt of an order which would result in a sale, or
cumulative sales in excess of 50,000 units in any calendar year (hereinafter an
"Order Requiring Notice"), and prior to delivery of that order. Copies of each
such executed agreement, any executed sub-license agreement, and the name and
address of any customer who has placed an Order Requiring Notice shall be
delivered to Scantek within the quarterly report required by Paragraph VI of the
License Agreement.
3. In place and instead of license fees and royalty payments and the
scheduled dates of those payments provided in Sections V(A), V(B) and V(C) of
the License Agreement, the parties have agreed to substitute the following:
V(A) In consideration of $50,000, paid from HumaScan to Scantek on the
signing of this Settlement Agreement, Licensor grants Licensee a
paid up license to all existing patents held by the Licensor
related to the Licensed Products or the Licensed Process for the
lives of those patents.
V(B) In consideration of the continuing right and License to use the
technological know-how previously disclosed, prior consulting
services, prior product developmental activities, and the
Authorization, the value and receipt of which are hereby
acknowledged by the Licensee, and irrespective of whether said
know-how or other proprietary information shall have fallen into
the public domain prior to or after such disclosure, the Licensee
shall pay the amounts, and shall issue the Warrants, as set forth
on Schedule A, and shall pay the royalties as set forth on
Schedule B, copies of which are attached hereto and incorporated
by reference herein.
V(C) Subject to the provisions of paragraph 4. of this Settlement
Agreement, all payments and vesting of all Warrants due pursuant
to Schedules A are due and payable on the dates specified without
set-off, or reduction of any kind except as expressly provided
herein. Failure to pay or vest on the date specified shall be a
default under terms of the License Agreement. Anything in this
paragraph to the contrary notwithstanding, the rights of HumaScan
under Paragraph V(J) of the License Agreement are not revoked or
diminished.
The provisions of this Paragraph shall not modify or eliminate or effect the
application of any payment made, or to be made, or any securities delivered, or
to be delivered, prior to December 31, 1997, under the prior terms of the
License Agreement.
4. The Earned Royalties payable as set forth on Schedule B shall be reduced
by an amount of up to a maximum of $550,000 (the "Royalty Credit") at the rate
of .50 cents for each dollar
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<PAGE>
of Earned Royalty payable until the amount of $550,000 has been deducted (the
"Royalty Adjustment").
5. Paragraph V(F) of the Second Amended License Agreement is hereby deleted
and instead of that paragraph, the following is substituted:
"Notwithstanding the provisions of Schedule B of this Section, there shall
be paid the following minimum royalty payments (the "Minimum Royalties") with
respect to each Royalty Year
Year Minimum Royalty
---- ---------------
1 $0
2 $0
3 $400,000
4 $500,000
5 $600,000
Earned Royalties paid pursuant to Schedule B for the period in question
shall be credited against the Minimum Royalties. In the event of a failure of
Licensee to pay the Minimum Royalties, Licensor shall have the right to convert
the License to Licensee, and sublicensees under Section II to a nonexclusive
license subject to the terms and conditions of the License (including the
payment of Earned Royalties under Schedule B but expressly excluding the
payment of Minimum Royalties under this Paragraph) (the "Conversion Option").
Licensor shall exercise the foregoing Conversion Option by written notice to
Licensee on or before ninety (90) days after the end of any calendar quarter in
which the Minimum Royalties due hereunder are not paid, provided that within
thirty (30) days from receipt by Licensee of said written notice from Licensor,
Licensee may pay the difference between the actual Earned Royalties and the
applicable Minimum Royalties for such period to maintain the exclusive license
and other rights granted under the License Agreement. If such payment is made by
Licensee to Licensor within said 30-day period, said Conversion Option, shall
have no force or effect and the License Agreement shall continue in full force
and effect.
Notwithstanding the foregoing, with respect to year three, should the
Earned Royalties be less than the Minimum Royalties, Licensee's obligation shall
be to pay the Earned Royalty and to reduce the Royalty Credit by an amount equal
to 50% of the difference between the year three Earned Royalties and the year
three Minimum Royalty, but only to the extent that the Royalty Credit remains
unpaid. This credit shall be applied first to any balance of the Royalty Credit
-3-
<PAGE>
following year two. If after application of this credit there remains any unpaid
balance of the Royalty Credit, then the Royalty Adjustment shall apply."
6. Licensee acknowledges that it is settling any and all claims (a) with
respect to Licensor's consulting services, product development services, and
guarantees (including without limitation the guarantees of Section IX(A) of the
License Agreement, which Section is hereby deleted in its entirety, but
excluding the guaranty in Section IX(B) of the License Agreement), and no
further consulting, product development or other services or information is due
from Licensor to Licensee, and (b) relating to alleged delays and defects in the
Manufacturing Line, the Product and the Licensor's Production Systems. To the
extent that any such delays or defects or attempts to correct any such delays or
defects cause increases in Costs of Production above those established by the
Schedule of Licensed Product Costs Elements, such increases shall not be
considered as part of Costs of Production for purposes of Section IX(B).
However, should Licensee require information in connection with any regulatory
issue, Licensor will provide reasonable cooperation in providing any such
information.
7. For purposes of Section X(A) of the License Agreement, the Manufacturing
Line is deemed to have been accepted, and the Licensee's Proxy is hereby
terminated. The obligation of Licensee to use its best efforts to cause the
election of Licensor's nominee to the Board of Directors contained in Section
X(A) is terminated effective as of consummation of Licensees IPO in August
1996.
8. In Paragraph IX(B), the sentence which reads "No Cost Overrun Royalty
Reductions shall be made with respect to any Quarter following the first four
consecutive Quarters of production at Licensee's Production Center in which
Minimum Production is calculated," is hereby changed to read "No Cost Overrun
Royalty Reductions shall be made with respect to any Quarter following the first
four consecutive Quarters of production at Licensee's Production Center in which
Minimum Production is achieved."
9. Licensee acknowledges the absence of any representations or warranties
of any nature whatsoever (including any representations or warranties to induce
the execution of the License Agreement), other than the representations and
warranties expressly contained in the License Agreement, and acknowledges that
Licensor expressly disclaims any representation or warranty with respect to the
value, cost, effectiveness of manufacture or function of the Invention, the
Licensed Product, the Licensed Process or the technology or know-how, or of any
other information or right granted in the License Agreement. Licensor shall have
no liability to Licensee for any claim whatsoever other than a claim arising
from an express representation or warranty labeled as a representation or
warranty in the body of this Settlement Agreement or the License Agreement.
Licensee hereby acknowledges that it has no right whatsoever to rely on any
other representation , warranty, comment, belief, document or information of any
kind provided by the Licensor to the Licensee.
-4-
<PAGE>
10. Nothing in the License Agreement or this Settlement Agreement shall be
construed to prohibit or restrict any action of Licensor taken within the
Exclusive Territory or outside the Exclusive Territory in furtherance of the
exercise of Licensor's rights outside the Exclusive Territory, including,
without limitation, the development, manufacture or operation of machinery for
the production of the Licensed Product to be sold outside the Exclusive
Territory, or the disclosure of Proprietary or Confidential information where
necessary or convenient in furtherance of Licensor's exercise of its rights
under the terms of the License Agreement, as modified by the Settlement
Agreement. Notwithstanding the foregoing, Licensor shall not do anything in the
Exclusive Territory which will diminish Licensee's rights within the Exclusive
Territory.
11. Notwithstanding any provision in the License Agreement to the contrary,
no default under the terms of the License Agreement shall cause termination of
the License except as set forth herein. In the event of a default, after
applying the Notice and Cure provisions contained in the License Agreement, the
License Agreement shall not terminate until a decision that termination should
occur is rendered by an arbitration panel before whom the parties bring their
dispute pursuant to paragraph XIX of the License Agreement. In the event that
the arbitration panel finds the existence of a default, and that the default was
not willful, then the arbitration panel shall not terminate the License, but
shall impose such other remedies or damages as the arbitration panel believes
will fully return the parties to the same position they would be in had no
default occurred in the first instance. Should the arbitration panel find that
the default was willful, then the arbitration panel must, in addition to the
relief set forth above, award the successful party the full amount of attorneys
fees incurred against the defaulting party. In the event of a second or further
default by Licensee, should the arbitration panel find the default was willful
for a second time, then the arbitration panel shall terminate the license
effective as of a date, either before or after the date of its opinion, as
provided by the arbitration panel. However, in the event of any default in
payments, or delivery, or vesting of warrants required by Paragraph 3.c., then
in connection with each and every such default the arbitration panel shall
provide that unless payment, plus interest is made of all amounts due pursuant
to Paragraphs 3.c. and 11 of this Settlement Agreement within fifteen (15)
business days after the arbitration panel's decision, then the License shall
terminate without any further notice or order. Termination of the License
Agreement shall not relieve Licensee of any obligation to make payments or
deliver warrants due prior to the date of termination.
12. The parties hereto agree that no arbitration shall be commenced prior
to a good faith effort to mediate before Judge John Gibbons. After two mediation
sessions, either party may terminate the mediation and proceed to arbitration.
If Judge Gibbons is unavailable, then the parties shall first attempt to agree
upon a mutually acceptable alternate mediator and failing such agreement, either
side may request the New York City office of JAMS/Endispute to designate a
mediator. However, in the event that the mediation shall not be concluded
within 30 days from a notice of default or written request for mediation, either
side shall be entitled to commence arbitration without further delay.
-5-
<PAGE>
13. In consideration of the foregoing the parties have executed mutual
releases annexed hereto as Exhibit B.
14. In the event that any of the payments called for on Schedule A or any
of the earned royalties required to be paid as set forth on Schedule B subject
to the Royalty Adjustment provided in paragraph 4 herein, are not paid when due,
then in that event, the Royalty Adjustment set forth in paragraph 4 shall be
eliminated and all of the Earned Royalties as set forth on Schedule B shall
immediately be due and owing, and a Minimum Royalty shall be due for year 1,
1998, in the amount of $150,000, and for year 2, 1999 in the amount of $300,000
to the extent that the earned royalties for 1998 and or 1999 are not equal to
the minimum royalties, said minimum royalties shall also be due and owing.
15. The Warrants listed on Schedule A shall be exercisable at 20% above the
market value per share at the closing price on the date of this Settlement
Agreement and shall vest on the dates and in the amounts as set forth on
Schedule A; shall have a term of five (5) years from date of vesting and shall
be adjusted from time to time as necessary to reflect stock splits, stock
dividends, consolidation, combination or reclassification of the common stock of
HumaScan. The Warrants shall also be exercisable on a cashless basis and such
cashless exercise provision shall be similar to that contained in options
granted by HumaScan to its officers, directors and employees. HumaScan shall use
its best efforts to register the underlying shares of common stock for resale
under the Securities Act of 1933, as amended ("Securities Act"), and the "blue
sky" laws of such States as are reasonably requested by the holders, within six
months after this Settlement Agreement, provided that HumaScan shall not be
required to register such shares in any State in which such registration would
cause (x) HumaScan to be obligated to register or license to do business in such
State or (y) the principal stockholders of HumaScan to be obligated to escrow
their shares of capital stock of HumaScan. HumaScan shall bear all fees and
expenses attendant to registering the shares of common stock underlying the
Warrants but the holders of such shares shall pay any commission and expenses of
any underwriter representing the holders and the fees and expenses of any legal
counsel representing them in connection with the sale of such shares. HumaScan
and such holders shall provide each other with customary indemnification, and
HumaScan shall cause any registration statement filed pursuant to such
registration rights to remain effective until the earlier of (x) the date on
which all of the underlying shares have been sold by the holders thereof, or (y)
the first date on which all shares of Common Stock underlying the Warrants are
eligible for resale by the holders pursuant to the provisions of Rule 144(k)
under the Securities Act.
16. The Parties agree to negotiate in good faith over further clarification
and restatement of the terms of the License Agreement and to mediate any
continuing disagreement arising from negotiations before Judge John Gibbons
should he be available to do so. Unless and until any agreement between the
parties in writing with respect to any modification, clarification or
re-statement, the terms of the License Agreement as amended by the Settlement
Agreement
-6-
<PAGE>
shall remain in full force and effect. If Judge John Gibbons is unavailable,
then the parties shall either pursue such mediation effort before a mediation
mutually selected by the parties. Absent mutual agreement as to such mediation,
the parties shall ask the New York City office of JAMS/Endispute to designate a
mediator.
17. Except to the extent expressly provided herein, by entering into this
Settlement Agreement, neither Scantek nor HumaScan shall be deemed to have made
*any admission against its respective interest, or admitted any alleged
liability, wrongdoing or violation of any rule, regulation or statute.
18. This Settlement Agreement sets forth the entire understanding between
the parties, and all previous discussions, understandings, representations,
negotiations, and agreements with respect to the matters included in this
Settlement Agreement are merged herein.
19. Should any provision of this Settlement Agreement require
interpretation or construction, it is agreed that because both parties, by their
respective attorneys, have fully participated in the preparation of all
provisions of this Settlement Agreement, any court or arbitration panel, in
interpreting or construing this Settlement Agreement, shall not apply any
presumption based upon the rule of construction that a document is to be
construed more strictly against the party who itself or through its agents
prepared the same.
Dated: May 15, 1998 Scantek Medical Inc.
By /s/ Zsigmond L. Sagi
--------------------------------
Zsigmond L. Sagi, President
By direction of the Board
HumaScan Inc.
By /s/ Donald Brounstein
--------------------------------
Donald Brounstein, President
By direction of the Board
-7-
<PAGE>
Schedule A to Scantek Agreement with Humascan
Dated May 15, 1998
Cash to be Paid by Warrants of its Stock to be
Date or Event HumaScan to Scantek Vested in Scantek
------------- ------------------- ---------------------------
Signing $125,000.00(1) 175,000
06/30/98 $75,000.00 0
09/30/98 $50,000.00 100,000
10/31/98 $75,000.00 0
12/31/98 $75,000.00 75,000
01/31/99 $0.00 0
03/31/99 $25,000.00 50,000
06/30/99 $25,000.00 0
09/30/99 $25,000.00 0
12/31/99 $50,000.00 0
03/30/00 $0.00 0
06/30/00 $0.00 0
Totals $525,000.00 400,000
- ----------
(1) Exclusive of $50,000 payable pursuant to Paragraph 3(a) of this
Settlement Agreement
<PAGE>
Schedule B to Scantek Agreement with Humascan
Dated May 15, 1998
Commencing with the first day of the first month in which Licensed Product
is sold (the "Royalty Date") and for each year ending on the anniversary of the
Royalty Date (hereinafter referred to as a "Royalty Year") through and including
the Termination Date, and subject to the provisions of subsection I of this
Section V, Licensee agrees to pay to Licensor earned royalties (the "Earned
Royalties") based on the Net Sales Price of all Sales of the Licensed Products
(the "Net Licensed Product Sales") during the Royalty Years as follows:
(i) with respect to the first $2,000,000 of Net Licensed Product
Sales, 3% of the aggregate of all such Net Licensed Product
Sales;
(ii) if the Net Licensed Product Sales exceed $2,000,000 but are less
than $4,000,000, 4% of the aggregate of such Net Licensed Product
Sales;
(iii) if the Net Licensed Product Sales exceed $4,000,000 but are less
than $6,000,000, 5% of the aggregate of such Net Licensed Product
Sales;
(iv) if the Net Licensed Product Sales exceed S6,000,000 but are less
than $8,000,000, 6% of the aggregate of such Net Licensed Product
Sales;
(v) if the Net Licensed Product Sales exceed $8,000,000 but are less
than S10,000,000, 8% of the aggregate of such Net Licensed
Product Sales;
(vi) if the Net Licensed Product Sales exceed $10,000,000, 10% of the
aggregate of such Net Licensed Product Sales.
Settlement Agreement
(Zigmed/HumaScan)
WHEREAS, Zigmed Corporation ("Zigmed") and HumaScan Inc. ("HumaScan") are
parties in an agreement for Zigmed to produce and HumaScan to purchase one (1)
Sensor Manufacturing machine and one (1) Assembly and Packaging machine
(collectively the "Manufacturing Line"), as contained in Zigmed's proposal
#193-2, HumaScan's Purchase Order of May 10, 1996, and specifications and
drawing dates January 1, 1991 and March 10, 1995 (collectively the
"Manufacturing Agreement"), and a Guarantee and Amendment Agreement among
Zigmed, HumaScan, and Zsigmond G. Sagi ("Z. G. Sagi") dated December 20, 1995
(the "Guarantee Agreement").
WHEREAS, certain disputes have arisen under the Manufacturing Agreement and
the Guarantee Agreement and the parties wish to resolve all such disputes as
hereinafter set forth, to execute mutual releases and to obtain peace; and
NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth, the mutual release of claims and resolution of disputes as hereinafter
indicated, the parties agree as follows:
1. In full satisfaction of all payment and other monetary obligations due
from HumaScan to Zigmed, HumaScan will pay Zigmed the sum of $105,000 at the
signing of the Settlement Agreement and will deliver 30,000 warrants exercisable
for five years from the date of this Settlement Agreement to acquire HumaScan
stock at 20% above the market value per share at the closing price on the date
of this Settlement Agreement, and will pay Zigmed $105,000 on the six-month
anniversary of the date of the Settlement Agreement.
2. Should the payments and warrant delivery called for by this Settlement
Agreement not be made as required by this paragraph, and should such default in
payment or delivery continue uncured for a period of ten business days, then
instead of the amounts due hereunder the amount of $425,000 shall immediately
become due and owing without any further notice and without any right of any
set-off or defense whatsoever, such rights and defenses having been waived.
3. In consideration of the foregoing the parties have executed mutual
general releases annexed hereto as Exhibit A.
4. The parties acknowledge that they are settling all claims with regard to
the timeliness of delivery, the quality or function of the Manufacturing Line
and its compliance with the contractual specifications, and the sufficiency of
any information, drawing, or specification delivered or not delivered from
Zigmed or others to HumaScan. All other rights of Zigmed with respect to the
Manufacturing Line, or Proprietary Information or Confidential Information and
<PAGE>
any limitations on HumaScan's rights or use of Proprietary Information of
Confidential Information as set forth in the Manufacturing Agreement remain in
effect.
5. Except to the extent expressly provided herein, by entering into this
Settlement Agreement, neither Zigmed, nor HumaScan, nor Sagi shall be deemed to
have made any admission against its respective interest, or admitted any alleged
liability, wrongdoing or violation of any rule, regulation or statute.
6. This Settlement Agreement sets forth the entire understanding between
the parties, and all previous discussions, understandings, representations,
negotiations, and agreements with respect to the matters included in this
Settlement Agreement are merged herein. This Settlement Agreement may be signed
in counterpart.
7. HumaScan acknowledges that it is settling any and all claims with regard
to the delivery date, value, cost, effectiveness of manufacture, speed or
function of the Manufacturing Line, the Invention, the Licensed Product, the
Licensed Process or the technology or know-how, or of any other information or
right granted in the Manufacturing Agreement. HumaScan hereby expressly
acknowledges that it has no right whatsoever to rely on any other
representation, warranty, comment, belief, document or information of any kind
provided by Zigmed or Zsigmond G. Sagi to HumaScan.
8. Should any provision of this Settlement Agreement require interpretation
or construction, it is agreed that because both parties, by their respective
attorneys, have fully participated in the preparation of all provisions of this
Settlement Agreement, any court or arbitrator, in interpreting or construing
this Settlement Agreement, shall not apply any presumption based upon the rule
of construction that a document is to be construed more strictly against the
party who itself or through its agents prepared the same.
9. The Warrants listed on Schedule B shall be exercisable at the market
value per share at the closing price on the date of this Settlement Agreement
and shall vest on the dates and in the amounts as set forth on Schedule B; shall
have a term of five (5) years from date of vesting and shall be adjusted from
time to time as necessary to reflect stock splits, stock dividends,
consolidation, combination or reclassification of the common stock of HumaScan.
The Warrants shall also be exercisable on a cashless basis and such cashless
exercise provision shall be similar to that contained in options granted by
HumaScan to its officers, directors and employees. HumaScan shall use its best
efforts to register the underlying shares of common stock for resale under the
Securities Act of 1933, as amended ("Securities Act"), and the "blue sky" laws
of such States as are reasonably requested by the holders, within six months
after this Settlement Agreement, provided that HumaScan shall not be required to
register such shares in any State in which such registration would cause (x)
HumaScan to be obligated to register or license to do business in such State or
(y) the principal stockholders of HumaScan to be obligated to escrow their
shares of capital stock of HumaScan. HumaScan shall bear all fees and expenses
attendant
2
<PAGE>
to registering the shares of common stock underlying the Warrants but the
holders of such shares shall pay any commission and expenses of any underwriter
representing the holders and the fees and expenses of any legal counsel
representing them in connection with the sale of such shares. HumaScan and such
holders shall provide each other with customary indemnification, and HumaScan
shall cause any registration statement filed pursuant to such registration
rights to remain effective until the earlier of (x) the date on which all of
the underlying shares have been sold by the holders thereof, or (y) the first
date on which all shares of Common Stock underlying the Warrants are eligible
for resale by the holders pursuant to the provisions of Rule 144(k) under the
Securities Act.
Dated: May 15, 1998 HumaScan Inc.
By /s/ Donald Brounstein
--------------------------------
Donald Brounstein, President
By direction of the Board
Zigmed Inc.
By /s/ Zsigmond G. Sagi
--------------------------------
Zsigmond G. Sagi, President
By direction of the Board
By /s/ Zsigmond G. Sagi
--------------------------------
Zsigmond G. Sagi, Individually
3
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 63,107
<SECURITIES> 2,987,375
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 901,777
<CURRENT-ASSETS> 4,166,584
<PP&E> 2,810,589
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0
0
<COMMON> 77,891
<OTHER-SE> 15,494,286
<TOTAL-LIABILITY-AND-EQUITY> 6,836,881
<SALES> 120,395
<TOTAL-REVENUES> 129,611
<CGS> 0
<TOTAL-COSTS> 4,197,819
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