<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............. to ............
Commission file number: 000-27592
SCANTEK MEDICAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 84-1090126
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26 Merry Lane
East Hanover, New Jersey 07936
(Address of principal executive offices)
(Zip Code)
201-331-1766
(Registrant's telephone number, including area code)
---------------------------------------------------------------
(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.
At February 1, 1997, there were 17,117,700 shares of Common Stock, $.0001
par value, outstanding.
<PAGE>
SCANTEK MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
Page Number
-----------
Part I. Financial Information 1
Item 1. Financial Statements
Consolidated Balance Sheets as
of December 31, 1996 (unaudited)
and June 30, 1996 2
Consolidated Statements of Operations
for the Six Months and Three Months
Ended December 31, 1996 and 1995
(unaudited) and for the Period June
10, 1988 (Date of Formation) through
December 31, 1996 3
Consolidated Statements of Stockholders'
Equity (Deficiency) for the Period June 10,
1988 (Date of Formation) through December
31, 1996 4 - 7
Consolidated Statements of Cash Flows
for the Six Months Ended December 31,
1996 and 1995 (unaudited) and for the
Period June 10, 1988 (Date of Formation)
through December 31, 1996 8 - 9
Notes to Consolidated Financial Statements
(unaudited) 10 - 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13 - 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Report on Form 8-K 18
Signatures 19
<PAGE>
PART I. Financial Information
Item 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that the following
consolidated financial statements be read in conjunction with the year-end
consolidated financial statements and notes thereto included in the Company's
Registration Statement on Form 10-SB for the year ended June 30, 1996.
The results of operations for the six months ended December 31, 1996,
are not necessarily indicative of the results to be expected for the entire
fiscal year or for any other period.
-1-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
------------- ----------
1996 1996
------------- ----------
Current Assets: (Unaudited)
Cash and cash equivalents $ 547,491 $ 247,515
Marketable securities 4,966,527 638,832
---------- ----------
Total Current Assets 5,514,018 886,347
---------- ----------
Equipment - net 338,080 2,346
Other assets - net 304,545 358,218
---------- ----------
TOTAL ASSETS $ 6,156,643 $ 1,246,911
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Short-term debt $ - $ 17,000
Current portion - long-term debt 175,000 -
Note payable to officer 304,993 304,993
Accounts payable 260,379 351,279
Accrued interest 64,085 247,784
Accrued salaries 481,119 398,619
Accrued expenses - 22,623
Deferred income taxes 129,000 -
---------- ----------
Total Current Liabilities 1,414,576 1,342,298
---------- ----------
Deferred income 829,082 826,582
Long-term debt 763,006 938,006
---------- ----------
Total Liabilities 3,006,664 3,106,886
---------- ----------
Stockholders' Equity (Deficiency):
Common stock, par value $.0001
per share - authorized
500,000,000; outstanding
17,117,700 and 15,790,200 1,712 1,579
Additional paid-in-capital 2,955,387 1,725,371
Unrealized gain on marketable
securities 4,563,195 364,500
Deficit accumulated during
development stage (4,370,315) (3,951,425)
---------- ----------
Total Stockholders' Equity
(Deficiency) 3,149,979 (1,859,975)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 6,156,643 $ 1,246,911
---------- ----------
---------- ----------
See notes to consolidated financial statements.
-2-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended For the Period
-------------------------- -------------------------- June 10, 1988
December 31, December 31, (Date of Formation)
-------------------------- -------------------------- through
1996 1995 1996 1995 December 31, 1996
----------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Income:
Interest income $ 11,185 $ 171 $ 6,529 $ 100 $ 17,134
Consulting - - - - 15,000
Miscellaneous - - - - 207,250
---------- ---------- ---------- ---------- ----------
Total Income 11,185 171 6,529 100 239,384
---------- ---------- ---------- ---------- ----------
Costs and Expenses:
General and adminis-
trative expenses 188,968 129,852 100,986 78,395 2,533,501
Amortization and
depreciation 55,685 55,117 28,471 27,559 584,325
Interest expense 52,669 59,104 26,351 22,320 418,390
Research and
development 132,753 79,180 66,459 43,500 1,073,483
---------- ---------- ---------- ---------- ----------
Total Costs and
Expenses 430,075 323,253 222,267 171,774 4,609,699
---------- ---------- ---------- ---------- ----------
Net (Loss) $ (418,890) $ (323,082) $ (215,738) $ (171,674) $(4,370,315)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
(Loss) per common share $(.03) $(.03) $(.01) $(.01)
---- ---- ---- ----
---- ---- ---- ----
Weighted average number
of common shares out-
standing 16,448,609 12,930,450 15,821,311 14,690,313
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------ ------------------------
Shares Amount Shares Amount
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Original Capitalization:
Sale of stock
($.023 per share) 2,000,000 $ 200 - $ -
Issuance of options for
services rendered (valued
at $.10 per share)
Net (loss) June 10, 1988
(Date of Formation)
through June 30, 1991
--------- --------- --------- ---------
Balance June 30, 1991 2,000,000 200 - -
.7 for 1 reverse stock
split (600,000) (60)
Donated stock to treasury 500,000
Issuance of stock to acquire
subsidiary ($.006 per
share) 7,100,000 710
Sale of treasury stock
($2.50 per share) (18,000)
Treasury stock exchanged for
services rendered (valued at
$.023 per share) (433,000)
Net (loss), June 30, 1992
--------- --------- --------- ---------
Balance, June 30, 1992 8,500,000 850 49,000 -
<CAPTION>
(Deficit)
Accumulated Unrealized
Additional During the Gain on
Paid - In Development Marketable
Capital Stage Securities Total
---------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Original Capitalization:
Sale of stock
($.023 per share) $ 45,894 $ - $ - $ 46,094
Issuance of options for
services rendered (valued
at .10 per share) 5,000 5,000
Net (loss) June 10, 1988
(Date of Formation)
through June 30, 1991 - (18,751) - (18,751)
------- -------- ------- --------
Balance June 30, 1991 50,894 (18,751) - 32,343
.7 for 1 reverse stock
split 60
Donated stock to treasury
Issuance of stock to acquire
subsidiary ($.006 per
share) 99,290 100,000
Sale of treasury stock
($2.50 per share) 45,000 45,000
Treasury stock exchanged for
services rendered (valued at
$.023 per share) 10,000 10,000
Net (loss), June 30, 1992 (485,314) (485,314)
------- -------- ------- --------
Balance, June 30, 1992 205,244 (504,065) - (297,971)
</TABLE>
See notes to consolidated financial statements. (Continued)
-4-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- -----------------------
Shares Amount Shares Amount
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Treasury stock exchanged
for services rendered
(valued at $.125 per share) (49,000)
Issuance of stock for
professional services
rendered (valued at $.25
to $.50 per share) 1,450,000 145
Issuance of stock for
contract release (valued
at $1.00 per share) 35,000 4
Net (loss)
---------- -------- -------- --------
Balance, June 30, 1993 9,985,000 999 - -
Issuance of callable
warrants for services
rendered (valued at
$.125 per share)
Issuance of stock in
connection with bridge
loan financing (issued
at $1.00 per share) 37,200 4
Net (loss)
---------- -------- -------- --------
Balance, June 30, 1994 10,022,200 1,003 - -
<CAPTION>
(Deficit)
Accumulated Unrealized
Additional During the Gain on
Paid - In Development Marketable
Capital Stage Securities Total
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Treasury stock exchanged
for services rendered
(valued at $.125 per share) 6,125 6,125
Issuance of stock for
professional services
rendered (valued at $.25
to $.50 per share) 412,355 412,500
Issuance of stock for
contract release (valued
at $1.00 per share) 34,996 35,000
Net (loss) (924,969) (924,969)
------- ---------- ------- ----------
Balance, June 30, 1993 658,720 (1,429,034) - (769,315)
Issuance of callable
warrants for services
rendered (valued at
$.125 per share) 15,625 15,625
Issuance of stock in
connection with bridge
loan financing (issued
at $1.00 per share) 37,196 37,200
Net (loss) (969,408) (969,408)
------- ---------- ------- ----------
Balance, June 30, 1994 711,541 (2,398,442) - (1,685,898)
</TABLE>
See notes to consolidated financial statements. (Continued)
-5-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- -------------------------
Shares Amount Shares Amount
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Issuance of stock in
connection with bridge
loan financing (issued
at $1.00 per share) 12,000 1
Issuance of stock for
services rendered (valued
at $.125 per share) 621,250 62
Net (loss)
---------- ------- ---------- -------
Balance, June 30, 1995 10,655,450 1,066
Issuance of stock exchanged
for accrued salaries (valued
at $.10 per share) 4,550,000 455
Long-term debt (valued at
$1.00 per share) 151,084 15
Issuance of stock for
services rendered (valued
at $.60 per share) 433,666 43
Issuance of warrants for
services rendered (valued
at $.30 per share)
Change in unrealized gain on
marketable securities
Net (loss)
---------- ------- ---------- -------
Balance, June 30, 1996 15,790,200 1,579 - -
<CAPTION>
(Deficit)
Accumulated Unrealized
Additional During the Gain on
Paid - In Development Marketable
Capital Stage Securities Total
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Issuance of stock in
connection with bridge
loan financing (issued
at $1.00 per share) 11,999 12,000
Issuance of stock for
services rendered (valued
at $.125 per share) 77,594 77,656
Net (loss) (736,267) (736,267)
--------- ---------- ------- ----------
Balance, June 30, 1995 801,134 (3,134,709) - (2,332,509)
Issuance of stock exchanged
for accrued salaries (valued
at $.10 per share) 454,545 455,000
Long-term debt (valued at
$1.00 per share) 151,069 151,084
Issuance of stock for
services rendered (valued
at $.60 per share) 273,623 273,666
Issuance of warrants for
services rendered (valued
at $.30 per share) 45,000 45,000
Change in unrealized gain on
marketable securities 364,500 364,500
Net (loss) (816,716) (816,716)
--------- ---------- ------- ----------
Balance, June 30, 1996 1,725,371 (3,951,425) 364,500 (1,859,975)
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- -------------------------
Shares Amount Shares Amount
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Issuance of stock in
connection with private
placement offering
(issued at $1.00 per share) 500,000 50
Issuance of stock in
connection with private
placement (issued at
$1.00 per share) 570,000 57
Issuance of stock for pro-
fessional services ren-
dered (valued at
$.167 per share) 60,000 6
Issuance of stock in lieu
of payment on equipment
(valued at $1.00 per share) 100,000 10
Stock options exercised
($.10 per share) 80,000 8
Issuance of stock in lieu
of payment for rental space
(valued at $1.69 per share) 17,500 2
Issuance of warrants for
services rendered (valued
at $.10 per share)
Change in unrealized gain on
marketable securities
Net (loss) - six month
period
---------- ------ ------- -------
Balance, December 31,
1996 17,117,700 $ 1,712 - $ -
---------- ------- -------- -------
---------- ------- -------- -------
<CAPTION>
(Deficit)
Accumulated Unrealized
Additional During the Gain on
Paid - In Development Marketable
Capital Stage Securities Total
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Issuance of stock in
connection with private
placement offering
(issued at $1.00 per share) 499,950 500,000
Issuance of stock in
connection with private
placement (issued at
$1.00 per share) 569,943 570,000
Issuance of stock for pro-
fessional services ren-
dered (valued at
$.167 per share) 9,994 10,000
Issuance of stock in lieu
of payment on equipment
(valued at $1.00 per share) 99,990 100,000
Stock options exercised
($.10 per share) 7,992 8,000
Issuance of stock in lieu
of payment for rental space
(valued at $1.69 per share) 29,644 29,646
Issuance of warrants for
services rendered (valued
at $.10 per share) 12,503 12,503
Change in unrealized gain on
marketable securities 4,198,695 4,198,695
Net (loss) - six month
period (418,890) (418,890)
--------- ---------- ---------- ---------
Balance, December 31,
1996 $2,955,387 $(4,370,315) $4,563,195 $3,149,979
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Period
Six Months Ended June 10, 1988
December 31, (Date of Formation)
----------------------------- through
1996 1995 December 31, 1996
-------------- ------------- ---------------------
<S> <C> <C> <C>
Cash flows from Operating Activities:
Net (loss) $ (418,890) $ (323,082) $(4,370,315)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on distribution of marketable securities - - (182,250)
Depreciation and amortization 55,686 55,117 584,326
Non-employee stock based compensation - - 845,572
Non-cash officers compensation - 455,000 639,500
Other non-cash items 12,503 12,300 126,787
Changes in operating assets and liabilities (172,676) (299,843) 1,506,477
--------- --------- ----------
Net Cash (Used in) Operating Activities (523,377) (100,508) (849,903)
--------- --------- ----------
Cash flows from Investing Activities:
Purchases of patents - - (76,069)
Organization costs - - (199,672)
Purchase of property, plant and equipment (237,647) - (244,958)
--------- --------- ----------
Net Cash (Used in) Investing Activities (237,647) - (520,699)
--------- --------- ----------
Cash flows from Financing Activities:
Proceeds from borrowings - - 536,006
Proceeds from officer loans - 89,000 306,993
Repayment of officer loans - - (2,000)
Repayment of notes (17,000) - (92,000)
Proceeds from sale of options 8,000 - 8,000
Proceeds from sale of common and treasury
stock 1,070,000 - 1,161,094
--------- --------- ----------
Net Cash Provided by Financing Activities 1,061,000 89,000 1,918,093
--------- --------- ----------
Net Increase (Decrease) in Cash 299,976 (11,508) 547,491
Cash - beginning of period 247,515 19,782 -
--------- --------- ----------
Cash and Cash Equivalents - end of period $ 547,491 $ 8,274 $ 547,491
--------- --------- ----------
--------- --------- ----------
</TABLE>
See notes to consolidated financial statements. (Continued)
-8-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Period
Six Months Ended June 10, 1988
December 31, (Date of Formation)
------------------------- through
1996 1995 December 31, 1996
---------- ---------- ------------------
<S> <C> <C> <C>
Changes in Operating Assets and Liabilities
Consist of:
(Increase) in other assets $ (100) $ - $ (100)
(Decrease) Increase in accounts
payable and accrued expenses (175,076) (342,666) 954,176
Increase in deferred income 2,500 50,000 552,500
(Decrease) in accrued
franchise tax - (7,177) (99)
--------- -------- ---------
$ (172,676) $(299,843) $1,506,477
--------- -------- ---------
--------- -------- ---------
Supplementary information:
Cash paid during the year for:
Interest $ 850 $ $ 250,858
--------- -------- ---------
--------- -------- ---------
Income taxes $ $ $ 13,347
--------- -------- ---------
--------- -------- ---------
Non-Cash Investing Activities
Debt incurred for asset transfer agreement
of patents $ $ $ 600,000
--------- -------- ---------
--------- -------- ---------
Acquisition of subsidiary for common stock $ $ $ 100,000
--------- -------- ---------
--------- -------- ---------
Acquisition of marketable securities
in connection with licensing agreement $ $ $ 276,582
--------- -------- ---------
--------- -------- ---------
Unrealized gain on marketable securities $ 265,149 $ $4,563,195
--------- -------- ---------
--------- -------- ---------
Purchase of equipment for common stock $ 100,000 $ $ 100,000
--------- -------- ---------
--------- -------- ---------
Non-Cash Financing Activities:
Conversion of accounts payable and accrued
expenses to common stock $ 39,646 $ $ 882,752
--------- -------- ---------
--------- -------- ---------
Conversion of accounts payable to stock
options $ $ $ 5,000
--------- -------- ---------
--------- -------- ---------
Conversion of accounts payable to warrants $ $ $ 60,625
--------- -------- ---------
--------- -------- ---------
Conversion of accounts payable to treasury
stock $ $ $ 16,125
--------- -------- ---------
--------- -------- ---------
Conversion of accrued officers salaries
to common stock $ $ $ 457,250
--------- -------- ---------
--------- -------- ---------
Conversion of long-term debt to common
stock $ $ $ 121,000
--------- -------- ---------
--------- -------- ---------
Issuance of warrants for services rendered $ 12,503 $ $ 12,503
--------- -------- ---------
--------- -------- ---------
</TABLE>
See notes to consolidated financial statements.
-9-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The consolidated balance sheet as of December 31, 1996, and the
consolidated statements of operations and cash flows for the six months ended
December 31, 1996 and 1995, and for the period June 10, 1988 (Date of Formation)
through December 31, 1996 have been prepared by the Company and are unaudited.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made. Certain
items in the December 31, 1995 financial statements have been reclassified to
conform to December 31, 1996 classifications. The information for June 30, 1996
was derived from audited financial statements.
2. In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which is effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees in Notes to Annual Financial Statements and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. Companies are permitted, however,
to continue to apply APB Opinion No. 25, which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock based compensation awards to
employees and will disclose the required pro forma effect on net income and
earnings per share in a note to its annual financial statements.
3. (Loss) Per Share - Loss per common share are computed using the weighted
average number of common shares outstanding during the period. The effect of
outstanding stock options and warrants were not considered as their effect was
antidilutive.
4. EQUIPMENT
Equipment consists of the following:
December 31, June 30,
------------- --------
1996 1996
------------- --------
Equipment $ 41,646 $ 4,000
Furniture and fixtures 9,462 9,462
Deposit on equipment 300,000 -
-------- --------
351,108 13,462
Less accumulated
depreciation 13,028 11,116
-------- --------
Net Equipment $ 338,080 $ 2,346
-------- --------
-------- --------
-10-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. DEBT
Long-term debt consists of the following:
December 31, June 30,
----------- --------
1996 1996
----------- --------
Unsecured notes, due upon
completion of a secondary
public offering, interest
at 10% per year $ 50,000 $ 50,000
Unsecured note, interest at
8% per year, due December
31, 1997 and beyond per
payment terms 888,006 888,006
-------- --------
938,006 938,006
Less current portion of long-
term debt (175,000) -
-------- --------
Long-Term Debt $ 763,006 $ 938,006
-------- --------
-------- --------
6. INCOME TAXES
Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes" (SFAS 109), provides for the recognition of deferred
assets subject to a valuation allowance. At June 30, 1996, the Company
established a valuation allowance equal to the full amount of the tax
effect of the net operating loss carryforward. At December 31, 1996, the
Company has provided deferred taxes of $129,000 on the unrealized gain on
marketable securities after off-setting the net operating loss
carryforward. The deferred taxes are netted against the unrealized gain on
marketable securities.
-11-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. NOTE PAYABLE TO OFFICER
The note payable to officer represents loans made to the Company by its
President and Chief Executive Officer. The promissory note bears interest
at prime plus one (1%) percent, nine and a quarter (9 1/4%) percent at
December 31, 1996 and June 30, 1996, and is payable on demand. The note
payable to officer was $304,993 at December 31, 1996 and June 30, 1996.
Included in accrued interest was $14,106 at December 31, 1996. Accrued
interest of $66,712 at June 30, 1996 was paid in August, 1996.
8. COMMITMENTS
The Company has entered into an agreement with Zigmed, Inc. (a company
owned and controlled by the son of Mr. Zsigmond Sagi, the Company's
President and Chief Executive Officer, who prior to 1990 owned Zigmed),
pursuant to which Zigmed Inc. will manufacture the production equipment
needed for the manufacturing of the Company's product for the contract
price of $1,850,000. In August 1996, the Company paid Zigmed Inc. an
advance deposit of $200,000 to begin production of the manufacturing
equipment and in September 1996 issued Zigmed Inc. 100,000 shares of the
Company's common stock (valued at $1.00 per share) against the contract
price. The $300,000 is shown as Deposit on Equipment as a component of
Equipment in the Company's consolidated balance sheet at December 31, 1996.
-12-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
OVERVIEW
- --------
The Company is a high-tech development stage company organized to develop,
manufacture, sell and license products and devices to assist in the diagnosis
and early detection of disease. At the present time, the Company is focusing to
manufacture, sell and license the BreastALERT device. The device has been
patented and has Food and Drug Administration ("FDA") approval for sale. The
BreastALERT is a screening device which can detect breast tissue abnormalities,
including breast cancer. The Company has not generated any revenues but has
entered into a License Agreement whereby the licensee purchased the right to
manufacture and sell the BreastALERT in the United States of America, Canada and
their territories and possessions.
The following table sets forth for the periods indicated, the percentage
increase or decrease of items included in the Company's consolidated statement
of operations:
% Increase (Decrease) from Prior Period
---------------------------------------
Six Months Ended Three Months Ended
December 31, 1996 December 31, 1996
compared with 1995 compared with 1996
------------------ ------------------
General and adminis-
trative expense 35.9 28.8
Amortization and
depreciation 1.0 3.3
Interest expense (10.9) 18.1
Research and
development 67.7 52.8
Net loss 25.7 25.6
SIX MONTHS 1996 VS. SIX MONTHS 1995
- -----------------------------------
GENERAL AND ADMINISTRATIVE
- --------------------------
General and administrative expenses increased 35.9% for the six month
period ending December 31, 1996 as compared with 1995. This increase is
primarily due to public relations expenses incurred during the six months ended
December 31, 1996.
AMORTIZATION AND DEPRECIATION
- -----------------------------
Amortization and depreciation for the six months ended December 31, 1996 as
compared to 1995 has remained relatively constant.
INTEREST EXPENSE
- ----------------
Interest expense was $52,669 for the six months ended December 31, 1996
compared to $55,117 for the six months ended December 31, 1995. The 10.9%
decrease was attributable to decreases in the debt incurred by the Company
during the previous fiscal year ending June 30, 1996.
-13-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------
RESEARCH AND DEVELOPMENT
- ------------------------
Research and development expense increased 25.7% to $132,753 during the six
months ended December 31, 1996 from $79,180 during the six months ended December
31, 1995. The increase is primarily attributable to increased salaries incurred
by the Company in the experimental area of development of its product.
THREE MONTHS 1996 VS. THREE MONTHS 1995
- ---------------------------------------
GENERAL AND ADMINISTRATIVE
- --------------------------
General and administrative expenses increased 28.8% for the three month
period ending December 31, 1996 as compared to 1995. The increase is primarily
due to public relation expenses incurred in the second quarter of 1996 as
compared to 1995.
AMORTIZATION AND DEPRECIATION
- -----------------------------
Amortization and depreciation for the three months ended December 31, 1996
and 1995, has remained relatively constant.
INTEREST EXPENSE
- ----------------
Interest expense increased 18.1% from the second quarter of 1995 to the
second quarter of 1996. The increase is attributable to the interest rate
increase of approximately 2% on a $888,006 note that was consolidated with new
terms.
RESEARCH AND DEVELOPMENT
- ------------------------
Research and development expense increased 25.6% to $66,459 during the
second quarter ending December 31, 1996 from $43,500 for the same period ending
1995. The increase is attributable to increased salaries incurred by the
Company in the experimental area of development of its product.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's need for funds has increased from period to period as it has
incurred expenses for among other things, research and development;
applications for domestic and international patent protection; licensing and
pre-marketing activities; and attempts to raise the necessary capital for
initial production. Since inception, the Company has funded these needs through
private placements of its equity and debt securities and advances from the
Company's President, Chief Executive Officer and major shareholder. In
addition, the Company's auditors' report for the year ended June 30, 1996 dated
August 6, 1996, expressed an opinion as to the Company continuing as a going
concern.
-14-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------------------
On April 29, 1996, the Company entered into an Amended License Agreement
with Humascan, Inc. ("Humascan" or "Licensee"), amending the October 20, 1995
License Agreement whereby Humascan purchased the right to manufacture and sell
the BreastALERT in the United States and Canada and their respective territories
and possessions and pay the Company a licensing fee of $1,600,000, $550,000 of
which has been received as of December 31, 1996 and the issuance to the Company
1,004,063 shares (after a three for four stock split) of the outstanding common
stock of Humascan. Thereafter (subject to acceptance of various equipment
installations by Humascan), $175,000 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.
In connection with the agreement, commencing with the first day of the
first month in which the Licensed Product is sold and for each year through and
including the termination date October 20, 2012, the Licensee agrees to pay the
Company a royalty based on net sales, ranging from three (3%) percent of the
first $2 million increasing to ten (10%) percent of net sales in excess of $10
million with a minimum royalty of $150,000 in the first year increasing to
$600,000 in the fifth year and thereafter.
The Company's working capital and capital requirements will depend on
numerous factors, including the level of resources that the Company devotes to
the purchase of manufacturing equipment to support start-up production and to
the marketing aspects of its product. The Company intends to construct a
production facility abroad to manufacture, market and sell the BreastALERT to
the international market. The Company entered into an agreement with Zigmed
Inc. pursuant to which Zigmed Inc. will manufacture the production equipment
needed for the manufacturing of the BreastALERT for the contract price of
$1,850,000. In August 1996, the Company paid Zigmed Inc. an advance deposit of
$200,000 to begin production of the manufacturing equipment and in September
1996 issued Zigmed Inc. 100,000 shares of the Company's common stock (valued at
$1.00 per share) against the contract price.
-15-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------------------
The Company believes it must maintain a separate manufacturing facility
from its licensee to sell the BreastALERT to the international market. To have
economical and profitable endeavors the Company intends to set up its
international activities outside of the U.S. The Company is looking for a
possible manufacturing location which can give the Company good access to
shipping, tax considerations, and low manufacturing cost. Due to the nature of
the Company's product, shipping will be a major cost factor; therefore, the
Company intends to set up the first manufacturing location in central Europe.
Another major consideration is the segmental distribution of the product,
because of policing of the crossover among distributor's areas. A final
consideration is the ease of possible distribution into South East Asia and Asia
in general from the European location.
As part of the licensing agreement with Humascan, the Company can purchase
$1 million worth of the BreastALERT to sell to the international market. This
provision is valid only in the first year of Humascan's operations. This will
enable the Company to start its distribution before its own production
capability is ready. The cost to purchase the BreastALERT per the agreement is
higher than if the Company was to manufacture the BreastALERT itself.
On November 19, 1996, the Company entered into a license agreement with
Health Technologies International Inc. ("HTI"), whereby HTI is to assemble
market and sell the BreastALERT in Chile and Singapore, and pay the Company a
licensing fee of $250,000 in the first quarter of 1997 of which $2,500 has been
received as of December 31, 1996.
Pursuant to the terms of the agreement, the licensee agrees to pay the
Company minimum royalties of $100,000 in 1997 with increasing royalties leveling
out at a minimum of $400,000 in the year 2000 and thereafter. Additionally, HTI
has agreed to pay the Company a one-hundred (100%) percent mark-up on product
cost for the Company's services in operating HTI's manufacturing line. The
Company is the beneficial owner of twenty (20%) percent of HTI.
The Company's success is dependent on raising sufficient capital to
establish a production facility and purchase manufacturing equipment to
manufacture the BreastALERT for the international market. The Company does not
have all the financing in place at this time, nor may it ever, to meet these
objectives. However, the Company feels payments to be received on the initial
license fee and the HTI license agreement, the $1,070,000 of net proceeds
received from two private placements in July and August 1996, and the
marketable securities owned by the Company that are available for sale will be
more than sufficient to cover the operations of the Company over the next
twelve (12) months. The Company believes the BreastALERT will be commercially
accepted throughout the international market. If the proposed production
facility is not constructed, the Company, under a separate agreement, will be
able to purchase additional units from Humascan to generate profits and cash
flows to fund its current operations in the foreseeable future, despite the
higher price it will pay for these units.
-16-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------
As stated previously, the Company has financed its operations through
private placements of its equity and debt securities and advances from the
Company's President.
In a 1994 private placement, the Company raised $246,000 through unsecured
notes. Each noteholder did receive 2,000 shares of the Company's common stock
as additional consideration for their ten (10%) percent promissory note. The
promissory notes issued in connection with these bridge loans are due in full
upon the completion of a public offering by the Company. In March 1995, the
Company offered to convert the promissory notes into shares of the Company's
common stock at a conversion price of $1.00 per share. As of September 30,
1996, $121,000 of promissory notes, plus interest, were converted into 151,084
shares and $75,000 of these notes were repaid.
On June 30, 1996, the Company consolidated a $288,006 note, due June 30,
1996 and a $600,000 note, due August 20, 1996 into one note for $888,006 bearing
simple interest at eight (8%) percent per year. The note is due December 31,
1997 and beyond per payment terms.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements that may or may not
materialize. Additional information on factors that could potentially affect
the Company's financial results may be found in the Company's filings with the
Securities and Exchange Commission.
-17-
<PAGE>
PART II. Other Information
Item 1. LEGAL PROCEEDINGS
-----------------
See Item 3 of the Company's Form 10-SB for the year ended June
30, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits: Exhibit 27.1 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed by the registrant
during the quarter ended December 31, 1996.
-18-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCANTEK MEDICAL INC.
By:/s/ Zsigmond Sagi
--------------------------------
Zsigmond Sagi, President and
Chief Financial Officer
Dated: February 18, 1997
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCANTEK
MEDICAL INC. FINANCIAL STATEMENTS AT DECEMBER 31, 1996 AND THE THREE MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 547,491
<SECURITIES> 4,966,527
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,514,018
<PP&E> 351,108
<DEPRECIATION> 13,028
<TOTAL-ASSETS> 6,156,643
<CURRENT-LIABILITIES> 1,414,576
<BONDS> 0
0
0
<COMMON> 1,712
<OTHER-SE> 3,148,267
<TOTAL-LIABILITY-AND-EQUITY> 6,156,643
<SALES> 0
<TOTAL-REVENUES> 11,185
<CGS> 0
<TOTAL-COSTS> 377,406
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,669
<INCOME-PRETAX> (418,890)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (418,890)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
