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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR 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 000-27592
SCANTEK MEDICAL INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1090126
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 PALMER ROAD, DENVILLE, NEW JERSEY 07834
(973) 366-5250
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(Address and telephone number, including area code, of
registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g)
of the Act: COMMON STOCK, $.001 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Aggregate market value of voting stock held by non-affiliates as of
September 15, 1998 was approximately $ (based upon the closing sales price of
those shares reported on the National Association of Securities Dealers
Automated Quotation System for that day).
Number of shares of Common Stock outstanding as of September 15, 1998:
17,220,200
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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SCANTEK MEDICAL INC.
INDEX
Part I Page
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Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to Vote of
Security Holders 15
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholders Matters 16
Item 6. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17
Item 7. Financial Statements 22
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 23
Part III
Item 9. Directors and Executive Officers;
Promoters and Control Persons;
Compliance with Section 16(a) of the
Exchange Act 23
Item 10. Executive Compensation 25
Item 11. Security Ownership of Certain
Beneficial Owners and Management 26
Item 12. Certain Relationships and Related
Transactions 28
Part IV
Item 13. Exhibits and Reports on Form 8-K 29
Signatures 34
* Page F-1 follows page 22.
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PART I
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company's competitive factors; the ability of the
terms satisfactory to the Company's competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
ITEM 1. BUSINESS
GENERAL
Scantek Medical, Inc. (the "Company"), a Delaware corporation, was
organized under the name "Jenncor Acquisition Inc." on June 10, 1988, to obtain
funding for prospective business opportunities available to publicly held
entities. Until October 3, 1991, when the Company exchanged its shares with
Scantek Digital Systems Inc. ("SDSI"), the Company's only business activities
involved raising capital through a public offering pursuant to Regulation A of
the Securities Act of 1933, as amended (the "Act"). Pursuant to the share
exchange between the Company and SDSI, SDSI, the current holder of several
patents relating to a medical product known as the Breast Abnormality Indicator
("BreastCare(TM)") device, became a wholly-owned subsidiary of the Company. The
Company is a development stage company and has not received any significant
sales revenue to date. Its accumulated deficit as of June 30, 1998 was
$4,070,347.
The Company's business is to develop products and devices to assist in the
diagnosis and early detection of disease. In today's health care environment,
containment of medical care cost is a major priority. The Company has focused
its business on easy to use low cost products and devices for its domestic and
international markets which will have an impact on preventive health care and
cost containment. The Company's first product, the BreastCare(TM) device has
United States Food and Drug Administration ("FDA") marketing clearance for use
by physicians as an adjunct to clinical examination, including palpation,
mammography and other established screening modalities. The BreastCare(TM)
device is a single-use, non-invasive, easy to use, accurate, cost-effective test
to alert the physician to the possibility of a physiological condition that may
be thermally active cancer.
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The BreastCare(TM) device can detect cellular abnormalities as small as
one-half centimeter in diameter as established through biopsy proven tumors. The
Company believes that this technology upon which the BreastCare(TM) device is
based will be useful in measuring certain other body disorders.
THE PRODUCT
Breast cancer is the most common cause of cancer deaths for women worldwide
as was reported by the World Wide Organization. The American Cancer Society's
1998 Cancer Facts and Figures states if breast cancer is detected when still
localized the 5-year survival rate is 97% today, and if you have distant
metastases at the time of diagnosis the 5-year survival rate drops to 20%. Early
detection and diagnosis of breast cancer are important in the reduction of
mortalities.
Management believes that the BreastCare(TM) device can assist in the
recognition of abnormal early cellular development by recording the heat
differentiation of corresponding areas of the breast. The BreastCare(TM) device
is not a definitive test for cancer (i.e., a biopsy, the removal and examination
of, usually microscopic, tissue from the living body, performed to establish a
precise diagnosis) but is a risk marker to identify and follow breast
abnormalities by means of temperature conductivity integration when used
adjunctly with clinical palpation and mammography.
One of the important biological activities of malignant tumors is the
increased rate of growth as compared to the surrounding or "host" tissue. The
malignant propensities are directly related to the speed of cell division, this
in turn is reflected by accelerated local metabolism which is adequately
supported by increased blood and lymphatic vascularity. These biological
alterations can be detected by measuring temperature differences in the tumor
and its immediate environment versus other segments of the same breast, or by
comparing to the same area of the opposite breast. Heat energy is transferred by
process of convection, conduction (as with the BreastCare(TM) device) and
radiation (as with Thermography).
The BreastCare(TM) device is designed to assist in the detection of
pathology of the breast by recognizing "significant" heat differences in the
underlying tissue of a particular area, by comparing corresponding
(mirror-image) segments of one breast to the other. The cause of the
hyperthermia cannot be determined by this test alone, so the BreastCare(TM)
device serves as an early warning signal to alert the doctor to the fact that
there is evidence of a pathological process, one of which could be thermally
active breast cancer, that should be evaluated further within a particular area
of the breast.
The device is designed to complement, not replace, conventional breast
abnormality screening methods and devices. It is intended for use by women of
all ages. The product will be available for a routine, primary office care
procedure used by physicians, gynecologists and other medical specialists as
part of a breast disease monitoring program adjunctively with Breast Self
Examination (BSE), Clinical Breast Examination (CBE), (depending on a patient's
age, family history, and other factors) mammography and other established
clinical procedures.
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The BreastCare(TM) device consists of a pair of mirror-image, non-invasive,
lightweight, disposable soft pads, each of which has three wafer-thin foil
segments containing columns of heat sensitive chemical sensors that change color
from blue to pink reflecting an 8.5 degree temperature range between 90 and 98.5
Fahrenheit. When placed against a woman's breasts inside her brassiere for a
period of 15 minutes, the BreastCare(TM) device registers the temperature
variations due to heat conducted from within the breast tissue to the surface of
the skin. The result will be digitally, not analogically, indicated by color
changes for each temperature gradation. Significant temperature differences (2
degrees F. or four bars) in the corresponding areas of the breasts may indicate
an abnormal unilateral thermal activity long before a lump is discovered by
self-examination or clinical examination or other detection methods such as
mammography, ultrasound, etc. The BreastCare(TM) device test does not replace
recommended guidelines for scheduled mammographic screening.
Development and clinical trials of the BreastCare(TM) device were completed
between 1980 and 1984. This testing showed the BreastCare(TM) device capable of
detecting lesions in the breast earlier than possible through clinical
examination by sensing metabolic changes in the breast. Studies were undertaken
to determine the efficacy of the device at Georgetown University School of
Medicine, Memorial Sloan-Kettering Hospital in New York, at M.D. Anderson
Memorial Hospital in Houston, at Brotman Memorial Hospital at UCLA, and Guttman
Breast Diagnostic Institute in New York. The device proved to have a sensitivity
index (88.1%) of unilateral breast cancer patients. In the Guttman screening
trials, the device when compared to mammography and clinical findings for the
suspension of cancer proved to have a sensitivity index of 86.9%. In the group
of women recommended for biopsy based on the suspicion of cancer, the device has
proven sensitivity of 86.7% against biopsy.
SCIENTIFIC BASIS
Infrared thermography for the evaluation of breast lesions was introduced
in 1956, and systems employing thermosensitive liquid crystal films have
generated renewed interest since 1978. Studies by Dr. Michael Gautherie,
University of Strasbourg, France and others dating from 1970 have directly
evaluated the heat of cancerous breast tissue compared with that of health
breast tissue. These studies found that tumor temperature was always higher than
the surrounding temperature and suggested that the increase in tumor heat
resulted from an increased metabolism. Moreover, two other phenomena were found
to occur: tumor heat was found to be transported within the surrounding breast
tissue (principally by blood convection through the veins) resulting in local or
diffuse increases in skin temperature; and vascular changes were observed in the
tumor area and further in the subcutaneous breast tissues. In short, both
hyperthermia and hypervascularization were found to have occurred in the tumor
and at its periphery, in comparison to the temperature and blood flow of healthy
tissue in the contralateral breast. Further research by Dr. Gautherie and others
has demonstrated an unequivocal relationship between the metabolic heat
production of cancer tissue and the doubling time of tumor volume: the faster
the tumor grows the more heat it generates.
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The BreastCare(TM) device measures underlying breast tissue temperature and
not skin surface temperature by retaining emitted heat when the BreastCare(TM)
device is placed against the breast. It differs from preexisting infrared and
liquid crystal thermography techniques which allow the heat to escape or radiate
during measurement. The BreastCare(TM) device takes into consideration that the
average temperature patterns of a healthy woman's breasts are closely
symmetrical. This method detects abnormalities by comparing the temperature
differences in the corresponding mirror image areas of a woman's breasts.
Recently, the scientific foundation for the BreastCare(TM) device
effectiveness has been considerably strengthened. Comprehensive research has
established in detail the mechanisms by which malignancies radically alter the
host tissue environment, notably through two quantitatively measurable
processes: (1) A tumor significantly elevates overall rates of metabolic
activity, and (2) A tumor greatly intensifies capillary vascularization in host
tissues. In particular, this latter process of angiogenesis was a very critical
finding, because it is the probable mechanism by which cancers with an enhanced
mestastic potential prepare to invade the host. These are but two of a number of
measurable host alterations, and each is associated with asymmetric heat
distribution.
CLINICAL TRIALS
Biopsy and screening clinical trials were conducted at well-established
institutions to assess and validate BreastCare(TM)'s usefulness in detecting
breast cancer. The BreastCare(TM) device was found to be very accurate in terms
of the device's documented sensitivity (true positive for cancer) and
specificity (true negatives - no cancer detectable by accepted medical methods)
indicates in relation to the biopsy (the "Gold Standard" diagnostic procedure),
and clinical breast examination and mammography.
BreastCare(TM) Device Test Results vs. Biopsy Findings
In the first study, the BreastCare(TM) device was the focus of a clinical
trial involving 179 women who underwent a biopsy. This multi-center study was
conducted at three prestigious cancer institutions: M.D. Anderson Hospital and
Tumor Institute, Memorial Sloan-Kettering Hospital, and Brotman Memorial
Hospital. The BreastCare(TM) device tested positive for the suspicion of cancer
in 93 of the 112 women who were diagnosed with cancer, for an overall
sensitivity index of 83.0% and was notably stronger in detecting unilateral
cancers - a sensitivity index of 88.1% (that is, 74 of the 84 unilateral cancers
diagnosed). (Less than 3% of breast cancers are believed to be bilateral
generally).
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The biopsy results were subjected to a breakdown by the size of cancer
detected and the patient age. The threshold tumor size detectable with the
BreastCare(TM) device is five millimeters and up - an early-stage cancer; of a
total of eight cancers under 1.0 centimeters diagnosed during the screening
study, seven tested positive using the device. It appears that the
BreastCare(TM) device has the proven ability to detect small, early-stage
cancers, which are most likely to be associated with favorable treatment
outcomes. Moreover, a breakdown of the BreastCare(TM) device results by age
suggests an especially high efficacy in detecting suspicious abnormalities in
younger women. This is noteworthy, indeed, because a prescreening method is
critically needed for women under 50 who have not been urged or who choose not
to seek a mammogram on an annual basis, since fast-growing, potentially
aggressive cancers are associated with the women in this age distribution. The
BreastCare(TM) device will be used adjunctively with palpation and mammography.
BreastCare(TM) Device Test Results vs. Clinical Findings vs.
Mammography and Physical Examination
In the second clinical trial study, the BreastCare(TM) device was studied
prospectively in 2,805 asymptomatic women for the test's ability to detect
abnormalities suspicious of breast cancer. Specifically, the BreastCare(TM)
device data was compared to the mammographic and clinical findings as well as to
a limited number of cytological findings. Of the 2,805 women screened, 99 were
recommended for a biopsy based on the suspicion of cancer in 86 of the 99 women
(a sensitivity index of 86.9%). Fifty-nine biopsies were subsequently performed,
and 13 of the 15 cancers diagnosed were positive for the BreastCare(TM) device
test (a sensitivity index of 86.7% against biopsy). Of the 2,706 women who has
no suspicion of cancer based on mammogram and/or clinical examinations, 2,340
had negative BreastCare(TM) device results (a specificity index of 86.5%).
The BreastCare(TM) device is very accurate, both in terms of sensitivity
and specificity. Notably, the very low false positive rate (true negatives with
a positive BreastCare(TM) device test) of 13.5%* BreastCare(TM) for the initial
screening trial actually assumes two additional circumstances: (1)
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* In the screening study of 2,805 women at the Guttman Breast Diagnostic
Institute, the observed 13.5% "false positive" index of the
BreastCare(TM)device test-on 366 women did not correlate with the Guttman
clinical staff conclusion of any breast abnormality indicating the positive
of cancer. The observed 13.5% "false positive" index does not mean that the
BreastCare(TM)device yielded a positive reading in 13.5% of women with no
abnormalities of the breast. The clinical staff screens for conditions that
warrant investigation regarding the possibility of breast cancer. Thus,
breast abnormalities that produce elevation of temperature in one breast
may result in a positive BreastCare(TM)device score, but may be classified
as nonmalignant by the clinical staff. Furthermore, because the thermal
signal will often proceed the tentative confirmation by imaging or clinical
findings by trained physicians, a number of women classified as "false
positive" could have cancer and would be confirmed by biopsy at a later
time. Various follow-up studies using other thermology technologies
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have shown this to be true and unofficial 1-year follow-ups by Sloan
Kettering of so-called BreastCare(TM) false positive were proven to be fast
growing fatal cancers. The 2,805 women in the Guttman study may not be
considered representative of the general population since many symptomatic
women were referred to this center by other concerned physicians. (In a
separate home study test of 200 asymptomatic women, only 5.5% had false
positive) that no mammographically undetectable cancers occurred, and (2)
that the rate of subsequent cancers occurrence within this so-called false
positive group is not statistically higher than that of the population of
women as a whole. A lower true false positive rate for the device can be
assumed if abnormal thermal distribution is a risk marker for future
disease incidences, as has frequently been suggested. In fact, several
publications have documented a positive predictive value for
thermographically-based tests to detect future cancers. The screening study
demonstrated reliability approaching that of mammography and significantly
greater than distantly related thermographic techniques.
ADDITIONAL CLINICAL STUDIES
Under the supervision of Dr. Umbero Veronesi additional clinical studies
with the BreastCare(TM) device will be conducted by Virgilio Sacchini in
October 1998 at the Instituto Europeo di Oncologia. One hundred women will be
tested prior to biopsy procedure and six hundred women prior to clinical breast
examination and mammography screening.
Also, the Company is finalizing the protocols for the clinical studies at
Sao Perola Byington Hospital, Sao Paulo, Brazil, where over three thousand women
are screened for breast cancer daily. Approximately 2,500 to 3,000 women will be
tested with the BreastCare(TM) device prior to clinical breast examination and
mammography. These studies, beginning in October, 1998, will be supervised by
Dr. Jose A. Pinotti and conducted by Dr. Alfredo Barros.
The Company anticipates these studies will play a vital role for future
screening projects in hospital and clinical settings.
EARLY DETECTION
Efficiency of treatment both traditional and projected, demands early
detection of breast cancer. The impact of early detection on long-term survival
of breast cancer patients has been increasingly demonstrated.
The most favorable prognosis results from treating an early "preclinical"
or "occult" breast lesion, that is, a malignancy not yet detectable by touch or
sight in a physical examination but detectable by mammography or other imaging
techniques. In contrast, treatment of a malignancy after its clinical appearance
is usually much less effective. Manual detection of a tumor imparts only a
slight lead-time advantage, since the threshold size permitting detection of a
palpable mass is one centimeter or larger. Notably, tumors diagnosed by physical
examination are frequently associated with a systemic metastatic cancer
invasion. Cancers one centimeter or less, which are the threshold size for
physical detection, may already display significant nodal involvement and
metastasis. It is all the more critical, therefore, that a primary breast cancer
is detected before a point of no-return either before a long time-interval
passes during which a chance spread of micro metastases may occur unchecked by
host defenses, or before the tumor attains a critical size at which metastases
are typically widely disseminated.
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LICENSING
The Company has granted HumaScan Inc. ("HumaScan") an exclusive license to
manufacture and sell the BreastCare(TM) in the United States and Canada under
the trademark BreastAlert ("BreastAlert(TM)"). HumaScan completed a public
offering of its shares on August 9, 1996, the proceeds of which are being used
to build HumaScan's manufacturing facility and commence the marketing of the
BreastAlert(TM) product. As the Company's initial licensee, HumaScan and its
exclusive distributor, Physician Sales & Service ("PSS"), began distribution in
December 1997 in the United States. PSS has agreed to purchase the BreastAlert
for $15.25 per unit. This first license agreement implements the Company's plan
to manufacture and market the BreastCare(TM) in certain key international
markets.
The Company and HumaScan reached a settlement agreement dated May 15, 1998,
resolving certain disputes which have arisen under the license agreement. Among
the many issues resolved, the following was agreed upon concerning the licensing
fee and royalties:
In consideration for a paid-up license and the prior delivery of
technological know-how, consulting services and product development activities,
the licensee agreed to pay the Company an amended balance of $575,000 on various
dates through December 31, 1999 of which $250,000 has been received to date, and
issue the Company 400,000 warrants exercisable at $4.725 per share vesting on
various dates through March 31, 1999 and have a term of five (5) years from date
of vesting.
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 as follows: three (3%) percent of the first
$2 million of net sales increasing to ten (10%) percent of net sales in excess
of $10 million with a minimum royalty of $400,000 in the third year increasing
to $600,000 in the fifth year and thereafter. The earned royalties payable shall
be reduced by an amount of up to a maximum of $550,000 at the rate of $.50 for
each dollar of earned royalty payable until the amount of $550,000 has been
deducted.
The Company entered into an exclusive license agreement, dated September
22, 1997, and amended February 18, 1998, with Sandell Corp. S.A. (the "Sandell
Agreement"), a Uruguayan corporation ("Sandell"), pursuant to which the Company
granted to Sandell an exclusive license to market and distribute the product in
Brazil, Venezuela, Columbia, Costa Rica, Ecuador, Nicaragua, Paraguay, Panama,
Peru, Bolivia, Argentina and Uruguay. Sandell is required to maintain operations
in Uruguay's Free Trade Zone. The Sandell Agreement is for a term of fourteen
(14) years. Under the Sandell Agreement, Sandell is to pay the Company a
non-refundable license fee of (i) $500,000 and (ii) thirty-five (35%) percent of
the outstanding shares of Sandell on a fully diluted basis.
The cash portion of the fee is payable (i) $100,000 upon execution of the
Sandell Agreement, which was paid by Sandell on October 14, 1997, (ii) $200,000
forty-five (45) days after shipment of the first product and (iii) $200,000 on
or before January 30, 1999. Sandell is also required to make minimum purchases
of the BreastCare(TM) device as follows: (i) 20,000 units per month during
calendar 1998 after shipment of the first product,
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(ii) 35,000 units per month during 1999, (iii) 65,000 units during 2000 and (iv)
90,000 units per month during 2001 and thereafter during the term of the
license. The purchase price is $8.30 per unit.
On August 15, 1996, the Company entered into a license agreement with
Health Technologies International Inc. ("HTI"), whereby HTI is to assemble,
market and sell the BreastCare(TM) device in Chile and Singapore, and pay the
Company a licensing fee of $250,000, all of which has been received. HTI was
acquired by D-Lanz Development Group, Inc. ("D-Lanz") in November 1997. As part
of the licensing agreement, the Company received 2,000,000 shares of D-Lanz
common stock which is publicly traded on the Electronic Bulletin Board under the
symbol DLNZ. Pursuant to the terms of the agreement, HTI agreed to pay the
Company minimum royalties of $100,000 in 1999 with increasing royalties leveling
out at a minimum of $400,000 in the year 2000 and thereafter. D-Lanz has signed
a letter of intent for Sandell to distribute the BreastCare(TM) product in
Chile.
REGULATIONS
The Company's development and manufacture of medical devices is controlled
by the Food, Drug and Cosmetic Act (the "Act"). The Food and Drug Administration
("FDA"), which administers the Act, has promulgated regulations pursuant to
Section 510(k) of the Act which permit certain new products to enter the U.S.
market through the submission of pre-market notification to FDA (Title 21, CFR,
Part 820 Good Manufacturing Practice for Medical Devices: General).
Any products manufactured or distributed by a company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
FDA. Device manufacturers are required to register their establishments and list
their devices with FDA, and are subject to periodic inspections by FDA and
certain state agencies. The FDA Act requires device manufacturers to comply with
cGMP regulations which impose certain procedural and documentation requirements
upon a company with respect to manufacturing and quality assurance activities.
FDA has proposed changes to the cGMP regulations which, if finalized, would
likely increase the cost of complying with cGMP requirements.
Subject to the potential changes in regulatory status discussed above, the
Company believes that it is in full compliance with the requirements of Part 807
Premarket Notification, as promulgated under Section 510(k) of the Act and
therefore, has market rights for the BreastCare(TM) product (which have been
assigned to HumaScan under the HumaScan License Agreement). Also included under
Part 807 is a requirement for product registration and listing, which the
Company believes has been satisfied.
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FOREIGN REGULATION
Because the Company proposes to distribute its product in foreign
countries, the Company will be required to comply with the regulations of those
countries where its product is distributed by the Company through licensees. No
assurances can be given that the Company and/or its licensees will be able to
comply with the regulatory requirements of the foreign markets in which the
BreastCare(TM) device will be sold.
Most countries require product registration before you can sell. In South
America, Sandell has made application and has received registration in Brazil,
Uruguay, Argentina with Peru pending. Paraguay and Bolivia have no registration
requirements to sell. Also, the company is applying for registration with the
Medical Device Directive (19/42/EEC) to be able to market throughout the
European Union. As of June 1998, all products put on the market in the European
Union are required to have a CE Marking.
PATENTS
The proprietary nature of the BreastCare(TM) device is protected under
patent rights issued in the U.S. and foreign countries. However, in general, the
level of protection afforded by a patent is directly proportional to the ability
of the patent owner to protect and enforce his rights under the patent. Since
the financial resources of the Company are currently limited, and patent
litigation can be both expensive and time consuming, there is a risk that
enforcing the patents for the BreastCare(TM) device will have a material adverse
financial effect on the Company or the Company will not have the financial
resources necessary to enforce its patents. Once the Company's existing patents
expire, other companies may be able to create substantially similar products. If
this were to happen, the Company would not be able to avail itself of the
protection afforded by the patent laws.
In the U.S., Patent No, 4, 190,058 for a "Device For Use in Early Detection
of Breast Cancer" was granted and issued to Mr. Sagi on February 26, 1980.
Patent No. 4,651,749, granted on March 24, 1987, entitled "Cancer Detection
Patch for Early Detection of Breast Cancer; Temperature, Indicators,
Flexibility, Thermoconductivity, Webs", is a partial continuation of Patent No.
4,190,058; Patent No. RE 4,624,264 granted November 24, 1986, has been
reinstated and expires November 25, 2003. On October 8, 1985, Patent no.
RE32,000, a reissue of the 1980 patent, was granted and issued.
Foreign patents for the BreastCare(TM) device include:
- - Belgium Patent No. 884,382; issued July 18, 1980; expires July
18, 2000
- - Canada Patent No. 1,130,157; issued August 24, 1982; expires
August 24, 1999
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- - France Patent No. 7913059; issued July 15, 1986; expires May
22, 1999
- - Germany Patent No. 2920785; issued May 22, 1985;
- - Israel Patent No. 58422; issued March 1, 1983; expires October
9, 1999
- - The Netherlands Patent No. 7,094,034; issued December 18, 1989;
expires May 22, 1999
- - United Kingdom Patent No. 2023288; issued April 27, 1983; expires May
21, 1999
- - Venezuela Patent No. 44,664; issued April 20, 1987;
PROPOSED REGIONAL CENTERS AND PRODUCTION EQUIPMENT
For the Company's international marketing and distribution activities, the
Company intends to establish regional centers ("RCs"). The Company will require
funds to establish RCs and to move expeditiously as agreements are reached.
Based on the arrangements through licensing agreements or joint ventures,
anticipated revenue will be through royalties and the sales of the product.
Proposed Regional
Center Locations: Uruguay, Hungary, Ireland, India, South Korea,
Israel/Egypt, China, and Australia.
The Company has entered into a letter of intent with respect to the
acquisition of a Hungarian based manufacturer of plastic medical packaging
products and the manufacturing facility for an aggregate purchase price of
$1,750,000 and a number of shares of the Company, based upon the exchange rate
and the market price of the Company's shares at closing. The acquisition is
subject to the execution of a definitive agreement and the obtaining of
financing for the purchase of the Hungarian manufacturer.
In January 1991, 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 BreastCare(TM) device for the contract price of
$1,750,680. Due to the fact that the Company has had insufficient capital, the
production of the manufacturing the equipment has been delayed. As a result of
the delay, the price for manufacturing the equipment was increased to
$1,850,680, plus 100,000 shares of the Company's common stock. See "CERTAIN
TRANSACTIONS".
Currently, the Company is manufacturing the sensor segments in the United
States for export to Scantek Medical, S.A. subsidiary in the free trade zone in
Montevideo, Uruguary for product assembly. The first products will be used for
test marketing in Paraguay, for additional product testing, and for September
1998 launch in Uruguay and Brazil. It is anticipated that an assembly center
will be established in Europe once product registration has been received
through the EEC.
The Company is contemplating installing additional equipment for the next
three centers in Uruguay, Hungary, and Western Europe. As of June 30, 1998 the
equipment was under construction with only the assembly line and packaging
sections to be completed. Each manufacturing equipment is designed to produce
sufficient product to supply each geographic territory.
-10-
<PAGE>
The Company will seek to raise additional capital through public or private
equity or debt financing by the end of 1998. The Company's success is dependent
on raising sufficient capital to establish a production facility and manufacture
production equipment to manufacture the BreastCare(TM) device 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. See Management's Discussion
and Analysis of Financial Condition and Results of Operation - Liquity and
Capital Resources for further information.
SUPPLIES AND RAW MATERIALS
Supplies and raw materials for the manufacture of the BreastCare(TM) device
are available from various sources. Historically, other than on a few rare
occasions, the supplies and raw materials for producing the BreastCare(TM)
device have been readily available and the cost of such materials has not
experienced any material fluctuation. The Company has determined the inventory
planning and control, as well as other production management systems, it intends
to use.
Key personnel for the management at the corporate headquarters and the
Company's production facility have been identified and preliminary employment
discussions are in progress. No assurance can be given that the Company will be
able to employ the personnel to satisfy its needs.
MARKETING
The over $5 billion annual international breast cancer market has untapped
potential. Management believes that in emerging and developing countries
the BreastCare(TM) product has the potential to become an important part of the
overall screening protocols used to detect breast disease. The Company's first
introduction of the BreastCare(TM) product was by its United States and Canadian
licensee, HumaScan who launched the product December 1997. In September 1998,
the Company's official launch of the BreastCare(TM) product will be in Uruguay
through the sub-licensee, Gautier, and in Brazil through Farmacotecnica.
For the BreastCare(TM) device campaign in Latin America and Europe, the
Company has been introducing the BreastCare(TM) device at educational forums
which were covered by the press and television. Also, the Company is exhibiting
at medical congresses to introduce the new product to the physician market.
In June 1998, in Oporto, Portugal, the Company exhibited at the 10th
International Congress on Breast Disease with 1600 physician participation and
September 20-24, 1998, exhibited at the 11th Brazilian International Mastology
Congress. BreastCare(TM) device exhibitions will continue in South America and
Europe through 1998 and into 1999. Physician education on the BreastCare(TM)
device for use in medical practices with clinical palpation and mammography for
the early detection of breast disease has been very receptive. The Company, at
this time, cannot determine the acceptance of the BreastCare(TM) device
throughout the world.
-11-
<PAGE>
UNITED STATES AND CANADA MARKETING - HUMASCAN
The target market for the BreastAlert(TM) device in the U.S. and Canada
includes primary care physicians, both in their own practices and as part of
groups such as health maintenance organizations (HMO's), and preferred provider
organizations (PPO's), gynecologists, obstetricians, internists and other
general practitioners.
With respect to the U.S. and Canada, HumaScan has entered into an agreement
with PSS, a major U.S. distributor, regarding its distribution of the
BreastAlert(TM) device. HumaScan has announced that their marketing strategy
will focus on physician education and detailing. HumaScan has hired new
strategic partners, Physicians World Communications Group and Syndicated
Detailing Services LLC to help increase usage and acceptance by educating the
physicians on how to integrate the BreastAlert(TM) product into their practices.
The Company is expected to reintroduce the product in September 1998.
SOUTH AMERICA AND SINGAPORE
As stated above, the Company granted an exclusive license to Sandell for
the territories of Brazil, Venezuela, Columbia, Costa Rica, Ecuador, Nicaragua,
Paraguay, Panama, Peru, Bolivia, Argentina and Uruguay. Sandell has entered into
agreements with regional distribution partners in Brazil, Peru, Paraguay, and
Uruguay. Each of the agreements that Sandell has signed with distribution
partners requires guaranteed monthly purchases and each invoice is backed by
Letters of Credit or cash payment terms upon delivery. The Company has also
granted an exclusive license to HTI for Chile and Singapore.
DISTRIBUTION
The Company has focused on developing partnerships with various
international companies who have relationships with distributors throughout the
world and who have connections in the medical communities of the target markets.
With respect to the distribution of the BreastCare(TM) device in the
international market, the Company intends to enter new markets on a regional
basis. The commencement of the Company's international distribution of the
BreastCare(TM) device has been scheduled for August/September 1998. The South
American market has been aggressively approached by the Company and Sandell,
having started test marketing in July in Paraguay which requires no registration
to sell, and receiving product registration in Brazil in record time for launch
in September. Also, preparing for product launch in Uruguay in September, the
Company and Sandell have held small education congresses to explain the product
usage. The educational process is laying the groundwork for the introduction,
ease of use, accuracy and willingness to include as part of the physicians and
government screening programs. Negotiations for distribution rights in Northern
Europe, Southern Europe, Mexico, China, Greece and Asian markets are in
progress. The Company anticipates to finalized additional distribution
agreements before the end of 1998. There can be no assurance that the Company
will be able to enter into distribution agreements on favorable terms or at all.
-12-
<PAGE>
In January, 1998 Scantek Medical, S.A. was organized in Montevideo,
Uruguay, as a subsidiary of Scantek Medical, Inc. Presently the Company has
leased approximately 2,500 square feet in the Free Trade Zone where the
BreastCare(TM) device is being assembled for distribution by Sandell. The
Company anticipates Brazil will be the largest market in South America for
BreastCare(TM) device sales, therefore, negotiations are in process to create a
regional center in Brazil.
COMPETITION
The breast cancer screening device industry is highly competitive and
fragmented. The Company is not aware of any low cost screening devices on the
market which would compete directly with the BreastCare(TM) device for use by
primary care physicians.
The Company believes that the BreastCare(TM) device, which provides digital
quantitative recordings of underlying tissue temperature, represents a
significant improvement over thermographic technology products because such
other products are subject to the inherent problems of subjective evaluation of
heat patterns. Based on these differences, the Company believes that the
prospects for the BreastCare(TM) device as a supplement to currently existing
screening tests are very good.
The Company believes it is in a unique position because the BreastCare(TM)
device has no known competing low cost screening devices. As a result, the
Company believes that the BreastCare(TM) device will augment other existing
forms of screening and technology.
Some of the Company's future competitors may be large, well-financed and
established companies that have greater resources for research and development,
manufacturing and marketing then the Company has and, therefore, may be better
able than the Company to compete for a share of the market, even in areas in
which the Company may have superior technology. There can be no assurance that
the Company will be able to produce a commercially acceptable product, or that
if produced, such a product will be competitive with existing or future
products. It is also possible that there will be technological changes or
developments by competitors which will render the Company products
noncompetitive or obsolete.
FUTURE PRODUCTS
The Company believes that the BreastCare(TM) device may have applicability
as a screening device for other abnormalities, including measuring ovulation
cycles for infertile couples, measuring changes in the cardiovascular system to
screen for potential stroke victims, and detecting abnormalities in the kidneys
and testicles. Although some testing was performed during the BreastCare(TM)
device's development stage, these initial tests were preliminary only, and in
order to obtain FDA approval, which would be required in order to market a
future product. The Company intends to further explore its initial findings and,
perhaps, introduce products in furtherance of these findings.
-13-
<PAGE>
EMPLOYEES
As of September 30, 1998, the Company employed a total of two people, both
on a full-time basis. The Company also has three part-time employees.
None of the Company's employees are covered by a collective bargaining
agreement with a union. The Company considers its relationship with its
employees to be good.
RISKS AND UNCERTAINTIES
The Company's business is subject to several risks and uncertainties,
including (a) the risk that it may be unable to raise enough capital to fund the
Company's operations, (b) the risk the BreastCare(TM) device will not be
accepted commercially, (c) the Company's reliance on certain customers, and (d)
the highly competitive nature of the Company's industry and the impact that
competitors' new products and pricing may have on the Company. Such factors, as
well as shortfalls in the Company's results of operations as compared with
analyst's expectations, capital market conditions and general economic
conditions, may also cause substantial volatility in the market price of the
Company's Common Stock.
-14-
<PAGE>
ITEM 2. PROPERTIES
The Company occupies approximately 7,000 square feet of warehouse and
office space, all of which is leased through leases expiring in June, 2000. See
Note 12 of Notes to Consolidated Financial Statements for additional information
pertaining to leased properties.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ending June 30, 1998.
-15-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock, par value $.001 per share (the "Common Stock"),
is traded in the over-the-counter market. The Common Stock is available for
quotation in the "pink sheets" published by the National Quotation Bureau,
Incorporated and on the "bulletin board" operated by NASDAQ. The following table
sets forth the periods indicated the high and low bid quotation for the Common
Stock:
HIGH LOW
---- ---
Fiscal Year Ended June 30, 1997
First Quarter 1 1/8 1/4
Second Quarter 1 1/4 9/16
Third Quarter 4 1/16 1/2
Fourth Quarter 2 7/16 1 1/4
Fiscal Year Ended June 30, 1998
First Quarter 1 7/8 1 1/32
Second Quarter 1 5/8 13/16
Third Quarter 1 5/8 17/32
Fourth Quarter 1 3/16 1/2
The Common Stock is reported under the Symbol SKML. As of the date of this
report, the Company's shares of Common Stock were "non-designated" securities as
defined under the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
These quotations reflected an inter-dealer price, without retail mark-up,
mark-down or commission, and may not necessarily reflect actual transactions.
(b) Holders
As of September 15, 1998, there were 350 shareholders of record of the
Company's Common Stock.
(c) Dividends
The Company has not paid any cash dividends and has no current plans to pay
any such dividends. There are no restrictions on the Company's ability to pay
dividends.
(d) Recent Sales of Securities
None
-16-
<PAGE>
ITEM 6. 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 BreastCare(TM) device. The device has been
patented and has Food and Drug Administration ("FDA") approval for sale. The
Company has not generated any sales revenues but has entered into three License
Agreements whereby the licensees purchased the right to manufacture and sell the
BreastCare(TM) device in the United States of America, Canada, their territories
and possessions, South America and Singapore.
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
---------------------------------------
June 30, 1998 June 30, 1997
compared with 1997 compared with 1996
------------------ ------------------
General and administrative
expense ................................... 224.6 (20.3)
Amortization and
depreciation .............................. (9.8) (15.3)
Interest expense ........................... 62.2 (2.1)
Research and development ................... 16.5 36.4
INCOME
During the year ended June 30, 1998, the Company has recognized license fee
income of approximately $1.8 million from one of the licensees since operations
have commenced in those territories.
The Company was also required to sell its marketable securities to meet its
margin call on its secured margin loan resulting in a gain on marketable
securities of approximately $400,000 during the fourth quarter of its 1998
fiscal year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 224.6% to $976,547 for the
year ended June 30, 1998, from $300,845 for the year ended June 30, 1997. This
increase is primarily due to the purchasing of keyman and directors and officers
insurance coupled with increases in rent for the leasing of office and warehouse
space in Denville, New Jersey, professional fees and financial services. This
was offset in part by decreases in consulting expenses.
-17-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
GENERAL AND ADMINISTRATIVE EXPENSES (Continued)
General and administrative expenses decreased 20.3% to $300,845 for the
year ended June 30, 1997 from $377,625 for the year ended June 30, 1996. This
decrease is primarily due to one-time consulting expenses incurred in 1996
offset, in part, by increases in accounting, legal services and public relations
expenses.
AMORTIZATION AND DEPRECIATION EXPENSES
Amortization and depreciation expenses decreased 9.8% to $84,219 for the
year ended June 30, 1998, from $93,384 for the year ended June 30, 1997. The
decrease was attributable to organization cost amortization expiring at March
31, 1997. This was offset to a much lesser extent by increases in depreciation
expense.
Amortization and depreciation expenses decreased 15.3% to $93,384 for the
year ended June 30, 1997 from $110,234 for the year ended June 30, 1996. The
decrease was primarily attributable to fully amortized organization costs
occurring during the period.
INTEREST EXPENSE
Interest expense was $183,889 for the year ended June 30, 1998, compared to
$113,344 for the year ended June 30, 1997. The 62.2% increase was attributable
to interest expense on the short-term debt margin loan.
Interest expense for the years ending June 30, 1997 and 1996, remained
relatively constant.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expense increased 16.5% to $339,337 for the year
ended June 30, 1998, from $291,013 for the year ended June 30, 1997. The
increase is primarily attributable to increased salaries incurred by the Company
in the experimental area of development of its product.
Research and development expense increased 36.4% to $291,013 for the year
ended June 30, 1997 from $213,311 for the year ended June 30, 1996. The increase
is primarily attributable to increased salaries incurred by the Company in the
experimental area of development of its product.
-18-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 trademarks 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. The
Company has entered into various license agreements that have raised additional
funds and borrowed money against common stock received in connection with the
license agreements. In addition, the Company's auditors' report for the year
ended June 30, 1998 dated September 1, 1998, expressed an opinion as to the
Company continuing as a going concern.
During May 1998, the Company was obligated on its short-term debt to repay
approximately $900,000. The common stock of HumaScan owned by the Company
pledged as collateral for the loan fell below $3.00 per share requiring the
Company either to sell the HumaScan shares or use alternative means to liquidate
the short-term debt. The Company sold marketable securities other than the
HumaScan stock, sold approximately 120,000 shares of the HumaScan stock, and the
balance of the funds to liquidate the debt of approximately $317,000 was
advanced by Sagi.
Prior to June 30, 1998, the Company also borrowed $100,000 from an
unaffiliated third party to meet its current operations.
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 products. The Company intends to construct
production and/or assembly centers abroad to manufacture, market and sell the
BreastCare (TM) in the international market. The Company entered into an
agreement with Zigmed Inc. pursuant to which Zigmed Inc. will manufacture the
production equipment needed for manufacturing of the BreastCare(TM) for the
contract price of $1,850,000. The Company as of June 30, 1998, has advanced
Zigmed Inc. payments of $610,000 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 Company has also executed a contract with respect to the acquisition of
a Hungarian based manufacturer of plastic medical packaging products and the
manufacturing facility for an aggregate purchase price of $1,750,000. The
acquisition is subject to the Company obtaining financing for the purchase of
the Hungarian manufacturer.
The Company and HumaScan have reached a settlement agreement dated May 15,
1998, resolving certain disputes which have arisen under the license agreement.
Among the many issues that were resolved, the following was agreed upon
concerning the licensing fee and royalties:
-19-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In consideration for a paid-up license and the prior delivery of
technological know-how, consulting services and product development activities,
the licensee agreed to pay the Company $575,000 on various dates through
December 31, 1999 of which $175,000 was received upon signing the agreement and
issue the Company 400,000 warrants exercisable at $4.725 per share vesting on
various dates through March 31, 1999 and have a term of five (5) years from date
of vesting.
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 as follows: three (3%) percent of the first
$2 million of net sales increasing to ten (10%) percent of net sales in excess
of $10 million with a minimum royalty of $400,000 in the third year increasing
to $600,000 in the fifth year and thereafter. The earned royalties payable shall
be reduced by an amount of up to a maximum of $550,000 at the rate of $.50 for
each dollar of earned royalty payable until the amount of $550,000 has been
deducted.
On August 15, 1996, the Company entered into a license agreement with
Health Technologies International Inc. ("HTI"), whereby HTI is to assemble,
market and sell the BreastCare(TM) in Chile and Singapore, and pay the Company a
licensing fee of $250,000, all of which has been received. HTI was acquired by
D-Lanz Development Group, Inc. ("D-Lanz") in November 1997. As part of the
licensing agreement, the Company received 2,000,000 shares of D-Lanz common
stock which is publicly traded on the Electronic Bulletin Board under the symbol
DLNZ. Pursuant to the terms of the agreement, HTI agreed to pay the Company
minimum royalties of $100,000 in 1999 with increasing royalties leveling out at
a minimum of $400,000 in the year 2000 and thereafter. D-Lanz has signed a
letter of intent for Sandell to distribute the BreastCare(TM) in Chile.
The Company entered into an exclusive license agreement, dated September
22, 1997 and amended February 18, 1998, with Sandell Corp. S.A. (the "Sandell
Agreement"), a Uruguayan corporation ("Sandell"), pursuant to which the Company
granted to Sandell an exclusive license to market and distribute the product in
Brazil, Venezuela, Columbia, Costa Rica, Ecuador, Nicaragua, Paraguay, Panama,
Peru, Bolivia, Argentina and Uruguay. Sandell is required to maintain operations
in Uruguay's Free Trade Zone. The Sandell Agreement is for a term of fourteen
(14) years. Under the Sandell Agreement, Sandell is to pay the Company a
non-refundable license fee of (i) $500,000 and (ii) thirty-five (35%) of the
outstanding shares of Sandell on a fully diluted basis. The cash portion of the
fee is payable (i) $100,00 upon execution of the Sandell Agreement, which was
paid by Sandell on October 14, 1997,(ii) $200,000 forty-five (45) days after
shipment of the first product and (iii) $200,000 on or before January 30, 1999.
Sandell is also required to make minimum purchases of the BreastCare(TM) as
follows: (i) 20,000 units per month during calendar 1998 after shipment of the
first product (ii) 35,000 units per month during 1999, (iii) 65,000 units during
2000 and (iv) 90,000 units per month during 2001 and thereafter during the term
of the license.
-20-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company's success is dependent on raising sufficient capital to
establish a production facility and purchase manufacturing equipment to
manufacture the BreastCare(TM) 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. The Company believes the BreastCare(TM) will be commercially
accepted throughout the international market. The Company expects to commence
operations during the first quarter of its next fiscal year. In addition, the
Company's U.S. Licensee commenced operations in January 1998 and the Company
will begin receiving royalty payments based on its agreement with HumaScan. The
Company feels the cash flow from the commencement of operations will be more
than sufficient to cover the operations of the Company over the next twelve (12)
months providing the Company is successful in raising the initial capital.
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 received 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. $121,000 of the notes
were converted including accrued interest of $30,084. As of December 31, 1997,
all remaining notes have been paid.
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 Company has renegotiated the
note with the lenders as of March 31, 1998. The note is due January 31, 1999
with interest payable quarterly.
In July and August 1996, the Company completed two private placements of
the Company's common stock, raising proceeds of $1,070,000.
ACCOUNTING STANDARDS
For information regarding certain recently promulgated accounting
standards, see Note 1 of the Notes to the Company's Consolidated Financial
Statements.
OTHER MATTERS
This Form 10-KSB, other than historical financial information, may consist
of forward-looking statements that include risks and uncertainties, including,
but not limited to, statements contained in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations". Such
statements are based on many assumptions and are subject to risks and
uncertainties. Actual results could differ materially from the results discussed
in the forward-looking statements due to a number of factors, including, but not
limited to, those set forth under "Business - Risks and Uncertainties" in this
Form 10-KSB.
-21-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-1 - F-2
Financial Statements:
Consolidated Balance Sheets, June 30, 1998 and 1997 F-3
Consolidated Statements of Operations, Years Ended
June 30, 1998, 1997, 1996 and the Period June 10,
1988 (Date of Formation) Through June 30, 1998 F-4
Consolidated Statements of Stockholders' Equity,
Years Ended June 30, 1998, 1997, 1996 and the
Period June 10, 1988 (Date of Formation)
Through June 30, 1998 F-5 - F-9
Consolidated Statements of Cash Flows, Years Ended
June 30, 1998, 1997, 1996 and the Period June 10,
1988 (Date of Formation) Through June 30, 1998 F-10 - F-11
Notes to Consolidated Financial Statements F-12 - F-29
-22-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Scantek Medical, Inc.
We have audited the accompanying consolidated balance sheet of Scantek Medical,
Inc. and subsidiaries (Development Stage Companies) (the "Company") as of June
30, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years ended June 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The Company's consolidated
financial statements at June 30, 1994 and for the period June 10, 1988 (Date of
Formation) through June 30, 1994 were audited by other auditors whose report,
dated September 22, 1994, expressed an unqualified opinion on those statements
and included an explanatory paragraph concerning substantial doubt about the
Company's ability to continue as a going concern. The other auditors' report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for such prior periods, is based solely on the report of such auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Scantek Medical,
Inc. and subsidiaries at June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years ended June 30, 1998
and for the period June 10, 1988 (Date of Formation) through June 30, 1998, in
conformity with generally accepted accounting principles.
F-1
<PAGE>
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing and ultimately manufacturing and marketing a
product that detects early breast tissue abnormalities including cancer. As more
fully explained in Note 1 of Notes to Consolidated Financial Statements, the
Company needs to obtain additional financing to fulfill its developmental
activities and achieve a level of sales adequate to support its cost structure.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Managements' plans are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties should the Company be unable to
continue as a going concern.
WIENER, PENTA & GOODMAN, P.C.
Certified Public Accountants
Eatontown, New Jersey
September 1, 1998
F-2
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
---------------------------
1998 1997
---------- ----------
Current Assets:
Cash $ 55,929 $ 918,393
Marketable securities 2,295,253 6,860,371
Due from licensees 726,900 550,000
Prepaid expenses 23,517 70,708
---------- ----------
Total Current Assets 3,101,599 8,399,472
---------- ----------
Property and equipment - net 822,043 391,452
Marketable securities - non-current 901,520 --
Other assets - net 383,275 783,768
---------- ----------
TOTAL ASSETS $5,208,437 $9,574,692
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 100,000 $ 966,000
Current portion - long-term debt -- 350,000
Current portion - deferred income 752,500 2,129,082
Note payable to officer 621,993 304,993
Accounts payable 266,869 121,901
Accrued interest 110,470 82,289
Accrued salaries 841,119 578,619
Accrued expenses 65,785 40,689
Deferred income taxes -- 609,000
----------- -----------
Total Current Liabilities 2,758,736 5,182,573
----------- -----------
Long-term debt 888,006 568,006
----------- -----------
Total Liabilities 3,646,742 5,750,579
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.001
per share - authorized 5,000,000
shares; none issued -- --
Common stock, par value $.001 per
share - authorized 45,000,000;
outstanding 17,220,200 17,220 17,220
Additional paid-in-capital 2,993,206 2,965,426
Unrealized gain on marketable
securities 2,621,616 5,566,615
Deficit accumulated during
development stage (4,070,347) (4,725,148)
----------- -----------
Total Stockholders' Equity 1,561,695 3,824,113
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,208,437 $ 9,574,692
=========== ===========
See notes to consolidated financial statements.
F-3
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
June 10, 1988
(Date of
For the Years Ended June 30, Formation)
------------------------------------------- Through
1998 1997 1996 June 30, 1998
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Income:
License fees $1,801,582 $ -- $ -- $ 1,801,582
Interest and dividends 21,507 23,763 212 51,219
Consulting -- -- -- 15,000
Gain on sale of
marketable securities 413,504 1,100 -- 414,604
Miscellaneous 1,900 -- -- 26,900
---------- --------- --------- -----------
Total Income 2,238,493 24,863 212 2,309,305
---------- --------- --------- -----------
Costs and Expenses:
General and adminis-
trative expenses 976,547 300,845 377,625 3,439,675
Amortization and
depreciation 84,219 93,384 110,234 706,243
Research and
development 339,037 291,013 213,311 1,570,780
Interest expense 183,889 113,344 115,758 662,954
---------- --------- --------- -----------
Total Costs and
Expenses 1,583,692 798,586 816,928 6,379,652
---------- --------- --------- -----------
Net earnings (loss) $ 654,801 $(773,723) $(816,716) $(4,070,347)
========== ========= ========= ===========
Earnings (loss) per
common share - basic $ .04 $ (.05) $ (.06)
========== ========= =========
Earnings (loss) per
common share - diluted $ .03 $ (.04) $ (.06)
========== ========= =========
Weighted average
number of common shares
outstanding - basic 17,220,200 16,802,145 14,214,138
========== ========== ==========
Weighted average
number of common shares
outstanding - diluted 18,742,501 17,835,554 14,378,304
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
-------------------------------------------------
Shares Amount Shares Amount
--------- -------- ------- --------
Original
Capitalization:
Sale of stock ($.023
per share) 2,000,000 $ 2,000 -- $ --
Issuance of
options for
services ren-
dered (valued
at .10 per share)
Net (loss)
June 10, 1988
(Date of For-
mation) through
June 30, 1991
--------- ------- -------- -------
Balance June 30,
1991 2,000,000 2,000 -- --
.7 for 1 reverse
stock split (600,000) (600)
Donated stock to
treasury 500,000 --
Issuance of
stock to acquire
subsidiary ($.006
per share) 7,100,000 7,100 -- --
Sale of treasury
stock ($2.50 per
share) (18,000) --
Treasury stock ex-
changed for
services rendered
(valued at $.023
per share) (433,000) --
Net (loss), June
30, 1992
--------- ------- -------- -------
Balance, June 30,
1992 8,500,000 8,500 49,000 --
(Deficit)
Unrealized Accumulated
Additional Gain (loss) on During the
Paid-In Marketable Development
Capital Securities Stage Total
---------- ------------- ----------- -----
Original
Capitalization:
Sale of stock ($.023
per share) $ 44,094 $ -- $ -- $ 46,094
Issuance of
options for
services ren-
dered (valued
at .10 per share) 5,000 5,000
Net (loss)
June 10, 1988
(Date of For-
mation) through
June 30, 1991 (18,751) (18,751)
--------- -------- --------- ----------
Balance June 30,
1991 49,094 -- (18,751) 32,343
.7 for 1 reverse
stock split 600 --
Donated stock to
treasury --
Issuance of
stock to acquire
subsidiary ($.006
per share) 92,900 100,000
Sale of treasury
stock ($2.50 per
share) 45,000 45,000
Treasury stock ex-
changed 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 197,594 -- (504,065) (297,971)
See notes to consolidated financial statements. (Continued)
F-5
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Common Stock Treasury Stock
------------------------ ---------------
Shares Amount Shares Amount
---------- ------ ------ ------
Treasury stock
exchanged for
services rendered
(valued at $0.125
per share) (49,000) --
Issuance of stock
for professional
services rendered
(valued at $.25 to
$.50 per share) 1,450,000 1,450
Issuance of stock
for contract
release (valued at
$1.00 per share) 35,000 35
Net (loss), June
30, 1993
---------- ------ ------ -----
Balance, June 30,
1993 9,985,000 9,985 -- --
Issuance of call-
able 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 37
Net (loss), June
30, 1994
---------- ------ ------ -----
Balance, June 30,
1994 10,022,200 10,022 -- --
(Deficit)
Unrealized Accumulated
Additional Gain (loss) on During the
Paid-In Marketable Development
Capital Securities Stage Total
------- ---------- ----------- --------
Treasury stock
exchanged for
services rendered
(valued at $0.125
per share) 6,125 6,125
Issuance of stock
for professional
services rendered
(valued at $.25 to
$.50 per share) 411,050 412,500
Issuance of stock
for contract
release (valued at
$1.00 per share) 34,965 35,000
Net (loss), June
30, 1993 (924,969) (924,969)
------- ---- --------- ---------
Balance, June 30,
1993 649,734 -- (1,429,034) (769,315)
Issuance of call-
able 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) 37,163 37,200
Net (loss), June
30, 1994 (969,408) (969,408)
------- ---- --------- ---------
Balance, June 30,
1994 702,522 -- (2,398,442) (1,685,898)
See notes to consolidated financial statements. (Continued)
F-6
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Common Stock Treasury Stock
------------------------- ---------------------
Shares Amount Shares Amount
-------- -------- ------- --------
Issuance of stock
in connection with
bridge loan finan-
cing (issued at
$1.00 per share) 12,000 12
Issuance of stock
for services ren-
dered (valued at
$.125 per share) 621,250 621
Net (loss), June
30, 1995
---------- ------ ------ -------
Balance - June 30,
1995 10,655,450 10,655 -- --
Issuance of stock
for accrued sal-
aries (valued at
$.10 per share) 4,550,000 4,550
Notes payable con-
versions to
common stock
(at $1.00 per
share) 151,084 151
Issuance of stock
for services ren-
dered (at $.60
per share) 433,666 434
Issuance of options
for services ren-
dered (at $.30
per share)
Net unrealized gain
on marketable
securities
Net (loss), June
30, 1996
---------- ------ ------ -------
Balance - June 30,
1996 15,790,200 15,790 -- --
(Deficit)
Unrealized Accumulated
Additional Gain (loss) on During the
Paid-In Marketable Development
Capital Securities Stage Total
---------- ------------- ----------- -----
Issuance of stock
in connection with
bridge loan finan-
cing (issued at
$1.00 per share) 11,988 12,000
Issuance of stock
for services ren-
dered (valued at
$.125 per share) 77,035 77,656
Net (loss), June
30, 1995 (736,267) (736,267)
--------- ------- --------- ---------
Balance - June 30,
1995 791,545 -- (3,134,709) (2,332,509)
Issuance of stock
for accrued sal-
aries (valued at
$.10 per share) 450,450 455,000
Notes payable con-
versions to
common stock
(at $1.00 per
share) 150,933 151,084
Issuance of stock
for services ren-
dered (at $.60
per share) 273,232 273,666
Issuance of options
for services ren-
dered (at $.30
per share) 45,000 45,000
Net unrealized gain
on marketable
securities 364,500 364,500
Net (loss), June
30, 1996 (816,716) (816,716)
--------- ------- --------- ---------
Balance - June 30,
1996 1,711,160 364,500 (3,951,425) (1,859,975)
See notes to consolidated financial statements.
F-7
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Common Stock Treasury Stock
-------------------------- ----------------
Shares Amount Shares Amount
---------- -------- ------- ------
Issuance of stock in
connection with pri-
vate placement
offering (issued at
$1.00 per share) 1,070,000 1,070
Issuance of stock
for professional
services rendered
(at $.167 to $1.00
per share) 72,500 73
Issuance of stock in
lieu of payment on
equipment (at $1.00
per share) 100,000 100
Stock options exer-
cised ($.10 to
$.375 per share) 170,000 170
Issuance of stock
for rent (at $2.01
per share) 17,500 17
Net unrealized gain
on marketable
securities
Net (loss) - June 30,
1997
--------- --------- ------- -------
Balance, June 30,
1997 17,220,200 17,220 -- --
(Deficit)
Unrealized Accumulated
Additional Gain (loss) on During the
Paid-In Marketable Development
Capital Securities Stage Total
---------- ---------- ----------- ---------
Issuance of stock in
connection with pri-
vate placement
offering (issued at
$1.00 per share) 1,068,930 1,070,000
Issuance of stock
for professional
services rendered
(at $.167 to $1.00
per share) 22,427 22,500
Issuance of stock in
lieu of payment on
equipment (at $1.00
per share) 99,900 100,000
Stock options exer-
cised ($.10 to
$.375 per share) 27,830 28,000
Issuance of stock
for rent (at $2.01
per share) 35,179 35,196
Net unrealized gain
on marketable
securities 5,202,115 5,202,115
Net (loss) - June 30,
1997 (773,723) (773,723)
--------- --------- --------- ---------
Balance, June 30,
1997 2,965,426 5,566,615 (4,725,148) 3,824,113
See notes to consolidated financial statements.
F-8
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Common Stock Treasury Stock
-------------------------- ----------------------
Shares Amount Shares Amount
-------- -------- ------- --------
Issuance of warrants
for services ren-
dered (at $ .55 to
$1.125 per share) 27,780 27,780
Net unrealized (loss)
on marketable
securities (2,944,999) (2,944,999)
Net earnings -
June 30, 1998
---------- ------- ------- --------
Balance, June 30,
1998 17,220,200 $17,220 -- $ --
========== ======= ======= =======
(Deficit)
Unrealized Accumulated
Additional Gain (loss) on During the
Paid-In Marketable Development
Capital Securities Stage Total
---------- ---------- ----------- ---------
Net earnings -
June 30, 1998 654,801 654,801
---------- ---------- ----------- ----------
Balance, June 30,
1998 $2,993,206 $2,621,616 $(4,070,347) $1,561,695
========== ========== =========== ==========
See notes to consolidated financial statements.
F-9
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
June 10, 1998
For the Years Ended June 30, (Date of For-
--------------------------------------- mation through
1998 1997 1996 June 30, 1998
----------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss) $ 654,801 $ (773,723) $(816,716) $(4,070,347)
Adjustments to reconcile net
earnings (loss) to net cash
used in operating activities:
Depreciation and amortiza-
tion 84,220 93,384 110,234 706,242
Net gain on sale of mar-
ketable securities (413,504) (1,100) -- (414,604)
Non-employee stock based
compensation -- -- 318,666 845,574
Non-cash officers compen-
sation -- -- 457,250 457,250
Other non-cash items 27,780 157,696 54,684 299,760
Changes in operating
assets and liabilities (1,015,074) (28,140) 25,615 635,939
----------- ---------- --------- -----------
Net Cash Provided by
(Used in) Operating
Activities (661,777) (551,883) 149,733 (1,540,186)
----------- ---------- --------- -----------
Cash flows from investing
activities:
Proceeds from sale of
marketable securities 1,168,445 22,868 -- 1,191,313
Purchases of patents -- -- -- (76,069)
Organization costs -- -- -- (199,672)
Purchase and deposits
of equipment (447,203) (394,915) -- (849,429)
Purchase of marketable
securities (345,342) (432,192) -- (777,534)
----------- ---------- --------- -----------
Net Cash Provided By
(Used in) Investing
Activities 375,900 (804,239) -- (711,391)
----------- ---------- --------- -----------
Cash flows from financing
activities:
Proceeds from borrowings 101,202 966,000 17,000 1,603,208
Proceeds from officer
loans 317,000 -- 138,000 623,993
Repayment of officer loans -- (2,000) (2,000)
Repayment of notes (994,789) (37,000) (75,000) (1,106,789)
Proceeds from sale of
options -- 28,000 -- 28,000
Proceeds from sale of
common and treasury
stock -- 1,070,000 -- 1,161,094
----------- ---------- --------- -----------
Net Cash Provided by
(Used in) Financing
Activities (576,587) 2,027,000 78,000 2,307,506
----------- ---------- --------- -----------
Net Increase (decrease)
in Cash (862,464) 670,878 227,733 55,929
Cash - beginning of period 918,393 247,515 19,782 --
----------- ---------- --------- -----------
Cash - end of period $ 55,929 $ 918,393 $ 247,515 $ 55,929
=========== ========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
June 10, 1998
For the Years Ended June 30, (Date of For-
--------------------------------------- mation through
1998 1997 1996 June 30, 1998
----------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Changes in Operating Assets
and Liabilities Consist of:
(Increase) decrease in due
from licensee $ 248,100 $ (550,000) $ -- $ (301,900)
(Increase) decrease in
prepaid expenses 47,191 (70,708) -- (23,517)
(Increase) in marketable
securities-non-current (300,000) -- -- (300,000)
(Increase) in other assets (92,115) (513,025) -- (605,140)
Increase (decrease) in
accounts payable and
accrued expenses 458,332 (196,907) (416,961) 1,390,677
Increase (decrease) in
deferred income (1,376,582) 1,302,500 450,000 475,918
Increase (decrease) in
accrued franchise tax -- -- (7,424) (99)
----------- ----------- ------- -----------
$(1,015,074) $ (28,140) $ 25,615 $ 635,939
=========== =========== ========= ===========
Supplementary information:
Cash paid during the year for:
Interest $ 155,709 $ 278,838 $ 15,340 $ 449,887
=========== =========== ========= ===========
Income taxes $ -- $ -- $ -- $ --
=========== =========== ========= ===========
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 $ 276,582
=========== =========== ========= ===========
Unrealized gain (loss) on
marketable securities $(2,944,999) $ 5,202,115 $ 364,500 $ 2,621,616
=========== =========== ========= ===========
Deposit on equipment for
common stock $ -- $ 100,000 $ -- $ 100,000
=========== =========== ========= ===========
Non-Cash Financing Activities:
Conversion of long-term
debt to common stock $ -- $ -- $ 121,000 $ 121,000
=========== =========== ========= ===========
Other Non-Cash Activities:
Conversion of accounts
payable and accrued
expenses to common stock $ -- $ 57,696 $ 303,750 $ 900,802
=========== =========== ========= ===========
Conversion of accounts
payable to stock options $ -- $ -- $ 45,000 $ 50,000
=========== =========== ========= ===========
Conversion of accounts
payable to warrants $ 27,780 $ -- $ -- $ 43,405
=========== =========== ========= ===========
Conversion of accounts
payable to treasury stock $ -- $ -- $ -- $ 16,125
=========== =========== ========= ===========
Conversion of accrued
officers salaries to
common stock $ -- $ -- $ 457,250 $ 457,250
=========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Scantek Medical, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on June 10, 1988 and is engaged, with its
subsidiaries, in developing and ultimately manufacturing, marketing, and
licensing the BreastCare(TM) ("BreastCare(TM)") device. The BreastCare(TM)
device is an early screening device which can detect certain breast tissue
abnormalities, including breast cancer. This device has been patented and
has Food and Drug Administration ("FDA") approval for sale.
The development activities of the Company are being financed through the
sale of its common stock and debt securities. The Company's continued
existence is dependent upon its ability to obtain needed working capital
through additional equity and/or debt financing, and the commencement of
its planned operations. Management is actively seeking additional capital
to ensure the continuation of its development activities. However, there is
no assurance that additional capital will be obtained. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern.
At June 30, 1998, planned principal operations have not yet commenced and
no sales revenue has been derived therefrom; accordingly, the Company is
considered a development stage company. There is no assurance that
commercially successful products will be developed nor that the Company
will achieve a profitable level of operations. Operations to date have been
devoted primarily to acquiring all of the necessary patents relating to the
BreastCare(TM) device; attending a variety of medical seminars; research
and development; medical follow-up studies; pre-marketing activities; and
attempting to raise the necessary capital for the initial production. The
Company has entered into three License Agreements whereby the licensees
purchased the right to manufacture and sell the BreastCare(TM) device in
the United States of America, Canada, their territories and possessions,
the majority of South America and Singapore. (See Note 6 of Notes to
Consolidated Financial Statements).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Scantek
Medical, Inc. and its wholly-owned subsidiaries (the "Company"). All
intercompany transactions have been eliminated. Investment in a 35%
owned affiliate is accounted for on the equity method. For the year ended
June 30, 1998, the results from the affiliate was not material.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts
F-12
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES (Continued)
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
AMENDMENT TO CERTIFICATE OF INCORPORATION
On March 11, 1997, the Company, with the consent of the majority of the
Company's shareholders amended the Certificate of Incorporation as to the
aggregate number of common and preferred shares of stock the Company shall
have the authority to issue. A total of 50,000,000 shares (5,000,000 shares
of preferred stock, par value $.001 per share and 45,000,000 shares of
common stock, par value $.001 per share) may be issued. All prior periods
presented have been restated to reflect this amendment.
MARKETABLE SECURITIES
The Company classifies its investment in equity securities, as "available
for sale", and accordingly, reflects unrealized gains, net of deferred
taxes, as a separate component of stockholders' equity.
The fair values of marketable securities are estimated based on quoted
market prices. Realized gains or losses from the sales of marketable
securities are based on the specific identification method.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments. The Company places its temporary cash investments with high
credit quality financial institutions and by policy, in the future, will
limit the amount of credit exposure with any one financial institution.
DEPRECIATION
Equipment is stated at cost less accumulated depreciation. Depreciation is
recorded using the straight-line method over the estimated useful lives of
the assets which are between 5 and 10 years.
PATENT COSTS
The costs associated with the acquisition and filings of United States,
French, English, Dutch and other patents have been capitalized. The
patents are amortized using the straight-line method over their respective
lives, not to exceed ten (10) years. The carrying value of intangible
assets is periodically reviewed by the Company and impairments are
recognized when the expected future operating cash flows to be derived from
such intangible assets is less than their carrying value.
F-13
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
Deferred taxes are provided to reflect the tax effect of temporary
differences between financial reporting and tax basis of assets and
liabilities. The principal items giving rise to deferred taxes are certain
deferred start-up expenses which have been deducted for financial reporting
purposes which are not currently deductible for income tax purposes and
taxes on unrealized gains on marketable securities.
DEFERRED INCOME
Deferred income consists of initial payments of licensing fees and
marketable securities received by the Company, valued as of the date of the
licensing agreements, in connection with the licensing of the
BreastCare(TM) device. The Company has substantially performed all material
conditions of the licensing agreement giving the licensee the right to
manufacture and sell the BreastCare(TM) device. This revenue will be
recognized in income when the licensees commence operations, since
substantial performance is presumed to occur at that point.
Receivables due from the licensees, in certain instances per the agreement,
are recognized upon the acceptance of the equipment by the licensees. Prior
to acceptance of the equipment, the amount due from these licensees will be
offset against the deferred income.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This statement was adopted by the Company in 1996. Since
adoption, no impairment losses have been recognized.
F-14
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
The standard encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on fair value accounting rules. The Company
has adopted the disclosure only provisions of SFAS No. 123 for pro forma
information.
EARNINGS PER COMMON SHARE
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share", which requires companies to present basic earnings per share (EPS)
and diluted earnings per share, instead of the primary and fully diluted
EPS that was required. The new standard requires additional informational
disclosures, and also makes certain modifications to the currently
applicable EPS calculations defined in Accounting Principles Board No. 15.
The Company's prior year results have been restated to conform with the
provisions of the statement.
Basic earnings per common share are computed by dividing net earnings by
the weighted average number of common shares outstanding during the year.
Diluted earnings per common share are computed by dividing net earnings by
the weighted average number of common and common stock equivalent shares
outstanding during the year. Common stock equivalents used in computing
diluted earnings per share related to stock options which, if exercised
would have a dilutive effect on earnings per share. The number of common
stock equivalent shares outstanding were 1,522,301, 1,033,409 and 164,166
for the years ended June 30, 1998, 1997 and 1996, respectively. During the
two years ending June 30, 1997 and 1996, common stock equivalents were not
used in the computation of diluted loss per common share as their effect
would be antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1998, the fair value of cash, amounts due from licensee,
prepaid expenses, notes payable to officer, accounts payable, accrued
interest, accrued salaries and accrued expenses approximated their carrying
values because of the short-term nature of these instruments. The fair
value of marketable securities are based on quoted market prices. It is not
practicable to estimate the fair value of the non-publicly traded
long-term debt.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in order to
conform with the current year's presentation.
F-15
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
2. INVESTMENT IN SUBSIDIARIES
(a) On September 6, 1991, the Company acquired all of the issued and
outstanding common stock of Scantek Digital Systems, Inc. ("SDSI") in
exchange for 7,100,000 shares of the Company's common stock. The
acquisition has been accounted for as a purchase and the results of
SDSI are included in the consolidated financial statements from the
date of acquisition.
(b) In January, 1998, the Company organized a wholly-owned subsidiary,
Scantek Medical S.A. Inc., a Uruguayan company, to handle the
distribution of the BreastCare(TM) device to their licensee in South
America.
(c) The Company has executed a contract with respect to the acquisition of
a Hungarian based manufacturer of plastic medical packaging products
and its manufacturing facility for an aggregate purchase price of
$1,750,000. The acquisition is subject to the Company obtaining
financing and the signing of a definitive agreement.
3. MARKETABLE SECURITIES
<TABLE>
<CAPTION>
Estimated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1998:
Marketable securities-
current:
Common stock $275,157 $2,295,253 $598,000 $5,163,118
========= ========== ========== ==========
Marketable securities-
non-current:
Warrants $300,000 $ 901,520 $601,520 $ --
========= ========== ========== ==========
June 30, 1997:
Marketable securities-
current:
Common stock $ 684,756 $6,860,371 $6,175,615 $ --
========= ========== ========== ===========
</TABLE>
Gross realized gains were $435,352 in 1998 and $1,377 in 1997. Gross
realized losses were $21,848 in 1998 and $277 in 1997. There were no
realized gains or losses in 1996.
4. PROPERTY AND EQUIPMENT
June 30,
-------------------------
1998 1997
-------- --------
Equipment $101,565 $ 48,914
Furniture and fixtures 27,489 9,462
Deposit on equipment 710,000 350,000
Leasehold improvements 16,525 --
-------- --------
855,579 408,376
Less accumulated depreciation 33,536 16,924
-------- --------
$822,043 $391,452
======== ========
F-16
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
5. OTHER ASSETS
June 30,
----------------------------
1998 1997
---------- ----------
Patent costs $ 676,069 $ 676,069
Long-term portion of amount
due from licensees 75,000 500,000
Security deposits 13,125 13,125
Other 92,114 --
---------- ----------
856,308 1,189,194
Less accumulated amortization 473,033 405,426
---------- ----------
$ 383,275 $ 783,768
========== ==========
6. LICENSE AGREEMENTS
The Company has granted HumaScan Inc. ("HumaScan") an exclusive license to
manufacture and sell the BreastCare(TM) device in the United States and
Canada under the trademark BreastAlert(TM). HumaScan completed a public
offering of its shares on August 9, 1996, the proceeds of which are being
used to build HumaScan's manufacturing facility and commence the marketing
of the BreastAlert(TM) product. As the Company's initial licensee, HumaScan
and its exclusive distributor, Physician Sales & Service ("PSS"), began
distribution in December 1997 in the United States. PSS has agreed to
purchase the BreastAlert(TM) from HumaScan for $15.25 per unit. This first
license agreement implements the Company's plan to manufacture, market or
license the BreastCare(TM) device in certain key international markets.
The Company and HumaScan reached a settlement agreement dated May 15, 1998,
resolving certain disputes which have arisen under the license agreement.
Among the many issues resolved, the following was agreed upon concerning
the licensing fee and royalties:
In consideration for a paid-up license and the prior delivery of
technological know-how, consulting services and product development
activities, the licensee agreed to pay the Company an amended balance of
$575,000 on various dates through December 31, 1999 (which is a reduction
of $375,000 from the original amount due to the Company) of which $250,000
has been received to date, and issue the Company 400,000 warrants (valued
at $300,000 as of the date of the amended agreement) exercisable at $4.725
per share vesting on various dates through March 31, 1999 and have a term
of five (5) years from date of vesting. The net effect of the settlement
was to reduce the license fee income by $75,000 for the year ending June
30, 1998.
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 as follows: three (3%) percent
of the first $2 million of net sales increasing to ten (10%) percent of net
sales in excess of $10 million with a minimum royalty of $400,000 in
F-17
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
6. LICENSE AGREEMENTS (Continued)
the third year increasing to $600,000 in the fifth year and thereafter. The
earned royalties payable shall be reduced by an amount of up to a maximum
of $550,000 at the rate of $.50 for each dollar of earned royalty payable
until the amount of $550,000 has been deducted.
The Company entered into an exclusive license agreement, dated September
22, 1997 and amended February 18, 1998, Sandell Corp. S.A. (the "Sandell
Agreement"), a Uruguayan corporation ("Sandell"), pursuant to which the
Company granted to Sandell an exclusive license to market and distribute
the product in Brazil, Venezuela, Columbia, Costa Rica, Eccuador,
Nicaragua, Paraguay, Panama, Peru, Bolivia, Argentina and Uruguay. Sandell
is required to maintain operations in Uruguay's Free Trade Zone. The
Sandell Agreement is for a term of fourteen (14) years. Under the Sandell
Agreement, Sandell is to pay the Company a non-refundable license fee of
(i) $500,000 and (ii) deliver to the Company thirty-five (35%) percent of
the outstanding shares of Sandell on a fully diluted basis. The Company
will account for their investment in Sandell using the equity method of
accounting. As of June 30, 1998, the income earned from the affiliate was
not material.
The cash portion of the fee is payable (i) $100,000 upon execution of the
Sandell Agreement, which was paid by Sandell on October 14, 1997, (ii)
$200,000 forty-five (45) days after shipment of the first product and (iii)
$200,000 on or before January 30, 1999. Sandell is also required to make
minimum purchases of the BreastCare(TM) device from the company as follows:
(i) 20,000 units per month during calendar 1998 after shipment of the first
product, (ii) 35,000 units per month during 1999, (iii) 65,000 units during
2000 and (iv) 90,000 units per month during 2001 and thereafter during the
term of the license. The purchase price for each unit is $8.30 per unit.
On August 15, 1996, the Company entered into a license agreement with
Health Technologies Internation Inc. ("HTI"), whereby HTI is to assemble,
market and sell the BreastCare(TM) device in Chile and Singapore, and pay
the Company a licensing fee of $250,000, all of which has been received.
HTI was acquired by D-Lanz Development Group, Inc. ("D-Lanz") in November
1997. As part of the licensing agreement, the Company received 2,000,000
shares of D-Lanz common stock which is publicly traded on the Electronic
Bulletin Board under the Symbol DLNZ. The Company will classify its
investment as "available for sale" and accordingly reflect unrealized
gains, net of deferred taxes, as a separate component of stockholders'
equity. Pursuant to the terms of the agreement, HTI agreed to pay the
Company minimum royalties of $100,000 in 1999 with increasing royalties
leveling out at a minimum of $400,000 in the year 2000 and thereafter.
D-Lanz has signed a letter of intent for Sandell to distribute the
BreastCare(TM) device in Chile.
F-18
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
7. DEBT
Short-term debt at June 30, is as follows:
1998 1997
--------- ---------
Unsecured note, interest
at 6% per year, due on demand $ 100,000 $ --
Secured margin loan, due on demand
if Humascan common stock falls
below $5 per share, margin interest
rates vary based upon debt range.
This loan was secured by 779,063
shares of Humascan
common stock. (1) -- 966,000
--------- ---------
$ 100,000 $ 966,000
========= =========
Long-term debt at June 30, is as follows:
1998 1997
--------- ---------
Unsecured notes, due upon
completion of a secondary
public offering, interest at
10% per year (2) $ -- $ 30,000
Unsecured notes, interest at prime
plus 2% (10.5% at June 30, 1998)
due September 30, 1999 (3) 888,006 888,006
--------- ---------
888,006 918,006
Current portion of long-term
debt -- 350,000
--------- ---------
$ 888,006 $ 568,006
========= =========
Annual maturities on long-term debt as of June 30, 1998 during the next
five years are:
Year Ending June 30,
--------------------
1999 $ --
2000 888,006
2001 --
2002 --
2003 --
--------
$888,006
========
F-19
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
7. DEBT (Continued)
(1) The Company was obligated to repay its secured margin loan in May 1998
when the HumaScan common stock held as collateral fell below $5.00 per
share. Initially, the Company provided additional collateral of
$200,000 in cash but when the share price fell below $3.00 per share,
the Company was obligated to liquidate the debt in full. The secured
lender sold approximately 120,000 of the HumaScan shares and the
balance was repaid by the Company from advances by Mr. Sagi.
(2) Each noteholder received shares of the Company's common stock, 49,200
shares in total, as additional consideration for their 10% interest
promissory note. This resulted in additional interest expense in the
amount of $49,200 that was amortized over the expected life of the
promissory notes, twenty-one (21) months through March 31, 1996. The
promissory notes issued in connection with these bridge loans were due
in full upon the completion of a public offering by the Company. In
March, 1996, the Company offered a one-time option to convert the
promissory notes into shares of the Company's common stock at a
conversion price of $1.00 per share. $121,000 of the notes were
converted including accrued interest of $30,084. The balance of these
notes were repaid in September 1997.
An officer of the Company was owed $10,000 at June 30, 1997 and
received 2,000 shares of the Company's common stock under the terms of
this note agreement. The Company repaid the officer in September 1997,
including accrued interest of $3,542. Accrued interest at June 30,
1997 was $3,292.
(3) 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. The note bore simple interest at eight (8%) percent per year
and was due on various dates with final payment due December 31, 1999.
The holder of the note was a corporation controlled by Mr. Zsigmond
Sagi ("Mr. Sagi"), the Company's President and Chief Executive
Officer. On March 31, 1998, the corporation holding the note dissolved
and distributed the note to its five shareholders in equal amounts of
$177,601. Two of the five shareholders are executive officers of the
Company, including Mr. Sagi and Carlo Civelli, Vice President of
Finance International. The note terms were renegotiated with the
lenders with principal payments due September 30, 1999 and interest at
prime plus two (2%) percent. Accrued interest at June 30, 1998 and
1997 was $53,200 and $35,520, respectively. Interest expense for the
fiscal year, ended June 30, 1998, 1997 and 1996, and for the period
June 10, 1988 (Date of Formation) through June 30, 1998, amounted to
$71,040, $71,040, $47,280 and $310,886, respectively.
F-20
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
8. INCOME TAXES
At June 30, 1998, the Company has a net operating loss ("NOL") carryforward
of approximately $3,834,000 for financial reporting purposes and
approximately $1,504,000 for tax purposes. The difference between financial
reporting and tax purposes results from the temporary difference caused by
the capitalization of start-up expenditures for tax purposes required by
Internal Revenue Code Section 195 and the net unrealized gain on marketable
securities. The Company has not reflected any benefit of such net operating
loss carryforwards in the accompanying financial statements in accordance
with Financial Accounting Standards Board Statement No. 109 as the
realization of this deferred tax benefit is not more than likely. The tax
NOL carryforwards expire in the years 2005 through 2010.
A reconciliation of taxes on income at the federal statutory rate to
amounts provided is as follows:
Years Ended June 30,
--------------------------------
1998 1997 1996
-------- ------- -------
Tax provision (benefit) computed
at the Federal statutory rate 345,000 (355,000) (177,000)
Increase (decrease) in taxes
resulting from:
Utilization of Federal net
operating loss carryforward (345,000) - -
Effect of unused tax losses - 355,000 177,000
-------- ------- -------
- - -
======== ======= =======
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to a
deferred tax asset and deferred tax liability and their approximate tax
effects are:
June 30,
----------------------------------------------------
1998 1997
------------------------ -------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
----------- ---------- ----------- -----------
Net operating
loss carry-
forward $(1,504,000) $ (602,000) $(1,902,000) $ (761,000)
Deferred start-
up expenses (2,330,000) (932,000) (2,751,000) (1,100,000)
Unrealized gains
on marketable
securities 2,622,000 1,049,000 6,176,000 2,470,000
Valuation
allowance 1,212,000 485,000 - -
----------- ---------- ----------- -----------
$ - $ - $ 1,523,000 $ 609,000
=========== ========== =========== ===========
F-21
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
9. STOCKS, WARRANTS AND OPTIONS (Continued)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for
the stock options awarded. Had compensation cost for the Company's issuing
of stock options and warrants been determined based on the fair value at
the grant date for awards in fiscal year ended 1998 and 1997 consistent
with the provision of SFAS No. 123, the Company's net earnings (loss) and
net earnings (loss) per share would have increased to the pro-forma amounts
indicated below:
June 30,
-----------------------------
1998 1997
-------- ---------
Net earnings (loss) - as reported $654,801 $(773,723)
Net earnings (loss) - pro-forma 411,836 (954,530)
Earnings (loss) per share - basic
- as reported $.04 $(.05)
Earnings (loss) per share - basic
-pro-forma $.02 $(.06)
Earnings (loss) per share - diluted
- as reported $.03 $(.04)
Earnings (loss) per share - diluted
- pro-forma $.02 $(.05)
The fair value of options and warrants are estimated on the date of grant
using the Black-Scholes option pricing method with the following weighted
average assumptions issued for grants in 1998 and 1997, respectively:
dividend yield of -0-%, expected volatility of 66% to 208% and 188% to
252%, risk free interest rate of 5.72% and 5.88% and expected lives of 2
years.
The Company grants stock options and warrants as follows:
(a) On March 7, 1995, the Company established a Non-Qualified Stock Option
Plan (the "Plan") which provides for the granting to key employees stock
options. The Plan provides for the issuance of up to 500,000 shares, none
of which have been registered. No shares have been granted as of June 30,
1998.
(b) On March 7, 1995, the Company established a Stock Grant Program which
provides for the granting to key employees common stock of the Company. The
Stock Grant Program provides for the issuance of up to 500,000 shares, none
of which have been registered. No shares have been granted as of June 30,
1998.
(c) The following options were granted outside the two March 7, 1995 Plans:
F-22
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
9. STOCKS, WARRANTS AND OPTIONS (Continued)
On March 7, 1995, the Company granted options to three outside
directors totalling 40,000 shares each (120,000 shares) at an option price
of $.10 per share, the fair value at the date of grant. As of June 30,
1997, 80,000 shares were exercised and 40,000 shares were cancelled.
On March 7, 1995, the Company granted options to purchase 50,000
shares of the Company's common stock at an option price of $.10 per share,
the fair value at the date of grant, to the Company's Vice-President of
Finance International. In May, 1997, 50,000 shares were exercised.
On October 31, 1996, the Company granted the Company's Vice President
of Finance International warrants to purchase 142,500 shares of the
Company's common stock at an option price of $1.0625 per share, the fair
value at the date of grant, for professional services rendered. The
warrants expire October 30, 2000.
On February 2, 1996, the Company granted its attorney an option to
purchase 150,000 shares of common stock in exchange for $45,000 of
professional services rendered. The option is exercisable, at any time,
through January 2, 1999 at an option price of $.625 per share, the fair
value at the date of grant.
On August 14, 1996, the Company granted options to the Company's
President and Chief Executive Officer to purchase up to 484,827 shares of
the Company's common stock at an option price of $.375 per share, the fair
value at the date of grant, for the conversion of accrued salaries to
August 30, 1996 in the amount of $181,810. The options expire August 30,
1999.
On August 14, 1996, the Company granted options to the Company's Vice
President and Secretary to purchase 345,851 shares of the Company's common
stock at an option price of $.375 per share, the fair value at the date of
grant, for the conversion of accrued salary to August 30, 1996 in the
amount of $129,694. The options expire August 30, 1999. Additionally, the
Company granted an option to purchase 40,000 shares to the Company's Vice
President and Secretary at an option price of $.375 per share. The options
expire August 13, 2001.
On August 14, 1996, the Company granted options to purchase 40,000
shares of the Company's common stock at an option price of $.375 per share,
the fair value at the date of grant, to the Company's Vice-President of
Corporate Development. In March, 1997, 40,000 shares were exercised.
On July 31, 1997, the Company granted options to purchase 15,000
shares of the Company's common stock at an option price of $1.125 per
share, the fair value at the date of grant, to Edward Taxin for publicity
services rendered. The options expire July 31, 2000.
F-23
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
9. STOCKS, WARRANTS AND OPTIONS (Continued)
On January 26, 1998, the Company granted warrants to purchase 35,000
shares of the Company's common stock at an exercise price of $.75 per
share, to Financial Communication Associates for professional services
rendered. The warrants expire January 26, 2003.
On January 26, 1998, the Company granted warrants to purchase 200,000
shares of the Company's common stock at an exercise price of $.55 per
share, the fair value at the date of grant, to D.C. Consultants for
professional services rendered. The warrants expire January 25, 2003.
On January 26, 1998, the Company granted its attorney a warrant to
purchse 150,000 shares of common stock at an exercise price of $.75 per
share in exchange for professional services rendered. The warrants expire
January 26, 2003.
On January 26, 1998, the Company granted options to the Company's
President and Chief Executive Officer to purchase 300,000 shares of the
Company's common stock at an option price of $.55 per share, the fair value
at the date of grant, as a bonus. The options expire January 25, 2003.
On January 26, 1998, the Company granted options to the Company's Vice
President and Secretary to purchase 150,000 shares of the Company's common
stock at an option price of $.55 per share, the fair value at the date of
grant, as a bonus. The options expire January 25, 2003.
On August 5, 1998, the Company granted options to three directors
totaling 40,000 shares each (120,000 shares) at an option price of $.5625
per share, the fair value at the date of grant. The options expire three to
five years from date of grant.
F-24
<PAGE>
9. STOCKS, WARRANTS AND OPTIONS (Continued)
Information regarding the Company's Stock Option Plans and Warrants,
for fiscal years ended 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ---------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISED EXERCISED EXERCISED
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options out-
standing -
beginning of
year 1,163,178 $ .49 330,000 $ .33 305,000 $2.50
Options exer-
cised - - (170,000) .17 - -
Options and
warrants
granted 850,000 .60 1,053,178 .47 150,000 .63
Options
cancelled - - (50,000) .01 (125,000) 6.00
--------- ------- --------- ------ ------- -----
Options and
warrants out-
standing, end
of year 2,013,178 $ .54 1,163,178 $ .40 330,000 $ .33
========= ======= ========= ====== ======= =====
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ---------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISED EXERCISED EXERCISED
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C>
Option and warrants
price range at end
of year $.38 to $1.125 $.01 to $1.06 $.01 to $6.00
Option price range
for exercised
shares - $.10 to $ .38 $ -
Options available
for grant 1,000,000 1,000,000 2,053,178
</TABLE>
F-25
<PAGE>
9. STOCKS, WARRANTS AND OPTIONS (Continued)
The weighted exercise price and weighted fair value of options and warrants
granted by the Company for the fiscal years ended 1998 and 1997 are as follows:
1998 1997
--------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Fair Exercise Fair
Price Value Price Value
-------- -------- -------- --------
Weighted average of
options and warrants
granted during the year
whose exercise price
exceeded fair market
value at the date of
grant .75 .36 -- --
Weighted average of
options and warrants
granted during the year
whose exercise price
was equal to fair market
value at the date of
grant .56 .38 .47 .42
The following table summarizes information about fixed-price stock options
and warrants outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise at June 30, Contractual Exercise at June 30, Exercise
Prices 1998 Life Price 1998 Price
- ----------------- ------------ ---------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
$.38 to $ .625 1,670,678 2.8 years $ .47 1,670,678 $ .47
$.75 to $1.125 342,500 3.3 years $ .90 342,500 $ .90
--------- ---------
2,013,178 2,013,178
========= =========
</TABLE>
10. RELATED PARTY TRANSACTIONS
The note payable to officer represents loans made to the Company by Mr.
Sagi. The promissory note bears interest at prime plus one (1%) percent
(9 1/2%, at June 30, 1998) and is payable on demand. The principal amount of
the note at June 30, 1998 and 1997 was $621,993 and $304,993, respectively.
Subsequent to the balance sheet date, Mr. Sagi advanced an additional
$125,000. Accrued interest at June 30, 1998 and 1997 was $56,973 and
$28,212, respectively. Interest expense for the fiscal years ended June 30,
1998, 1997, 1996 and for the period June 10, 1988 (Date of Formation)
through June 30, 1998 amounted to $31,096, $28,212, $22,365, and $126,020,
respectively.
F-26
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
10. RELATED PARTY TRANSACTIONS (Continued)
On February 3, 1993, 1,250,000 shares of common stock was issued to SMC
Corp. SMC Corp. was the Company's largest shareholder and had the same
President and Chief Executive Officer as the Company. The 1,250,000 shares
represent replacement of shares delivered by SMC Corp. to third parties for
professional services performed on behalf of the Company in the amount of
approximately $312,500.
On March 31, 1998, SMC Corp. dissolved and distributed the note due
from the Company to its five shareholders, including Mr. Sagi and Carlo
Civelli. See Note 7 of Notes to Consolidated Financial Statements for
further information.
The Company and Zigmed Corporation ("Zigmed") have entered into
various agreements. Zigmed is owned and controlled by the son of Mr. Sagi,
who, prior to 1990, owned Zigmed. The Company has contracted with Zigmed to
manufacture its production equipment needed for its manufacturing centers.
The Company sublets warehouse space to Zigmed for $1,850 per month and
received $22,200 as rental income from Zigmed for the year ended June 30,
1998. The Company has also contracted with Zigmed for the production of the
BreastCare(TM) device prior to the full scale production by the Company
abroad. The Company has advanced Zigmed approximately $74,000 for the year
ended June 30, 1998 for materials and labor. As at June 30, 1998, no
amounts were due Zigmed other than the amounts due for the production
equipment. See Note 12 of Notes to Consolidated Financial Statements for
further information.
11. OTHER TRANSACTIONS AND AGREEMENTS
The Company and SMC Corp. entered into various agreements with an
investment banking firm ("361") to, among other things, provide financing
for the Company in exchange for shares of the Company's common stock. In
exchange for terminating all prior agreements between 361 and the Company
and SMC Corp., the Company issued 621,250 shares of its common stock to 361
representing services valued at approximately $78,000, which was approved
by the Board of Directors on March 7, 1995.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and warehousing facilities. Certain of these
leases require the Company to pay certain executory costs (such as
insurance and maintenance). In June, 1997 the Company signed a three (3)
year lease for office and warehouse space in Denville, New Jersey.
F-27
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
12. COMMITMENTS AND CONTINGENCIES (Continued)
LEASES (Continued
Future minimum lease payments for operating leases are as follows:
Year Ending June 30,
--------------------
1999 $ 73,750
2000 56,000
2001 --
2002 --
2003 --
Thereafter --
--------
$129,750
========
RENT EXPENSE
Rent expense for the years ended June 30, 1998, 1997, 1996 and from
June 10, 1988 (Date of Formation) through June 30, 1998 was approximately
$68,000, $43,000, $36,000, and $280,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts in principle with
the two officers/directors of the Company.
The agreements all provide the following: base salaries increasing
upon certain conditions, incentive bonus plans and severance benefits. The
agreements also provide for the issuance of Humascan common stock owned by
the Company as a form of additional compensation. In April, 1996, the
Company issued to Mr. Sagi and the Company's Secretary, a total of 225,000
shares of Humascan common stock valued at $2,250 based upon a fair market
value of $.01 per share on the date of issuance.
PRODUCTION AGREEMENTS
The Company intends to construct strategic regional manufacturing
centers abroad to manufacture, assemble and market the BreastCare(TM)
device. The Company has entered into an amended agreement with Zigmed
pursuant to which Zigmed will manufacture the production equipment needed
for the manufacturing centers for the contract price of $1,850,680 plus
100,000 shares of the Company's common stock. In August 1996, the Company
paid Zigmed an advance deposit of $200,000 to begin production of the
manufacturing equipment, and in September, 1996 issued Zigmed 100,000
shares of the Company's common stock (valued at $1.00 per share) against
the contract. The Company has accounted for the issuance of shares of
common stock as a deposit on machinery and equipment. As of June 30, 1998,
the Company has advanced Zigmed $710,000. See Note 4 of Notes to
Consolidated Financial Statements.
F-28
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, 1996 AND FOR THE PERIOD
JUNE 10, 1988 (DATE OF FORMATION) THROUGH JUNE 30, 1998
13. SUBSEQUENT EVENT
The Company's investment in marketable securities includes 661,563
shares of HumaScan's common stock valued at $2.563 per share at June 30,
1998. The Company also has 400,000 warrants of HumaScan's common stock
valued at $901,520. As of September 25, 1998, the price of HumaScan's
common stock has substantially diminished to $.50 per share. The decrease
in market value could have a material adverse effect on the Company's
balance sheet and statement of operations.
F-29
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None to be reported.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table and biographical outlines set forth the directors,
positions and officers within the Company presently held by each executive
officer of the Company and a brief account of the business experience of each
such director and officer for the past five years.
Positions and Officers
within the Company/
Name and Age Age Business Experience
- ------------ --- ----------------------
Zsigmond L. Sagi, Ph.D. 65 Chairman of the Board, Chief
Executive Officer and
Director
Maurice Siegel, Ph.D. 68 Vice President, Research and
Development and Director
Patricia B. Furness 51 Vice President, Secretary
and Director
Carlo Civelli 49 Vice President of Finance
International
Louis Gottlieb 70 Vice President of Corporate
Development
Paul Nelson 66 Director
Robert Lane 49 Director
Kenneth Courey 61 Director
ZSIGMOND L. SAGI, PH.D., has served as Chairman of the Board, Chief
Executive Officer and Chief Scientist of the Company since October, 1991. Mr.
Sagi has over 25 years experience in the health-care field and has invented or
developed several commercial medical devices and technological products. From
1968 until 1977 he served as Executive Vice President and Chief Operating
Officer of Bio-Medical Sciences, Inc., a publicly held company of which he was
one of the founders. Thereafter, he organized and managed several companies,
including Zigmed Corp., a healthcare engineering firm. In 1974, he founded BCSI
Laboratories, Inc., the company which developed the BreastCare(TM). From 1986
until 1991, Mr. Sagi served as Chairman of the Board and President of SMC Corp.,
a company he founded in 1986. Mr. Sagi has been issued numerous United States
and foreign patents in the fields of healthcare, chemical applications,
electronics and mechanics, including the disposable oral thermometer, the Zigzag
sewing machine, an ambulatory automated feeding device, and a sterilization
indicator. He received his doctorate in Physics from Stevens Institute of
Technology, Newark, New Jersey, in 1968 and his master's in mechanical
engineering at Technical University of Hungary in 1954.
-23-
<PAGE>
MAURICE SIEGEL, PH.D., has served as the Company's Vice President of
Research and Development since 1991. From 1989 until 1991 he served in the same
capacity with Scantek Medical Corp., the Company's predecessor. He was employed
by Faberge, Inc. from 1957 through 1987, as Director of Research and Development
from 1957 to 1996, as Vice President of Research and Development from 1966 to
1977, and last holding the position of Executive Vice President of Research and
Development from 1977 to 1987. Since 1987, Mr. Siegel has served, and continues
to serve, as a consultant to numerous companies, including Tri-Scent, Imported
Beauty Lines, Telebrands and Sun Laboratories. Mr. Siegel received a Ph.D. in
Physical and Organic Chemistry from New York University in 1957.
PATRICIA B. FURNESS, has served as the Vice President, Secretary and
Director of the Company since 1991. In addition to managing marketing, finance
and public relations for the Company, Ms. Furness is also responsible for
coordinating market research, product testing programs and Clinical Research
follow-up studies. From 1988 until 1991 she served as Vice President and
Secretary of Scantek Medical Corp., and, in 1989, was elected to its Board of
Directors. In 1987, Ms. Furness became the Manager of Corporate Development of
Zigmed, Inc., a manufacturer of automated systems for the health care industry.
Ms. Furness received a Bachelor of Science Degree in education from Appalachian
State in Boone, North Carolina in 1969.
CARLO CIVELLI, has served as Vice President of Finance International since
March 7, 1995. Since 1980, Mr. Civelli has owned Clarion Finance, A.G., a Swiss
corporation which he founded. From 1969 to 1971, Mr. Civelli was an Assistant
Vice-President with New Province Securities in Zurich, Switzerland. From 1971 to
1978, he served as Vice President of a European NYSE brokerage firm. From 1978
to 1980, Mr. Civelli was a free-lance investment advisor. Mr. Civelli is a
graduate of the College of the Swiss Mercantile Society, London.
LOUIS GOTTLIEB, has served as Vice President of Corporate Development since
August, 1996. Presently, he is on the Board of Directors at Brookdale Hospital
Medical Center, Linrock Nursing Home, First Central Financial Corp. From
1992-1995, he was treasurer and Board Member of South Shore Association for
Independent Living. From 1973 to present, CEO of the Gottlieb Group, one of the
largest 500 construction firms in the U.S. From 1942 to 1945 Mr. Gottlieb served
in the US Air Corps. as a Commissioned Lt. Fighter pilot. Mr. Gottlieb studied
civil engineering at Brooklyn Polytechnical Institute.
PAUL NELSON, has served on the Company's Board of Directors since 1991.
From 1987 until 1991, he served as a Director of Scantek Medical Corp., the
Company's Predecessor. In 1968, Mr. Nelson founded compressed Gas, Inc., a
wholesale supplier of medical and industrial compressed gases. Although Mr.
Nelson has since sold his ownership in Compressed Gas, Inc., he has served as
both President and Director of Compressed Gas, Inc. Mr. Nelson received a
Bachelor of Science Degree from the University of North Carolina in Chapel Hill,
North Carolina.
ROBERT LANE, joined the Company's Board of Directors in May of 1998. From
1972 through the present, Mr. Lane has been the head of the Lane Group and
serves as President and Chief Executive Officer of Lane Construction Company,
Inc. and Lane Enterprises, Inc. as well. He is also the Managing Partner of
Tamara Enterprises, Hike Enterprises, West Milford Shopping Plaza Associates and
Clairidge Mall Associates. He has also served as a member of the St. Clare's
Medical Center Foundation Board, the Board of Directors of Powder Mill Bank, as
a special Advisory Board member to Carnegie Bank, the Board of Directors of
HumaScan, Inc. Mr. Lane is a graduate of the University of Rochester.
-24-
<PAGE>
KENNETH COUREY, joined the Company's Board of Directors in July 1998.
Presently, Mr. Courey is Founder and Chairman of the Board of Directors of
QualCare Preferred Providers of New Jersey, Inc. From 1984-1996 he was President
and Chief Executive Officer of St. Francis Life Care Corporation, from 1984-1994
he was President and Chief Executive Officer of SSM Health Care Ministry
Corporation, and from 1970-1992 he was President of St. Clare's Riverside
Medical Center. Currently, he is a member of the Denville, N.J., Advisory
Board of Carnegie Bank and is a member of the Board of Directors of Health Care
Insurance Company and C.S.R.A., a senior-housing management and development
company. Mr. Courey received a Bachelor of Arts Degree in Political Science from
St. Ambrose College, Davenport, Iowa in 1959 and Master of Arts Degree in
Hospital and Health Administration from State University of Iowa, Iowa City,
Iowa in 1962.
Compliance with 16(a) of the Securities and Exchange Act of 1934
To the Company's knowledge, based solely on a review of such materials as
are required by the Securities and Exchange Commission, no officer, director or
beneficial holder of more than ten (10%) percent of the Company's issued and
outstanding shares of Common Stock failed to timely file with the Securities and
Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended June 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The following sets forth, for the fiscal years ended June 30, 1998, 1997
and 1996, the annual and long-term compensation paid or accrued of the Company's
Chief Executive Officer.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
----------------------- --------------------------------
Name and Principal Other Annual Long-Term
Position Year Salary Bonus Compensation Compensation
- ------------------ ---- ------ ----- ------------ ------------
(1)
Zsigmond L. Sagi 1998 $ 190,000 $ -- -- None
Chairman of the 1997 190,000 -- -- None
Board and Chief 1996 145,000 2,100 -- None
Executive Officer
- ----------
(1) In April, 1996, Mr. Sagi received 210,000 shares of HumaScan's common
stock.
EMPLOYMENT AGREEMENTS
On February 26, 1993, Mr. Sagi and Ms. Patricia Furness each entered into
letters of employment (the "Letters of Employment") with the Company. Pursuant
to such Letters of Employment, Mr. Sagi and Ms. Furness earn annual salaries of
$100,000 and $50,000, respectively. These salaries were prorated from October 3,
1991, and were to be paid upon the completion of certain financing. On September
28, 1995, a portion of Mr. Sagi's accrued salaries were converted into shares of
the Company's Common Stock. Also on September 28, 1995, a portion of Ms.
Furness' accrued salaries were converted into shares of the Company's Common
Stock.
In July 1996, the Company entered into employment agreements in principle
with Mr. Sagi and Ms. Furness. The agreements provide for base salaries of
$190,000 and $75,000, respectively. Ms. Furness' base salary was increased to
$90,000 effective July 1997.
-25-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company as
of the date of this Statement, with respect to beneficial ownership of: (i) each
person who is known by the Company to be the beneficial owner of more than five
(5%) percent of the Company's outstanding Common Stock; (ii) each of the
Company's directors and executive officers; and (iii) all officers and directors
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws, where applicable.
<TABLE>
<CAPTION>
Amount and
Name and Nature of
Title Address of Beneficial Percent
of Beneficial Ownership of Shares
Class Owner as of September 15, 1998 Outstanding (1)
- ----- ---------- ------------------------ ---------------
<S> <C> <C> <C>
Common Zsigmond L. Sagi
Stock 19 Lockley Court
Mountain Lakes, NJ 07046 5,729,394(2)(3)(4)(5) 31.82%
Common 361 Acquisition Corp.
Stock 885 W. Georgia St., Ste 1200
Vancouver, BC
Canada V6L 3E8 2,121,250 (6) 12.32%
Common Patricia B. Furness
Stock 25 Beechway Road
Mountain Lakes, NJ 07046 1,412,851(7)(8)(9) 7.96%
Common Paul Nelson
Stock 69 Lookout Road
Mountain Lakes, NJ 07046 139,500 (10) 0.81%
Common Maurice Siegel
Stock 560 W. 43rd Street
New York, NY 10036 64,500 (11) 0.37%
Common Carlo Civelli
Stock 19 Lockley Court
Mountain Lakes, NJ 07046 942,500(12)(13)(14) 5.43%
Common Louis Gottlieb
Stock 20 N. Central Avenue
Vally Stream, NY 11580 252,500(15) 1.47%
Common Robert Lane 215,000(16) 1.24%
Stock
Common Kenneth Courey 40,000(17) 0.23%
Stock
Common All directors and executive
Stock officers as a group (consis-
ting of 8 persons) 8,795,745 46.78%
</TABLE>
-26-
<PAGE>
- ----------
(1) There were 17,220,200 shares of Common Stock outstanding as of September
15, 1998.
(2) Includes 3,750,000 shares of the Company's Common Stock issued to Mr. Sagi
upon conversion of an aggregate of $375,000 of accrued salaries.
(3) Includes 484,827 shares issuable to Mr. Sagi upon the exercise of options
granted on August 30, 1996 for the conversion of accrued salary to August
30, 1996 and 300,000 shares issuable to Mr. Sagi upon the exercise of
options granted in January, 1998.
(4) Includes 535,785 shares received upon the dissolution of SMC Corp.
(5) Does not include 45,000 shares of the Company's Common Stock owned by Mr.
Sagi's former wife, and 98,500 shares of the Company's Common Stock owned
by Mr. Sagi's children and their spouses, as to which Mr. Sagi disclaims
beneficial ownership.
(6) Includes 621,250 shares of the Company's Common Stock which 361 Acquisition
Corp. received as part of the 361 Acquisition Agreement. (See "Certain
Relationships and Related Transactions").
(7) Includes 10,000 shares owned by Ms. Furness' children, as to which Ms.
Furness disclaims beneficial ownership.
(8) Includes 800,000 shares of the Company's Common Stock issued to Ms. Furness
upon conversion of an aggregate of $80,000 of accrued salaries.
(9) Includes 345,851 shares issuable to Ms. Furness upon the exercise of
options granted on August 30, 1996 for the conversion of accrued salary to
August 30, 1996, 40,000 shares issuable to Ms. Furness upon the exercise of
options granted in August 1996 and 150,000 shares issuable to Ms. Furness
upon the exercise of options granted in January, 1998.
(10) Includes 40,000 shares of the Company's Common Stock issued upon the
exercise of options granted on March 7, 1995 to such director.
(11) Includes 40,000 shares of the Company's Common Stock issuable upon the
exercise of options granted on August 5, 1998 to Mr. Siegel.
(12) Includes 50,000 shares of the Company's Common Stock issued to Mr. Civelli
upon the exercise of options granted on March 7, 1995 and 142,500 shares
issuable upon the exercise of options granted October 31, 1996.
(13) Includes 750,000 shares received upon the dissolution of SMC Corp.
(14) Does not include the 2,121,250 shares of the Company's Common Stock owned
by 361 Acquisition Corp. Mr. Civelli is the largest stockholder of 361
Acquisition Corp. and controls in excess of fifty (50%) percent of the
outstanding shares.
(15) Includes 40,000 shares of the Company's Common Stock issued upon the
exercise of options granted August 14, 1996 to Mr. Gottlieb.
-27-
<PAGE>
(16) Includes 40,000 shares of the Company's Common Stock issuable upon the
exercise of options granted on August 5, 1998 to Mr. Lane.
(17) Includes 40,000 shares of the Company's Common Stock issuable upon the
exercise of options granted on August 5, 1998 to Mr. Courey.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) The Company has entered into an agreement dated August 25, 1996, as
amended, with Zigmed, Inc. ("Zigmed"), a company owned by Mr. Sagi's
son, pursuant to which Zigmed agreed to manufacture the production
equipment needed for the manufacturing centers for the contract price
of $1,850,680 plus 100,000 shares of the Company's Common Stock. In
August 1996, the Company paid Zigmed an advance deposit of $200,000 to
begin production of the manufacturing equipment, and in March 1997
issued Zigmed 100,000 shares of the Company's Common Stock (Valued at
$1.00 per share) against the contract. As of June 30, 1998, the
Company has advanced Zigmed $710,000, including the shares of common
stock.
(b) The Company and SMC Corp. entered into various agreements with an
investment banking firm ("361") to, among other things, provide
financing for the Company in exchange for shares of common stock. In
exchange for terminating all prior agreements between 361 and the
Company and SMC Corp., the Company issued 621,250 shares of its common
stock to 361 representing services valued at approximately $78,000,
which was approved by the Board of Directors on March 7, 1995.
(c) The Company has borrowed funds from Mr. Sagi. The promissory note to
Mr. Sagi bears interest at prime plus one (1%) percent, 9 1/2% at June
30, 1998, and is payable on demand. The principal amount of the note
is $621,993 at June 30, 1998. Subsequent to the balance sheet date,
Mr. Sagi advanced an additional $125,000. Interest expense for the
year ended June 30, 1998 was $31,096.
(d) On March 31, 1998, SMC Corp. dissolved and distributed the note
receivable of $888,006 from the Company to the five shareholders in
equal amounts of $177,601, including Mr. Sagi and Carlo Civelli. The
note terms were renegotiated with the lenders with principal payments
due September 30, 1999, and interest at prime plus two (2%) percent.
Accrued interest due Mr. Sagi and Mr. Civelli at June 30, 1998, was
$10,640, respectively.
-28-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Page
----
(a)
1. Financial statements filed as part of this report:
Independent Auditors' Report F-1
Consolidated Balance Sheets, June 30,
1998 and 1997 F-2 - F-3
Consolidated Statements of Operations, Years Ended June
30, 1998, 1997 and 1996, and the Period June 10, 1988
(Date of Formation) through June 30, 1998 F-4
Consolidated Statements of Stockholders' Equity,
Years Ended June 30, 1998, 1997 and 1996, and
the Period June 10, 1988 (Date of Formation)
through June 30, 1998 F-5 - F-9
Consolidated Statements of Cash Flows, Years Ended June
30, 1998, 1997 and 1996, and the Period June 10, 1988
(Date of Formation) through June 30, 1998 F-10 - F-11
Notes to Consolidated Financial Statements F-12 - F-29
2. Financial statement schedules filed as part of this
report:
All schedules are omitted because they are inapplicable,
not required or the information is included in the
financial statements or notes thereto.
(b)
3. Exhibits filed as part of this report
Exhibit No.:
- ------------
3.1 Certificate of Incorporation and Bylaws of the Registrant --
Incorporated by Reference to Exhibit 2.1 and 2.2 of the Company's
Report on Form 10-SB/A-1 dated September 17, 1996.
3.2 Amendment to the Certificate of Incorporation filed March 31, 1997 --
Incorporated by Reference to Exhibit 3.2 of the Company's Report on
Form 10-KSB for the year ending June 30, 1997.
10.1 Private Placement Memorandum dated May 17, 1994 -- Incorporated by
Reference to Exhibit 3.1 of the Company's Report on Form 10-SB/A-1
dated September 17, 1996.
-29-
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Exhibit No.:
- ------------
10.2 Instrument defining shareholder rights regarding 18,000 shares of the
Company's Common Stock purchased on November 29, 1991 -- Incorporated
by Reference to Exhibit 3.2 of the Company's Report on Form 10-SB/A-1
dated September 17, 1996.
10.3 Instruments defining shareholder rights regarding 18,000 shares of the
Company's Common Stock purchased between June and August, 1993 --
Incorporated by Reference to Exhibit 3.3 of the Company's Report on
Form 10-SB/A-1 dated September 17, 1996.
10.4 Agreement defining Bio-Life shareholders' rights regarding 35,000
shares of the Company's Common Stock -- Incorporated by Reference to
Exhibit 3.4 of the Company's Report on Form 10-SB/A-1 dated September
17, 1996.
10.5 Asset Transfer Agreement among SDSI (as SMC Acquisition Corp.), Mr.
Sagi and Scantek Medical Corp. dated August 12, 1991 -- Incorporated
by Reference to Exhibit 6.1 of the Company's Report on Form 10-SB/A-1
dated September 17, 1996.
10.6 Letter Agreement between SMC Corp. and Zigmed Corporation dated
January 8, 1991 ("Zigmed Agreement") -- Incorporated by Reference to
Exhibit 6.2 of the Company's Report on Form 10-SB/A-1 dated September
17, 1996.
10.7 Amendment to Purchase Order Agreement dated August 28, 1996 -
Incorporated by Reference to Exhibit 10.7 of the Company's Form 10-KSB
for the year ending June 30, 1997.
10.8 Purchase Order between SMC Corp. and Zigmed Corp. dated January 22,
1991 -- Incorporated by Reference to Exhibit 6.3 of the Company's
Report on Form 10-SB/A-1 dated September 17, 1996.
10.9 Amendment to Purchase Order Agreement dated August 28, 1996 -
Incorporated by Reference to Exhibit 10.9 of the Company's Form 10-KSB
for the year ending June 30, 1997.
10.10 Non-Disclosure Agreement between SMC Corp. and Zigmed Corp. dated
January 7, 1990 -- Incorporated by Reference to Exhibit 6.4 of the
Company's Report on Form 10-SB/A-1 dated September 17, 1996.
10.11 Escrow Agreement among SMC Corp., 361 Acquisition Corp. and Chase
Lincoln First Bank dated August 20, 1991 -- Incorporated by Reference
to Exhibit 6.5 of the Company's Report on Form 10-SB/A-1 dated
September 17, 1996.
10.12 Termination Agreement among Scantek Medical Corp., Mr. Sagi, 361
Acquisition Corp., Dal Brynelsen, Douglas E. McRae and Scantek Medical
Ltd. dated August 12, 1991 -- Incorporated by Reference to Exhibit 6.6
of the Company's Report on Form 10-SB/A-1 dated September 17, 1996.
-30-
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Exhibit No.:
- ------------
10.13361 Acquisition Agreement (Amendment No. 2) between SMC Corp., Mr. Sagi,
361 Acquisition Corp., Brynelsen, Scantek Medical Ltd. and Scantek
Medical, Inc. dated March 7, 1995 -- Incorporated by Reference to
Exhibit 6.7 of the Company's Report on Form 10-SB/A-1 dated September
17, 1996.
10.14 Humascan Inc. Licensing Agreement between Scantek Medical, Inc. and
Humascan, Inc. dated October 20, 1995 -- Incorporated by Reference to
Exhibit 6.8 of the Company's Report on Form 10-SB/A-1 dated September
17, 1996.
10.15 Amendment to the Humascan Inc. Licensing Agreement between Scantek
Medical, Inc. and Humascan, Inc. dated April 29, 1996 -- Incorporated
by Reference to Exhibit 6.9 of the Company's Report on Form 10-SB/A-1
dated September 17, 1996.
10.16 Lease between Scantek Medical, Inc. and Kabert Realty Corporation for
Storage and Office Space -- Incorporated by Reference to Exhibit 6.10
of the Company's Report on Form 10-SB/A-1 dated September 17, 1996.
10.17 Lease between Scantek Medical, Inc. and Carol Yang for Office Space --
Incorporated by Reference to Exhibit 6.11 of the Company's Report on
Form 10-SB/A-1 dated September 17, 1996.
10.18 Lease between Scantek Medical, Inc. and Pablito, L.L.C. for Warehouse
and Office Space dated June 13, 1997 - Incorporated by Reference to
Exhibit 10.18 of the Company's Form 10-KSB for the year ending June
30, 1997.
10.19 Letters of Employment for Mr. Zsigmond Sagi and Ms. Patricia Furness
dated February 26, 1993 -- Incorporated by Reference to Exhibit 6.12
of the Company's Report on Form 10-SB/A-1 dated September 17, 1996.
10.20 Amendment to the Humascan Inc. Licensing Agreement between Scantek
Medical, Inc. and Humascan, Inc. dated May 31, 1996 -- Incorporated by
Reference to Exhibit 6.13 of the Company's Report on Form 10-SB/A-1
dated September 17, 1996.
10.21 Licensing Agreement with Health Technologies International Inc. and
Scantek Medical Inc. dated August 15, 1996 -- Incorporated by
Reference to Exhibit 10.21 of the Company's Form 10-KSB for the year
ending June 30, 1997.
10.22 Amendment to Licensing Agreement dated August 15, 1996 between Health
Technologies International Inc. and Scantek Medical, Inc. dated April
30, 1997 -- Incorporated by Reference to Exhibit 10.22 of the
Company's Form 10-KSB for the year ending June 30, 1997.
-31-
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Exhibit No.:
- ------------
10.23 Licensing Agreement with Scantek Medical, Inc. and Sandell Corp. S.A.
dated September 22, 1997 -- Incorporated by Reference to Exhibit 10.23
of the Company's Form 10-KSB for the year ending June 30, 1997.
10.24 Settlement Agreement with HumaScan, Inc. and Scantek Medical Inc.
dated May 15, 1998 -- Incorporated by Reference to Exhibit 10.1 of the
Company's Form 8-K dated May 15, 1998.
10.25 Amended Licensing Agreement with Scantek Medical, Inc. and Sandell
Corp. S.A. dated February 18, 1998
11 A statement regarding the computation of earnings per share is omitted
because such computation can be clearly determined from the material
contained in this Annual Report on Form 10-KSB.
22 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99 Reinstatement of Patent No. RE.4,624,264 United States, Extension to
November 25, 2003 -- dated August 12, 1997.
(b) Reports on Form 8-K
On May 15, 1998, the Registrant filed a Current Report on Form 8-K
describing the amended License Agreement with its licensee,
HumaScan,Inc. ("HumaScan"), pursuant to which agreement HumaScan has
the exclusive rights to manufacture and distribute the Company's
adjunctive breast disease screening device in the U.S. and Canada.
The Settlement Agreement resolved certain matters which were the
subject of mediation between the Company and HumaScan, Inc. and
provide both the Company and HumaScan with a package of financial
adjustments and other benefits. The Settlement Agreement gives
HumaScan some additional time and financing to pursue its marketing
and distribution of the "BreastAlert" product, while increasing the
Company's interest in HumaScan.
Pursuant to the Settlement Agreement, during the first two years of
royalty payments, the minimum payments by HumaScan to the Company of
$150,000 and $300,000 will not be required and, while the royalty
payments due to the Company ranging from 3% to 10% remain unchanged,
the Company will credit 50% of the earned royalty payments up to
$550,000. The parties also agreed to certain adjustments with respect
to the third year minimum royalty payment upon occurrence of certain
events.
-32-
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
In addition, the Company requested certain language changes to the
License Agreement and received 400,000 warrants to purchase shares of
HumaScan common stock at $4.725 per share in exchange for reducing by
$375,000 certain licensing fees due by early 1999, and other payment
adjustments. The warrants vest over a ten month period and are
exercisable for five (5) years from vesting.
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 L. SAGI
------------------------------------
Zsigmond L. Sagi, President
Date: September 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ ZSIGMOND L. SAGI
- --------------------------------------
Zsigmond L. Sagi
President, Chairman of the Board
and Director
/s/ PATRICIA B. FURNESS
- --------------------------------------
Patricia B. Furness
Vice President, Secretary and
Director
/s/ PAUL NELSON
- --------------------------------------
Paul Nelson
Director
/s/ MAURICE SIEGEL
- --------------------------------------
Maurice Siegel
Vice President and Director
/s/ ROBERT LANE
- --------------------------------------
Robert Lane
Director
/s/ KENNETH COUREY
- --------------------------------------
Kenneth Courey
Director
-34-
SUBSIDIARY OF SCANTEK MEDICAL INC.
Jurisdiction of
Name Incorporation
---- ---------------
Scantek Digital Systems, Inc. Delaware
Scantek Medical S.A. Uruguay
EXCLUSIVE DISTRIBUTION AGREEMENT
BETWEEN
SCANTEK MEDICAL, INC.
AND
SANDELL CORP. S.A.
THIS AGREEMENT is made this 18th day of February 1998 by and between Scantek
Medical, Inc. (the "Manufacturer"), a Delaware corporation having its principal
place of business at 321 Palmer Road, Denville, New Jersey, and Sandell Corp.
S.A., a Uruguayan corporation, (the "Distributor") having its principal place
of business at Brandzen 1984-704 Montevideo, Uruguay with reference to the
following facts and upon the following terms and conditions:
WHEREAS, Certain technology having been the object of Letters Patent of the
United States set forth on Exhibit A which have been assigned to the
Manufacturer along with numerous patents obtained on the same technology in
countries other than the United States, and also comprising technical trade
secrets and business know-how (hereinafter referred to jointly and severally as
the "Technology"); and
WHEREAS, Distributor is desirous of obtaining, for itself and its Affiliates, an
exclusive right to distribute, directly or through subdistributors, certain
devices made with said technology, defined below, to sell devices described on
Exhibit C hereto defined below, (the "Agreement Devices") and to sell and use
the Agreement Devices in the Territory, defined below; and
WHEREAS, Manufacturer is willing to grant such rights to Distributor on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing premises, which are hereby
incorporated as part of this Agreement, and the mutual covenants herein
contained, the parties hereto agree as follows:
1. DEFINITIONS
The following terms as used in this Agreement shall, unless clearly indicated
otherwise, have the following meanings:
<PAGE>
A. "Territory" shall mean the countries listed on Exhibit B hereto, except
as any of them are eliminated under this Agreement.
B. "Agreement Devices" shall mean the Breast Thermal Activity Indicator
("BTAI") Devices described on Exhibit C to be marketed by the Distributor
in the Territory and all improvements thereto, also to be known under the
Trademarks "BreastCare" and "BreastAlert."
C. "Minimum Net Sales" shall mean the Minimum Net Sales specified on
Exhibit D which Distributor is required to maintain in each country there
listed.
D. "Net Sales" shall mean the gross amount invoiced for the Agreement
Devices less all credits or allowances granted on account of rejection,
returns, billing errors, duties, taxes and other governmental charges.
E. "Technical Information and Know-How" shall mean all information
belonging to Manufacturer or in Manufacturer's possession which is
necessary for the assembly, marketing and use of the Agreement Devices
including, inter alia, written assembly directions, quality control
specifications and procedures used in connection therewith and information
and data regarding the use of the Agreement Devices, and also information
utilized by Manufacturer in obtaining governmental approvals for the sale
of the Agreement Devices.
F. "Minimum Sales" shall mean the minimum sales which must be paid by the
Distributor to Manufacturer during each Contract Year hereunder.
G. "Contract Year" shall mean each year during the term of this Agreement
commencing on an anniversary of the date hereof and ending on the day
immediately preceding the next such anniversary.
2. EXCLUSIVE AGREEMENT/MANDATORY LOCATION
Subject to the Distributor's compliance with the terms hereof, the Manufacturer
hereby grants to the Distributor during the term hereof, a non-assignable,
indivisible, non-transferable exclusive
<PAGE>
right and distribute in and only within the Territory, to, use, and sell the
Agreement Device containing the Technology. However, the Distributor shall have
the right to grant subdistributors with respect to this agreement.
Distributor must maintain its operations in the Uruguay Free Trade Zone.
Failure to do so will result in the termination of this Agreement at
Manufacturer's sole option and without recourse by Distributor.
3. PURCHASING REQUIREMENTS; AGREEMENT FEE; OTHER CONDITIONS
A. In addition to any other fees specified below, and solely as
consideration for Manufacturer's entry into this Agreement, the Distributor
shall pay to the Manufacturer a non-refundable Agreement Fee of thirty five
percent (35%) of the fully diluted, total issued and outstanding common
shares of the Distributor and Five Hundred Thousand Dollars ($500,000) paid
in three installments as follows: One Hundred Thousand Dollars ($100,000)
upon the execution of this Agreement; an additional payment of Two Hundred
Thousand Dollars ($200,000) 45 days after the date of the first shipment
effected according to this agreement; and Two Hundred Thousand Dollars
($200,000) on or before January 31, 1999. Unless specified otherwise
herein, all dollars referred to in this Agreement are United States
Dollars.
B. Distributors shall purchase the Agreement Device solely from the
Manufacturer during each Contract Year during the term of the Agreement the
guaranteed Minimum Product Purchases ("Minimum Purchases") equal to the
amounts for each Contract Year indicated on Exhibit D hereto.
C. Distributor shall maintain true, complete and correct books and records
of all transactions within the scope of this Agreement, in accordance with
generally accepted accounting principles, to enable Manufacturer to readily
ascertain all amounts purchased hereunder and the information to be set
forth in the statements required by this Section 3. Manufacturer, its
agents or representatives, shall have the right, during Distributor's
normal business hours, at any time and from time to time during the term of
this Agreement and for a period of two years thereafter, to inspect,
examine and copy all or any part or parts of such books and records and all
other documents and materials (at Manufacturer's
<PAGE>
expense), relating to the transactions contemplated by this Agreement. All
such books and records shall be kept available by Distributor for at least
two years after the termination of this Agreement. (However, Distributor
shall be free to destroy any material more than six (6) years old.)
D. Distributor agrees to limit membership on its Board of Directors to five
(5) members of which Scantek shall have the right to appoint up to three
(3) members.
E. The 35% of the Agreement's equity which is owned hereafter by the
Manufacturer shall not be diluted for any reason whatsoever. Any such
dilution shall cause the immediate termination of the Agreement granted
herein, at the Manufacturer's sole option.
4. TERMS
A. Subject to Distributor's compliance with its obligations hereunder the
term of this Agreement shall be FOURTEEN (14) years, but subject to the
following:
(i) If the Distributor shall abandon the exploitation of the Agreement
Device by failing for a period of twelve consecutive months to achieve
the Minimum Product Purchases as specified in Exhibit D the
Manufacturer may on thirty days written notice to the Distributor, at
its option, terminate this Agreement or alter the definition of
"Territory," in either case without prejudice, however, to the money
due to the Manufacturer hereunder.
(ii) If any payments due hereunder are in arrears for thirty days
after the due date, and if thereupon notice is given to the
Distributor both by telegram, telefax, or by registered mail, and if
thereafter such payment remains in arrears for thirty days after the
sending of such notice; or if the Distributor defaults in performing
any of the other terms of this Agreement and continues in default for
a period of thirty days after written notice thereof; or if the
Distributor is adjudicated with its creditors; or if a receiver is
appointed for it; then, in any such event, the Manufacturer shall have
the right to terminate this Agreement upon giving notice to the
Distributor at least thirty days before the time when such termination
is to take effect, and thereupon this Agreement shall become
<PAGE>
void but without prejudice to any remedy of the Manufacturer.
(iii) Upon termination under subdivisions (i), or (ii) of this
paragraph, the Distributor shall duly account to the Manufacturer and
transfer to it all Technology processes, and apparatus, together with
all copies its documentation evidencing or embodying the Technical
Information and know-how in respect thereof, and all rights to any sub
agreement or subdistributors which may have been granted pursuant to
the terms hereof.
5. MANUFACTURING AND PURCHASE
A. All manufacturing of the Agreement Device to be delivered to Distributor
shall be the responsibility and under the control of the Manufacturer.
Distributor shall not attempt, directly or indirectly, to compete with the
Manufacturer in the manufacture of the Agreement Device.
B. Manufacturer shall deliver Distributor's requirements for the Agreement
Device to Distributor, F.O.B. Manufacturer plant location, at an initial
price of US. $8.30 per Unit (except for Units to be sold by the Uruguayan
distributor which shall be sold on the basis of eleven (11) Units for
$80.00). This price will be adjusted upward only based upon the percentage
of increase in the United States Consumer Price Index. The parties will
renegotiate in good faith prices applicable to specific shipments sold to
Public Health Institutions.
C. Payment by the Distributor shall be (payable thirty (30) days after date
of shipment), F.O.B. Manufacturer's (or its subcontractors) factory.
Distributor shall be responsible for risk of loss, customs clearing and
transportation. Distributor acknowledges that it is responsible for the
cost of shipment and insurance for all units purchased once they are
delivered to the F.O.B. point. Title to all units of Devices or Agreement
Devices will pass to Distributor upon delivery of such units to the F.O.B.
point referred to above.
D. Distributor shall inspect the Devices, within 30 days after receipt of
the Devices by either Distributor or Subdistributors. If Distributor timely
rejects any units of
<PAGE>
the Devices, which do not conform to agreed upon specifications
Manufacturer may substitute a like quantity of conforming Devices.
Distributor may reject any shipment of non-conforming units of the Devices
only within 30 days after receipt by the final distributor, by notice to
Distributor stating the reason for rejection with specificity. Failure to
timely reject or give proper notice of rejection shall be deemed to
constitute acceptance of such shipment. Properly rejected units of the
Devices shall, at Manufacturer's sole option, be returned to Manufacturer
(at Manufacturer's expense) or destroyed.
E. If any shipping date is specified, such date represents a good faith
estimate by Manufacturer. In any event, Manufacturer shall not be
responsible for a delay in shipment resulting from events or circumstances
beyond Manufacturer's control or for damages or losses attributable to any
such delay.
F. Manufacturer guarantees that the Devices shall be manufactured by it in
accordance with the design, manufacturing, performance and packaging
specifications, and the quality control and testing standards as the
parties may from time to time agree upon in writing. Manufacturer
guarantees that Devices and Manufacturer's manufacturing procedures will
comply with all requirements of applicable governmental bodies in the
United States. Except as provided above, Manufacturer HEREBY EXPRESSLY
DISCLAIMS ANY OTHER REPRESENTATIONS, WARRANTIES AND GUARANTEES WITH RESPECT
TO THE AGREEMENT DEVICES PURCHASED HEREUNDER, WHETHER WRITTEN, ORAL,
IMPLIED OR INFERRED BY TRADE, CUSTOM OR PRACTICE, INCLUDING, WITHOUT
LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. Manufacturer SHALL NOT BE LIABLE UNDER ANY
CIRCUMSTANCES FOR DAMAGES OF ANY KIND, WHETHER DIRECT, CONSEQUENTIAL OR
OTHERWISE RELATING TO THE PERFORMANCE OF ANY SENSOR. IN NO EVENT SHALL
Manufacturer's LIABILITY UNDER THIS AGREEMENT EXCEED THE PURCHASE PRICE FOR
THE Devices PURCHASED HEREUNDER.
G. If Distributor does not pay the full amount of the purchase price and
other amounts specified under this Agreement or in any other order from
Manufacturer as and when due, then, in addition to its other rights or
remedies hereunder and under applicable law, Manufacturer may withhold
performance of its obligations hereunder or cancel any outstanding orders,
without liability to
<PAGE>
Distributor by Manufacturer, and without discharge or mitigation of any
Distributor's obligations.
H. Distributor may not cancel or assign any order given to Manufacturer
without the prior written consent of Manufacturer, which Manufacturer may
withhold in its sole and absolute discretion.
I. Non delivery or default by the Manufacturer as to any individual
shipment shall not be deemed a breach of this Agreement except as to such
installment. Such non delivery or default shall not relieve Distributor
from its obligation to accept and pay for any subsequent or prior
installment, regardless of whether such non delivery substantially impairs
the value of this contract. In the event that Manufacturer fails to deliver
product for a period of ninety (90) days following placement of an order by
the Distributor, for reasons other than Force Majeure, then this paragraph
shall be null and void and the parties may seek whatever remedies are
otherwise allowed under this Agreement.
6. USES OF TRADEMARKS, TECHNICAL INFORMATION AND KNOW-HOW
Distributor, and, if Distributor performs its obligations hereunder,
Manufacturer, agree to freely exchange any Technical Information and Know-How
developed by them through an open and continuous dialogue regarding their
operations. [Manufacturer agrees hereby to Agreement at no additional cost to
Distributor any and all trademarks and service marks owned by Manufacturer.]
Such Agreement(s) shall be solely for use in connection with sale of the Devices
in the Territory, and shall not include any information regarding manufacturing
processes or equipment.
7. NOTICE
Any notice to be given pursuant to the terms of this Agreement shall be
addressed as follows:
<PAGE>
If to the Manufacturer: Zsigmond L. Sagi, President
Scantek Medical, Inc.
321 Palmer Road
Denville, New Jersey 07834
If to the Distributor: Luis Primavesi, Vice President
SANDELL CORP., S.A.
BRANDZEN, 1984, 704
MONTEVIDEO, URUGUAY
8. NECESSARY DOCUMENTS
The Distributor shall furnish to the Manufacturer, or to nominees and patent
attorneys, all information and documents regarding any inventions or
improvements developed by the Distributor, including the apparatus, processes,
and formulas in respect thereof, in order to enable the Manufacturer to operate
thereunder and to enable its attorneys to prepare and prosecute Patent
applications therefor, with respect to any and all improvements developed by
Distributor the understanding that, if so requested by the Manufacturer, such
attorneys shall collaborate with such other Patent attorney as the Manufacturer
may designate. The Manufacturer shall (at Distributor's expense) render to the
Distributor such services in their consulting capacity as may be necessary in
order to instruct the Distributor, or its appointed representative, in all
operations pertaining to the industrial and commercial exploitation of the
Inventions.
9. OWNERSHIP OF PATENTS
All Patents shall be the exclusive property of the Manufacturer, subject to the
exclusive Agreement hereby granted. The Manufacturer shall, upon demand, execute
and deliver to the Distributor such documents as may be deemed necessary or
advisable by counsel for the Distributor for filing in the appropriate Patent
offices to evidence the granting of the exclusive Agreement hereby given. No
additional patents covering any technology developed by Manufacturer, or the
Distributor which uses the Manufacturer's technology as a starting point, shall
be applied for by the Distributor without the Manufacturer's express written
consent.
<PAGE>
10. NEW INVENTIONS/TEST RESULTS
If during the continuance of this Agreement the Distributor makes any further
improvements in the Agreement Devices, the Technical Information and Know-How or
the Technology or the mode using them, or becomes the owner of any such
improvements either through Patents or otherwise, then it shall and hereby does
assign such improvements to the Manufacturer which shall give the Manufacturer
full information regarding the mode of using them. However, during the term of
this Agreement, the Distributor shall be entitled to use the same with all
rights which are hereby granted to the Distributor in respect to the Technology
and the Technical Information without paying any additional royalty with respect
thereto. Distributor shall also provide Manufacturer with any and all test
results arising from tests of any Agreement Devices as soon as such results are
available.
11. ARBITRATION
Except as otherwise provided herein, any dispute under this Agreement shall be
settled by arbitration in pursuant to the Commercial Rules, then obtaining, of
the American Arbitration Association, such arbitration to be conducted in
Montevideo, Uruguay or such other place as the parties hereto may mutually
agree.
12. BENEFIT
This agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors in interest.
13. NONDISCLOSURE
A. CONFIDENTIAL INFORMATION. (i) Upon the effective date and thereafter during
the term of this Agreement, Manufacturer shall make available to Distributor
full and complete Technical Information and Know-How possessed on the date of
this Agreement by Manufacturer relating to the Agreement Devices, except with
respect to manufacturing processes and equipment. Manufacturer shall not during
the term of this Agreement disclose to any other person, firm or corporation in
the Territory other than Distributor, any
<PAGE>
technical information relating to the subject matter of this Agreement. Nothing,
contained in this Agreement shall be construed to require Manufacturer to
disclose to Distributor any information which Manufacturer shall have acquired
from others if the disclosure thereof to Distributor would breach any of the
then existing obligations of Manufacturer.
(ii) Distributor shall not use or disclose any information received from
Manufacturer under this Agreement for any purpose other than the distribution
and sale of the Agreement Devices covered by this Agreement. Distributor shall
not disclose any information received from Manufacturer under this Agreement to
any person except persons in Distributor's employ to whom it shall be necessary
to make such disclosure to enable Distributor to obtain the benefit of such
information in the distribution of the Agreement Devices which are included
within the subject matter of this Agreement, and any such person shall receive
such information only after agreeing in writing to hold same in strictest
confidence and to use same only for the purposes specified and permitted in this
Agreement. The foregoing restrictions on disclosures of information shall apply
so long as the information has not properly come into the public domain by such
disclosure in issued patents or otherwise.
(iii) All employees of Distributor who shall be given access to confidential
Technical Information and Know-How shall execute a Non-Disclosure and Assignment
Agreement in form acceptable to Manufacturer.
(iv) The obligation of confidentiality will not be understood as non-compliance
when a subdistributor is appointed and provided with the corresponding
information for the selling of the Agreement Devices.
B. PATENTS. (i) Distributor may, only with the express written consent of the
Manufacturer and at its own expense, apply for patents in any country on any
discovery or invention which Distributor or its employees shall have obtained
prior to the termination of this Agreement on any product or process related to
the subject matter of this Agreement, notifying Manufacturer of its intention,
keeping Manufacturer currently informed of its activities in respect thereto,
and providing Manufacturer with copies of patent applications and amendments
thereto, patent office communications, and other relevant papers. All such
patent
<PAGE>
applications or issued patents must be assigned to the Manufacturer.
(ii) Manufacturer hereby grants to Distributor a nonexclusive, royalty-free
Agreement to make, use and sell without limitation under any such discovery or
invention and any patent application, and any patents granted thereon, including
renewals and reissues thereof, to the extent that they relate to the subject
matter of this Agreement, which Agreements shall extend to the end of the full
term of the Agreement. These Agreements shall not be assignable or divisible,
and shall not include the right to grant subdistributors.
C. TRADEMARKS. During the term hereof, Manufacturer through its designated
representative or representatives, grants to Distributor the right to affix,
without charge to Distributor, the Trademarks set forth on Exhibit E (the
"Trademarks") as marks of certification to Agreement Devices distributed in the
Territory by Distributor through the operations, practices, agreements, and
processes which are the subject of this Agreement, provided:
(i) that all labels, advertising, and packaging for the Agreement Devices
conform to the specifications of the Manufacturer.
(ii) that Distributor submits to the Manufacturer, when requested by
Manufacturer, packaging, labels, literature of the Agreement Device so that
Manufacturer can review from time to time.
14. ADVERTISING, MARKETING AND SALES
A. During each Contract Year, Distributor shall assure that its distributors
shall have sufficient quality personnel and capital resources to effect the
sales of the BTAI Device.
B. Distributor has the responsibility to assure that the Distributors have
sufficient marketing materials to enable the sales personnel to function
properly.
C. Distributor will allocate 6% of its gross sales for advertising during the
first two (2) years.
<PAGE>
15. NON-COMPETITION
In order to induce Manufacturer to enter into this Agreement, Distributor agrees
that neither Distributor, nor its shareholders, officers, directors or
principals (with the exception of Manufacturer and Hall's interest in
Manufacturer), will during the term of this Agreement or, for a period of five
(5) years from the date of termination hereof, manufacture Devices or purchase
Devices manufactured by any entity other than Manufacturer for use in the
Agreement Devices or any competing device, or directly or indirectly own,
manage, operation or control of or be connected as an officer, director,
shareholder, partner, consultant, owner, employee, agent, lender, donor, vendor
or otherwise, or have any financial interest in or aid or assist anyone else in
the conduct of any competing entity which manufactures, distributes or offers
for sale goods similar to the Agreement Devices to any competing entity.
Distributor, and its shareholders, officers, directors and principals further
agree that they will not (i) personally, or cause others to personally induce or
attempt to induce any employee to terminate their employment with the
Manufacturer; (ii) interfere with or disrupt the Manufacturer's relationship
with its suppliers or employees; or (iii) solicit or entice any person to leave
their employ with the Manufacturer. For the purposes herewith, the term
"competing entity" shall mean any business or enterprise of any and every kind
whatsoever which is engaged in the manufacture, distribution or sale of goods
similar to the Agreement Devices, anywhere in the world; provided, however, that
ownership of one (1%) percent or less of any class of outstanding securities of
a company whose securities are listed on a national securities exchange or which
has not fewer than 1,000 shareholders shall not be deemed to constitute
ownership or participation in the ownership of the business of such company. If
any portion of this Paragraph 15 shall be determined to be invalid and
unenforceable, such determination shall not affect the validity or enforce
ability of the balance hereof, and such balance shall remain in full force and
effect. In the event of any breach by Distributor of the provisions hereof, the
Distributor acknowledges that the Manufacturer will not have an adequate remedy
at law and the Manufacturer will be entitled to institute and prosecute
proceedings in an appropriate Court of competent jurisdiction and to obtain an
injunction restraining the Distributor from violating the
<PAGE>
provisions of this Agreement without posting a bond or other security.
16. LAWS
This Agreement shall be construed, and all the rights, powers, and liabilities
of the parties hereunder shall be determined in accordance with the laws of the
State of New Jersey.
17. WAIVERS
No omission or delay of either party hereto in requiring due and punctual
fulfillment by the other party of the obligations of such party hereunder shall
be deemed to constitute a waiver of its right to require such due and punctual
fulfillment or of any of its remedies hereunder.
18. ASSIGNMENT
Neither this Agreement nor any part thereof may be assigned by Distributor
without the written consent of Manufacturer.
19. DEFAULT OF MANUFACTURE/LOSS OF AGREEMENT
In the event that the Manufacturer is insolvent, has made an assignment for the
benefit of Manufacturer's creditors or files under the Bankruptcy laws,
Distributor shall have the right to immediately assume control of the sensor
production utilizing Manufacturer's equipment either in Manufacturer's facility
or at any other location.
<PAGE>
WITNESS WHEREOF THE PARTIES HERETO HAVE SET THEIR HANDS ON THIS 18 DAY OF
February 1998.
SANDELL CORP. S.A. SCANTEK MEDICAL, INC.
BY: /s/ DANIEL ALVAREZ BY: /s/ PATRICIA B. FURNESS
------------------- -----------------------
Daniel Alvarez Patricia B. Furness
Vice President Vice President
CORPORATE SEAL
/s/ PATRICIA B. FURNESS
- ------------------------
CORPORATE SECRETARY
WITNESSED BY: DATE: 2/19/98
-------------
/S/ ELSIE C. COWLES
- ------------------------
TITLE:
State of New Jersey: I, ALFONSE W. SCERBO, Clerk of the County of Morris holden
in and for said County, do hereby certify the Notary herein
County of Morris; set forth by whom the foregoing proof, acknowledgment or
affidavit taken and certified was at the time of taking such
proof, acknowledgment or affidavit a NOTARY PUBLIC, duly
commissioned, sworn and residing in said County and State,
and was as such officer of this State, authorized to take
and certify said proof, acknowledgment or affidavit as well
as to take and certify proofs of acknowledgments of deeds
for conveyance of lands, tenements or hereditaments and
other instruments in Writing, to be recorded in said State;
and full faith credit are and ought to be given to his/her
official acts and I am well acquainted with the handwriting
of said Notary and believe the signature to the instrument
to which the certificate is attached is his/her genuine
signature.
[SPECIMEN} Notary
-----------------------------------------
IN TESTIMONY WHEREOF, I have set my hand and affixed the
seal of said Court and County at Morristown:
Dated: 2-19-98 [SPECIMEN} County Clerk
-------------------------------
[SPECIMEN} Special Deputy Clerk
----------------------------------
<PAGE>
EXHIBIT B
Territory
SOUTH AMERICA, EXCLUDING CHILE, BUT SPECIFICALLY INCLUDING THE
FOLLOWING COUNTRIES:
ARGENTINA
BRAZIL
BOLIVIA
COSTA RICA
COLOMBIA
ECUADOR
PANAMA
PARAGUAY
PERU
NICARAGUA
VENEZUELA
URUGUAY
<PAGE>
EXHIBIT C
Agreement Devices
KNOWN AS BTAI, BREASTCARE, AND BREASTALERT
Nothwithstanding the following more specific description of the Agreement
device, the Agreement Devices shall include any temperature sensing device
manufactured by the Manufacturer using the patented technology set forth in the
Patents listed in Exhibit A or improvements thereto.
The BTAI is an early diagnostic direct reading, digital device to screen the
breast for abnormalities, including cancer.
The BTAI measures underlying breast tissue temperature and not skin surface
temperature by retaining the emitted heat when BTAI is placed against the breast
for 15 minutes. The averaged and recorded reading on the BTAI has taken into
consideration that the temperature patterns of a woman's breasts are closely
symmetrical. This method detects abnormalities by comparing the temperature
differences in the corresponding areas of a woman's breasts.
The BTAI device consists of a pair of non-woven pads made of spun-fiber
material, each of which has three wafer-thin, pliant, aluminum foil, and
temperature responsive segments attached to its inner surface. Each segment is
wedge-shaped and contains 18 columns or bars of thermal dots. These dots contain
a chemical heat sensors that changes color when exposed to a specific
temperature.
<PAGE>
EXHIBIT D
MINIMUM UNIT SALES
The minimum unit sales are set forth below:
Year* Minimum Unit Purchases-Monthly
---- ------------------------------
The minimum monthly purchase requirements will start with the first
shipment of the BreastCare product for each 12 twelve month period thereafter
as indicated below:
First 12 month period after first shipment 20,000 Units
Second 12 month period 35,000 Units
Third 12 month period 65,000 Units
Fourth 12 month period and thereafter/FS 90,000 Units
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCANTEK
MEDICAL INC. FINANCIAL STATEMENTS AT JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 55,929
<SECURITIES> 3,196,773
<RECEIVABLES> 801,900
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,101,599
<PP&E> 855,579
<DEPRECIATION> 33,536
<TOTAL-ASSETS> 5,208,437
<CURRENT-LIABILITIES> 2,758,736
<BONDS> 0
0
0
<COMMON> 17,220
<OTHER-SE> 1,544,475
<TOTAL-LIABILITY-AND-EQUITY> 5,208,437
<SALES> 0
<TOTAL-REVENUES> 2,238,493
<CGS> 0
<TOTAL-COSTS> 1,583,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183,889
<INCOME-PRETAX> 654,801
<INCOME-TAX> 0
<INCOME-CONTINUING> 654,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 654,801
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
