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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------
Commission File Number 000-27592
SCANTEK MEDICAL INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1090126
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 PALMER ROAD, DENVILLE, NEW JERSEY 07834
(973) 366-5250
----------------------------------------------------------------
(Address and telephone number, including area code, of
registrant's principal executive office)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At October 31, 1998, there were 17,220,200 shares of Common Stock, $.001
par value, outstanding.
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<PAGE>
SCANTEK MEDICAL INC.
INDEX
Page
Part I. Financial Information 1
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and
June 30, 1998 2
Consolidated Statements of Operations
for the Three Months Ended September
30, 1998 and 1997 (unaudited) and for
the Period June 10, 1988 (Date of
Formation) through September 30, 1998 3
Consolidated Statements of Stockholders'
Equity the Period June 10, 1988 (Date
of Formation) through September 30, 1998 4 - 8
Consolidated Statements of Cash Flows
for the Three Months Ended September 30,
1998 and 1997 (unaudited) and for the
Period June 10, 1988 (Date of Formation)
through September 30, 1998 9 - 10
Notes to Financial Statements (unaudited) 11 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 20
Part II. Other Information 21
Item 1. Legal Proceedings 21
Item 6. Exhibits and Report on Form 8-K 22
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that the following
consolidated financial statements be read in conjunction with the year-end
financial statements and notes thereto included in the Company's Registration
Statement on Form 10-KSB for the year ended June 30, 1998.
The results of operations for the three months ended September 30,
1998, are not necessarily indicative of the results to be expected for the
entire fiscal year or for any other period.
-1-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, June 30,
------------- --------
1998 1998
------------- --------
(Unaudited)
Current Assets:
Cash $ 21,890 $ 55,929
Marketable securities 1,706,408 2,295,253
Inventory 54,224 --
Due from licensees 676,900 726,900
Prepaid expenses 19,701 23,517
---------- ----------
Total Current Assets 2,479,123 3,101,599
---------- ----------
Property and equipment - net 956,352 822,043
Marketable securities - non-current 107,123 901,520
Other assets - net 405,165 383,275
---------- ----------
TOTAL ASSETS $ 3,947,763 $ 5,208,437
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 200,000 $ 100,000
Current portion - long-term debt 888,006 --
Current portion - deferred income 252,500 752,500
Note payable to officer 746,993 621,993
Accounts payable 327,569 266,869
Accrued interest 149,478 110,470
Accrued salaries 906,119 841,119
Accrued expenses 63,792 65,785
---------- ----------
Total Current Liabilities 3,534,457 2,758,736
---------- ----------
Long-term debt -- 888,006
---------- ----------
Total Liabilities 3,534,457 3,646,742
---------- ----------
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 3,007,424 2,993,206
Unrealized gain on marketable
securities 1,238,373 2,621,616
Deficit accumulated during develop-
ment stage (3,849,711) (4,070,347)
---------- ----------
Total Stockholders' Equity 413,306 1,561,695
---------- ----------
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY $ 3,947,763 $ 5,208,437
========== ==========
See notes to consolidated financial statements.
2
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
June 10, 1988
Three Months Ended September 30, (Date of Formation)
----------------------------------- Through
1998 1997 September 30, 1998
---------- ---------- ------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 94,792 $ -- $ 94,792
License fees 500,000 -- 2,301,582
---------- ---------- ----------
Total Revenues 594,792 -- 2,396,374
---------- ---------- ----------
Costs and Expenses:
Cost of sales 57,415 -- 57,415
General and adminis-
trative expenses 172,338 167,297 3,612,013
Amortization and
depreciation 22,592 19,096 728,835
Research and
development 81,391 74,110 1,652,171
Interest expense 40,539 46,671 703,493
---------- ---------- ----------
Total Costs and
Expenses 374,275 307,174 6,753,927
---------- ---------- ----------
Net Operating Income
(Loss) 220,517 (307,174) (4,357,553)
---------- ---------- ----------
Other income:
Interest and dividends 119 9,981 51,338
Consulting -- -- 15,000
Gain on sale of
marketable securities -- -- 414,604
Miscellaneous -- 8,186 26,900
---------- ---------- ----------
Total Other Income 119 18,167 507,842
---------- ---------- ----------
Net Earnings (Loss) $ 220,636 $ (289,007) $ 3,849,711
========== ========== ==========
Earnings (loss) per
common share - basic $.01 $(.02)
=== ====
Earnings (loss) per
common share - diluted $.01 $(.02)
=== ====
Weighted average number of common
shares outstanding - basic 17,220,200 17,220,200
========== ==========
Weighted average number of common
shares outstanding - diluted 17,453,714 17,220,200
========== ==========
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
--------------------- ------------------- Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
------ ------ ------ ------ ---------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Original Capitalization:
Sale of stock ($.023
per share) 2,000,000 $ 2,000 -- $ -- $ 44,094 $ -- $ -- $ 46,094
Issuance of options for
services rendered (valued
at .10 per share) 5,000 5,000
Net (loss)
June 10, 1988 (Date of
Formation) through
June 30, 1991 (18,751) (18,751)
--------- ----- ------- -------- ------- -------- -------- --------
Balance June 30, 1991 2,000,000 $ 2,000 -- $ -- $ 49,094 $ -- (18,751) 32,343
-------- --------
.7 for 1 reverse
stock split (600,000) (600) 600 --
Donated stock to
treasury 500,000 -- --
Issuance of stock to
acquire subsidiary
($.006 per share) 7,100,000 7,100 -- 92,900 100,000
Sale of treasury stock
($2.50 per share) (18,000) 45,000 45,000
Treasury stock exchanged
for services rendered
(valued at
$.023 per share) (433,000) 10,000 10,000
Net (loss), June 30, 1992 (485,314) (485,314)
--------- ----- ------- -------- ------- -------- -------- --------
Balance, June 30, 1992 8,500,000 $8,500 49,000 -- $197,594 -- $(504,065) $(297,971)
See notes to consolidated financial statements.(Continued)
</TABLE>
4
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
--------------------- ------------------- Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
------ ------ ------ ------ ---------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury stock exchanged
for services rendered
(valued at $0.125
per share) (49,000) 6,125 6,125
Issuance of stock for
professional services
rendered (valued at $.25
to $.50 per share) 1,450,000 1,450 411,050 412,500
Issuance of stock
for contract release
(valued at $1.00 per share) 35,000 35 34,965 35,000
Net (loss), June 30, 1993 (924,969) (924,969)
---------- ------ ------- -------- ------- -------- ---------- ----------
Balance, June 30, 1993 9,985,000 9,985 -- -- 649,734 -- (1,429,034) (769,315)
Issuance of callable
warrants for services
rendered (valued at
$.125 per share) 15,625 15,625
Issuance of stock in
connection with bridge
loan financing (issued
at $1.00 per share) 37,200 37 37,163 37,200
Net (loss), June 30, 1994 (969,408) (969,408)
---------- ------ ------- -------- ------- -------- ---------- ----------
Balance, June 30, 1994 10,022,200 10,022 -- -- 702,522 -- (2,398,442) (1,685,898)
See notes to consolidated financial statements.(Continued)
</TABLE>
5
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
--------------------- ------------------- Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
------ ------ ------ ------ ---------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Stock in
connection with bridge
loan financing (issued
at $1.00 per share) 12,000 12 11,988 12,000
Issuance of stock for
services rendered
(valued at $.125 per
share) 621,250 621 77,035 77,656
Net (loss), June 30, 1995 (736,267) (736,267)
---------- ------ ------- -------- --------- ------- ---------- ----------
Balance - June 30, 1995 10,655,450 10,655 -- -- 791,545 -- (3,134,709) (2,332,509)
Issuance of stock for
accrued salaries (valued
at $.10 per share) 4,550,000 4,550 450,450 455,000
Notes payable conversions
to common stock (at
$1.00 per share) 151,084 151 150,933 151,084
Issuance of stock for
services rendered (at
$.60 per share) 433,666 434 273,232 273,666
Issuance of options for
services rendered (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 15,790,200 15,790 -- -- 1,711,160 364,500 (3,951,425) (1,859,975)
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
--------------------- ------------------- Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
------ ------ ------ ------ ---------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock in
connection with private
placement offering
(issued at $1.00
per share) 1,070,000 1,070 1,068,930 1,070,000
Issuance of stock for
professional services
rendered (at $.167 to
$1.00 per share) 72,500 73 22,427 22,500
Issuance of stock in lieu
of payment on equipment
(at $1.00 per share) 100,000 100 99,900 100,000
Stock options exercised
($.10 to $.375 per share) 170,000 170 27,830 28,000
Issuance of stock for rent
(at $2.01 per share) 17,500 17 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 17,220,200 17,220 -- -- 2,965,426 5,566,615 (4,725,148) 3,824,113
See notes to consolidated financial statements.
</TABLE>
7
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
--------------------- ------------------- Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
------ ------ ------ ------ ---------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of warrants
for services rendered
(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 654,801 654,801
--------- ------ ------- -------- --------- --------- ---------- ----------
Balance, June 30, 1998 17,20,200 $17,220 -- $ -- $2,993,206 2,621,616 $(4,070,347) $ 1,561,695
Issuance of warrants for
services rendered (at
$ .55 to $1.125
per share) 14,218 14,218
Net unrealized (loss) on
marketable securities (1,383,243) (1,383,243)
Net earnings -
September 30, 1998 220,636 220,636
--------- ------ ------- -------- --------- --------- ---------- ----------
Balance, September 30, 1998 17,220,200 $17,220 $ $ $3,007,424 $1,238,373 $(3,849,711 $ 413,306
========== ====== ======= ======== ========= ========= ========== ==========
See notes to consolidated financial statements.
</TABLE>
8
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period June
Three Months Ended September 30, 10, 1988 (Date of
------------------------------- Formation) through
1998 1997 September 30, 1998
----------- -------- ------------------
<S> <C> <C> <C>
Cash flows from operation
activities:
Net earnings (loss) $ 220,636 $ (289,007) $(3,849,711)
Adjustments to reconcile net
earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 22,592 19,096 728,834
Net gain on sale of mar-
ketable securities -- (8,186) (414,604)
Non-employee stock based
compensation -- -- 845,574
Non-cash officers compensation -- -- 457,250
Other non-cash items 14,218 -- 313,978
Changes in operating
assets and liabilities (375,283) 23,986 260,656
-------- -------- -----------
Net Cash (Used in)
Operating Activities (117,837) (254,111) (1,658,023)
-------- -------- -----------
Cash flows from investing activities:
Proceeds from sale of
marketable securities -- 116,701 1,191,313
Purchases of patents -- -- (76,069)
Organization costs -- -- (199,672)
Purchase and deposits
of equipment (140,000) -- (989,429)
Purchase of marketable
securities -- (72,183) (777,534)
-------- -------- ----------
Net Cash Provided by
(Used in) Investing
Activities (140,000) 44,518 (851,391)
-------- -------- ----------
Cash flows from financing activities:
Proceeds from borrowings 100,000 -- 1,703,208
Proceeds from officer loans 125,000 -- 748,993
Repayment of officer loans -- -- (2,000)
Repayment of notes (1,202) (54,931) (1,107,991)
Proceeds from the sale of
options -- -- 28,000
Proceeds from sale of common
and treasury stock -- -- 1,161,094
-------- -------- ----------
Net Cash Provided by (Used
in) Financing Activities 223,798 (54,931) 2,531,304
-------- -------- ----------
Net Increase (decrease) in Cash (34,039) (264,524) 21,890
Cash - beginning of period 55,929 918,393 --
-------- -------- ----------
Cash - end of period $ 21,890 $ 653,869 $ 21,890
======== ======== ==========
See notes to consolidated financial statements.
</TABLE>
9
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period June
Three Months Ended September 30, 10, 1988 (Date of
------------------------------- Formation) through
1998 1997 September 30, 1998
----------- -------- ------------------
<S> <C> <C> <C>
Changes in Operating Assets
and Liabilities Consits of:
(Increase) in inventory $ (54,224) $ -- $ (54,224)
(Increase) decrease in
due from licensees 75,000 (300,000) (226,900)
(Increase) decrease in
prepaid expenses 3,816 (460) (19,701)
(Increase) in marketable
securities - non-current -- -- (300,000)
(Increase) in other asset (63,792) (200,000) (668,932)
Increase (decrease) in
accounts payable and
accrued expenses 163,917 24,446 1,554,594
Increase (decrease) in
deferred income (500,000) 500,000 (24,082)
(Decrease) in accrued
franchise taxes -- -- (99)
----------- ----------- -----------
$ (375,203) $ 23,986 $ 260,656
=========== =========== ===========
Supplementary information:
Cash paid during the year for:
Interest $ 1,531 $ 93,469 $ 451,418
=========== =========== ===========
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 mar-
ketable securities in
connection with
licensing agreement $ -- $ -- $ 276,582
=========== =========== ===========
Unrealized gain (loss)
on marketable
securities $(1,383,243) $ 1,033,677 $ 1,238,373
=========== =========== ===========
Deposit on equipment
for common stock $ -- $ -- $ 100,000
=========== =========== ===========
Non-Cash Financing Activities:
Conversion of long-term
debt to common stock $ -- $ -- $ 121,000
=========== =========== ===========
Other Non-Cash Activities:
Conversion of accounts
payable and accrued
expenses to common
stock $ -- $ -- $ 900,802
=========== =========== ===========
Conversion of accounts
payable to stock
options $ 14,218 $ -- $ 50,000
=========== =========== ===========
Conversion of accounts
payable to warrants $ -- $ -- $ 57,623
=========== =========== ===========
Conversion of accounts
payable to treasury
stock $ -- $ -- $ 16,125
=========== =========== ===========
Conversion of accrued officers
salaries to common
stock $ -- $ -- $ 457,250
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
At September 30, 1998, planned principal operations of Scantek
Medical Inc. (the "Company" or "Scantek") have commenced. The Company
manufactured and distributed units of the BreastCare(TM) device to
customers in Brazil. Uruguay and Paraguay during the first quarter of
its current fiscal year. The Company will continue to proceed with
shipments in the second quarter but expects its manufacturing and
distribution operations to be in full operation in January 1999. The
Company's continued existence is dependent not only from cash flow to be
derived from operations during 1999 but upon its ability to obtain
needed working capital through additional equity and/or debt financing.
Management is actively seeking additional capital to ensure the
continuation of its development and marketing activities as well as its
manufacturing and distribution operations; accordingly, the Company is
considered a development stage company.
The consolidated balance sheet as of September 30, 1998, consolidated
statements of operations and cash flows for the three months ended
September 30, 1998 and 1997, and for the period June 10, 1988 (Date of
Formation) through September 30, 1998 have been prepared by the Company
and are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for all
periods presented have been made. Certain items in the September 30,
1997 financial statements have been reclassified to conform to September
30, 1998 classifications. The information for June 30, 1998 was derived
from audited financial statements.
Receivable Recognition - Receivables due from licensees are
recognized either upon the acceptance of the equipment by the licensee
or upon the signing of the definitive agreement.
License Revenue Recognition - Revenues will be recognized in income
when the licensees commence operations, since substantial performance is
presumed to occur at that point.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are computed using the
weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per common share are computed using the weighted
average number of common shares and common stock equivalent shares
outstanding during the period. Loss per share for the quarter ended
September 30, 1997 has been restated to conform to the provisions of
SFAS 128.
11
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS (LOSS) PER SHARE (Continued)
Three Months Ended September 30,
----------------------------------
1998 1997
----------- -----------
Basic:
Net earnings (loss) $ 220,636 $ (289,007)
Weighted average shares
outstanding 17,220,200 17,220,200
Earnings (loss) per
share - basic $.01 $(.02)
Diluted:
Net earnings (loss) $ 220,636 $ (289,007)
Weighted average shares
outstanding 17,220,200 17,220,200
Incremental shares 233,514 --
---------- ----------
Adjusted weighted
average shares out-
standing 17,453,714 17,220,200
=========== ===========
Earnings (loss) per
share - diluted $.01 $(.02)
3. MARKETABLE SECURITIES
Esti-
mated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
---------- --------- ---------- ----------
September 30, 1998:
Marketable Securities
--Current
Common stock $ 275,157 $1,706,408 $1,498,000 $ 66,749
Marketable Securities
--Non-current
Warrants $ 300,000 $ 107,123 $ -- $ 192,877
June 30, 1998:
Marketable Securities
--Current
Common stock $ 275,157 $2,295,253 $2,020,096 $ --
Marketable Securities
--Non-current
Warrants $ 300,000 $ 901,520 $ 601,520 $ --
4. INVENTORIES
Inventories consist of the following:
September 30 June 30
-----------------------------
1998 1998
-------- --------
Raw materials $ 9,859 $ --
Work-in-process 4,000 --
Finished goods 40,365 --
-------- --------
$ 54,224 $ --
======== ========
12
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EQUIPMENT
Equipment consists of the following:
September 30, June 30,
1998 1998
------------ ---------
Equipment $ 101,565 $ 101,565
Furniture and fixtures 27,489 27,489
Deposit on equipment 850,000 710,000
Leasehold improvements 16,525 16,525
--------- ---------
995,579 855,579
Less accumulated
depreciation 39,227 33,536
--------- ---------
Net Equipment $ 956,352 $ 822,043
========= =========
6. OTHER ASSETS
Other assets consist of the following:
September 30, June 30,
1998 1998
------------ ---------
Patent costs $ 676,069 $ 676,069
Long-term portion of amount
due from licensees 50,000 75,000
Security deposits 13,125 13,125
Other 155,906 92,114
--------- ---------
895,100 856,308
Less accumulated amortization 489,935 473,033
--------- ---------
Other Assets - Net $ 405,165 $ 383,275
========= =========
7. INCOME TAXES
Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes" (SFAS 109), provides for the recognition of deferred
assets subject to a valuation allowance. At June 30, 1996, the Company
established a valuation allowance equal to the full amount of the tax
effect of the net operating loss carryforward. At September 30, 1998,
the Company has provided no deferred taxes on the unrealized gain on
marketable securities after off-setting the net operating loss
carryforward,which offsets any gain.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth for the periods indicated, the percentage
increase or (decrease) of certain items included in the Company's consolidated
statement of operations:
% Increase (Decrease) from Prior Period
Three Months Ended
September 30, 1998
compared with three
months ended
September 30, 1997
------------------
General and adminis-
trative expense 3.0%
Amortization and
depreciation 18.3
Research and
development 9.8
Interest expense (13.1)
Net earnings (loss) 176.3
THREE MONTHS 1998 VS. THREE MONTHS 1997
Net Sales
Net sales increased to $94,792 during the three months ended September 30,
1998 from $-0- during the three months ended September 30, 1997 as the Company
commenced initial shipments of its BreastCare(TM) device during the first
quarter of its current fiscal year. The Company expects the demand for its
product to continue with full operations commencing in January 1999.
Cost of Sales
Cost of sales increased to $57,415 during the three months ended September
30, 1998 from $-0- during the three months ended September 30, 1997 primarily to
the same reasons above.
General and Administrative Expenses
General and administrative expenses increased 3.0 % for the three month
period ending September 30, 1998 as compared with the three month period ended
September 30, 1997. This increase is primarily due to increases in professional
fees.
Amortization and Depreciation Expense
Amortization and depreciation was $22,592 for the three months ended
September 30, 1998 as compared to $19,096 for the three months ended September
30, 1997. The 18.3% increase was attributable to increases in depreciation
expense on its leasehold improvements.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Interest Expense
Interest expense was $40,539 for the three months ended September 30, 1998
compared to $46,671 for the three months ended September 30, 1997. The 13.1%
decrease was attributable to the reduction on the short-term debt margin loan.
Research and Development Expenses
Research and development expense increased 9.8% to $81,391 during the three
months ended September 30, 1998 from $74,110 during the three months ended
September 30, 1997. The increase is primarily attributable to increased salaries
incurred by the Company in the experimental area of development of its product.
Liquidity and Capital Resources
The Company's need for funds has increased from period to period as it has
incurred expenses for among other things, research and development; applications
for domestic and international 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 Mr. Zsigmond Sagi ("Sagi"), 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 September 1998, the Company commenced the sale of its BreastCare(TM)
device in Brazil, Uruguay and Paraguay through its South American licensee. The
Company expects to expand its distribution and be fully operational in January
1999. However, until that time, the Company needs financing to fund its current
overhead and various capital requirements. As of September 30, 1998, the Company
borrowed $200,000 from unaffiliated third parties and in November 1998 the
Company borrowed an additional $100,000. These loans are payable by the Company
in early 1999. In addition, Sagi advanced the Company an additional $125,000
during the first quarter of its fiscal year. These loans will support the
Company through the balance of 1998 and the Company expects the cash flow from
sales commencing in 1999 to cover the operations of the Company over the balance
of the fiscal year providing the Company is successful in raising the initial
capital.
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 manufacturing of the BreastCare(TM)
for the contract price of $1,850,000. The Company as of September 30, 1998, has
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
advanced Zigmed Inc. payments of $750,000 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 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. The acquisition is subject to the Company obtaining financing for
the purchase of the Hungarian manufacturer.
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)
as follows: (i) 20,000 units per month during the first six months of calendar
1999 (ii) 35,000 units per month during the balance of 1999, (iii) 65,000 units
during 2000 and (iv) 90,000 units per month during 2001 and thereafter during
the term of the license.
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 and HumaScan Inc. ("HumaScan"), its original licensee in the
United States and Canada, have reached a settlement agreement dated May 15,
1998, resolving certain disputes which have arisen under the licensee agreement.
Among the many issues that were resolved, the following was agreed upon
concerning the licensing fee and royalties:
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (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.
During November 1998, HumaScan issued a statement concerning the ability of
the Company to continue as a going concern. As of this date, all payments due
the Company from HumaScan have been received. The Company is concerned regarding
the U.S. Licensee's operations and the expected royalty payments due the
Company. The Company owns approximately 650,000 shares of HumaScan common stock.
The drop in value of the common stock of HumaScan owned by the Company has been
reflected on the Company's balance sheet at September 30, 1998.
The Company's success is dependent on raising sufficient capital to
establish a production and assembly facility and purchase additional
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.
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.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 ten (10%) percent per year. The Company has renegotiated the
note with the lenders as of March 31, 1998. The note is due September 30, 1999,
all remaining notes have been paid.
In July and August 1996, the Company completed two private placements of
the Company's common stock, raising proceeds of $1,070.000.
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 HumaScan stock, and the
balance of the funds to liquidate the debt of approximately $317,000 was
advanced by Sagi.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements that may or may not
materialize. Additional information on factors that could potentially affect the
Company's financial results may be found in the Company's filings with the
Securities and Exchange Commission.
Other Matters
Year 2000
Background
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable years. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures.
The Company will rely heavily on computer technologies to operate its
business. In 1998, the Company conducted an initial assessment of its
information technology to determine which Year 2000 related problems might cause
processing errors or computer system failures. The Company also did a complete
analysis of its present computer system and its needs for the future. Based on
the results of that analysis, the Company's executive management identified the
Year 2000 problem as a top corporate priority and established an internal group
to provide a solution.
18
<PAGE>
The following discussion of the implications of the Year 2000 problem for
the Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the date on which the Company
plans to complete its internal Year 2000 modifications are based on the
Company's best estimates, which were derived utilizing a number of assumptions
of future events including the continued availability of internal and external
resources, third party modifications and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ. Moreover, although the Company believes it will be able to make the
necessary modifications in advance, there can be no guarantee that failure to
modify the systems would not have a material adverse effect on the Company.
In addition, the Company places a high degree of reliance on computer
systems of third parties, such as customers, trade suppliers and computer
hardware and commercial software suppliers. Although the Company is assessing
the readiness of these third parties and preparing contingency plans, there can
be no guarantee that the failure of these third parties to modify their systems
in advance of December 31, 1999, would not have a material adverse effect on the
Company.
Readiness
The Year 2000 project is intended to ensure that all critical systems,
devices and applications, as well as data exchanged with customers, trade
suppliers and other third parties have been evaluated and will be suitable for
continued use into and beyond the Year 2000.
The Company is a development stage company and expects to be fully
operational in early 1999. All computers the Company operates now are compatible
with the Year 2000. The Company expects to vastly upgrade its computer system as
it becomes fully operational in 1999.
Since early 1998, the Company has required Year 2000 compliance statements
from all suppliers of the Company's computer hardware and commercial software.
Regardless of the compliance statements, all third party hardware and software
will also be subjected to testing to reconfirm the Year 2000 readiness.
Cost
The Company estimates that the total cost of achieving Year 2000 readiness
for its internal systems, devices and applications and a complete upgrade of its
computer system is approximately $250,000. The cost of the Year 2000 problem is
not material but the extent of upgrading the computer system will absorb most of
the cost. Year 2000 project costs are difficult to estimate accurately and the
projected cost could change due to unanticipated technological difficulties and
Year 2000 readiness of third parties.
19
<PAGE>
Contingency Plans
In the event that the efforts of the Company's Year 2000 project do not
address all potential systems problems, the Company is currently developing
business interruption contingency plans. The Company believes, however, that due
to the widespread nature of potential Year 2000 issues, the contingency planning
process is an ongoing one which will require further modifications as the
Company obtains additional information regarding (1) the Company's internal
systems during the remediation and testing phases of its Year 2000 project and
(2) the status of third party Year 2000 readiness. Contingency planning for
possible Year 2000 disruptions will continue to be defined, improved and
implemented.
Risks
The Company believes that completed and planned modifications and
conversions of its critical systems, devices and applications will allow it to
be Year 2000 compliant in a timely manner. There can be no assurances, however,
that the Company's internal systems, devices and applications or those of a
third parties on which the Company relies will be Year 2000 compliant by year
2000 or that the Company's or third parties' contingency plans will mitigate the
effects of any noncompliance. An interruption of the Company's ability to
conduct its business due to a Year 2000 readiness problem could have a material
adverse effect on the Company.
This report contains forward-looking statements that involve substantial
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the "Business",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and "Risks and Uncertainties" captions in the Company's Form 10-KSB
for the year ended June 30, 1998.
20
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
See Item 3 of the Company's Form 10-KSB for the year ended June 30,
1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27.1 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed by the registrant
during the quarter ended September 30, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCANTEK MEDICAL INC.
By:/s/ ZSIGMOND SAGI
-------------------------------------
Zsigmond Sagi, President and
Chief Financial Officer
Dated: November 13, 1998
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCANTEK
MEDICAL INC. FINANCIAL STATEMENTS AT SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
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<INVENTORY> 54,224
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<PP&E> 995,579
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<COMMON> 17,220
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