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, 2000
[_] 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 (I.R.S.Employer
Incorporation or Identification No.)
of Organization)
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 30, 2000 was approximately $9,416,252 (based upon the closing sales
price of those shares reported on the National Association of Securities Dealers
Bulletin Board for that day).
Number of shares of Common Stock outstanding as of September 30, 2000:
19,639,690.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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SCANTEK MEDICAL INC.
INDEX
Part I
Page
Item 1. Business .............................................. 1
Item 2. Properties ............................................ 22
Item 3. Legal Proceedings ..................................... 22
Item 4. Submission of Matters to Vote of
Security Holders ...................................... 22
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholders Matters ...................... 23
Item 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ......................................... 26
Item 7. Financial Statements .................................. 32*
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure .................................. 33
Part III
Item 9. Directors and Executive Officers; ..................... 33
Promoters and Control Persons;
Compliance with Section 16(a)
of the Exchange Act
Item 10. Executive Compensation ................................ 35
Item 11. Security Ownership of Certain Beneficial
Owners and Management ................................. 37
Item 12. Certain Relationships and
Related Transactions .................................. 40
Part IV
Item 13. Exhibits and Reports on Form 8-K ...................... 42
Signatures ..................................................... 47
* Page F-1 follows page 32
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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, are forward-looking statements 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. These 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. (OTC: BB, SKML) (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, the then holder of several
patents relating to a medical product known as the
BreastCare(TM)/BreastAlert(TM), Differential Temperature Sensor/Breast
Abnormality Indicator (the "BreastCare(TM)/BreastAlert(TM)"), SDSI became a
wholly-owned subsidiary of the Company. The Company was formerly a developmental
stage company and became fully operational in early 1999.
On June 6, 2000 , the Company opened its web site, WWW.SCANTEKMEDICAL.COM.
The web site will provide information about the Company and its business, and
its principal product, BreastCare(TM)/BreastAlert(TM). Also included will be
summaries of clinical studies, sales and distribution progress and plans, press
releases and financial information, participation at medical conferences, and
links to other sites for information on breast cancer."
-1-
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The Company is headquartered in Denville, New Jersey, where it maintains
approximately 13,000 square feet of manufacturing and administrative space. At
this facility, the Company has two production lines in which to manufacture the
BreastCare(TM)/BreastAlert(TM). These production lines are capable of producing
two million units per shift annually. One production line will be shipped to the
Company's subsidiary, Scantek Medical do Brasil Ltda, when the new manufacturing
facility is completed at Port Suape, Pernambuco-Brazil in the first half of
calendar year 2001. The Company maintains a manufacturing and administrative
staff and intends to add to its staff in key functional areas, pending funding
of the Company and revenue from sales of the BreastCare(TM)/BreastAlert(TM)
units.
The Company is a medical company engaged in developing, manufacturing,
selling and licensing of products and devices to assist in the early detection
and diagnosis of disease. At the present time, the Company is focusing on
manufacturing, selling and licensing the Company's first product, the
BreastCare(TM)/BreastAlert(TM) in response to the global demand for the early
detection of breast disease, a major threat to women's health in developing as
well as industrial countries. 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 BreastCare(TM)/BreastAlert(TM) has United States Food and Drug
Administration ("FDA") marketing clearance; the BreastCare(TM)/BreastAlert(TM)
is to be used by physicians as an adjunct to clinical breast examination,
mammography and other established procedures for the detection of breast
disease. The BreastCare(TM)/BreastAlert(TM) is a single-use, non-invasive, easy
to use and cost-effective test to alert the physician to the possibility of a
physiological condition that may be thermally active cancer.
The BreastCare(TM)/BreastAlert(TM) 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)/BreastAlert(TM) is based will be useful in measuring certain
other body disorders.
THE PRODUCT
At present, the fear of breast cancer continues to escalate, comparatively
because little is actually known with respect to managing breast cancer. It is
estimated worldwide, that each year, over 300,000 women will die from breast
cancer. In fact, according to the America Cancer Society, this grave disease has
been identified to be the medical issue of highest priority for women's health.
Moreover, it cannot be predicted who will develop this epidemic cancer; any
woman at any age may develop breast cancer. Breast cancer is the second leading
cause of death for women in the U.S., but the most common for women between the
ages of 35 and 54. Worldwide, breast cancer ranked highest as the leading cause
of cancer deaths for women. Early detection and diagnosis of breast cancer are
important in the reduction of mortalities.
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In the United States, American women are afforded with a preventive health
measure, mammography. In developing countries however, mammography is not
readily available to women, even for those women who have the resources to pay
for such. There is a void between manifestation of the breast cancer and
detection due to unavailable screening systems. Failure to intervene during this
period may significantly reduce the likelihood of survival because the cancer
then metastasizes. The American Cancer Society, on Cancer Facts & Figures in
2000, reported that if cancer is localized at the time of diagnosis, there is a
96% chance of a 5-year survival rate, which has risen from 72% in 1940.
Nevertheless, in spite of research and efforts to detect breast cancer in the
early stages, the rate of mortality due to breast cancer in developing countries
has consistently increased over the past four decades.
Management believes that the BreastCare(TM)/BreastAlert(TM) will help to
detect breast cancer in its early stages. Management believes that the
BreastCare(TM)/BreastAlert(TM) will assist in the recognition of abnormal early
cellular development by recording the heat differentiation of corresponding
areas of the breast. The BreastCare(TM)/BreastAlert(TM) 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, or by comparing to the same area of the opposite
breast.
The BreastCare(TM)/BreastAlert(TM) 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; therefore, the
BreastCare(TM)/BreastAlert(TM) 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, which should be further evaluated
within a particular area of the breast.
The BreastCare(TM)/BreastAlert(TM) is designed to complement, not replace,
conventional breast abnormality screening methods and devices. It is intended
for use by women of all ages. The BreastCare(TM)/BreastAlert(TM) is 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 upon a patient's age, family history, and other factors)
mammography and other established clinical procedures.
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The basis for the BreastCare(TM)/BreastAlert(TM) is based upon data going
back a number of years which show that blood on the venous side of breast
cancers is warmer than blood on the arterial side of the lesion. This indication
of heat generation is presumably due to increased metabolic rate of neoplastic
tissue, including more rapid cell division, angiogenesis, etc. However, heat is
not specific to neoplasia and may for example be due to inflammation. The
presence of asymmetrical patterns (one side is warmer than the other by 2
degrees Fahrenheit) is a sign that may be detected with the
BreastCare(TM)/BreastAlert(TM).
The BreastCare(TM)/BreastAlert(TM) 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 breast inside her
brassiere for a period of 15 minutes, the BreastCare(TM)/BreastAlert(TM)
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 Fahrenheit or four bars) in the
corresponding areas of the breast may indicate an abnormal unilateral thermal
activity long before a lump is discovered by self-examination, clinical
examination or other detection methods such as mammography, ultrasound, etc.
Accordingly, by comparing the mirror-image temperature differences between the
two breasts registered by the BreastCare(TM)/BreastAlert(TM), a determination
can be made as to whether a sufficient abnormality is present to warrant further
site-specific testing by other diagnostic techniques, including, but not limited
to mammography and/or biopsy. The BreastCare(TM)/BreastAlert(TM) test does not
replace recommended guidelines for scheduled mammographic screening.
The BreastCare(TM)/BreastAlert(TM) is a safe, non-invasive, economical and
easy to use test. The BreastCare(TM)/BreastAlert(TM), which is disposable, can
be administered and evaluated by health care providers after minimal instruction
and a permanent record of results can be placed in the patient's files.
Management believes that the utilization of the BreastCare(TM)/BreastAlert(TM)
is cost effective and when used in combination with a mammographic work-up or at
intervals of recommended screenings, will have an impact on breast cancer
mortality and improve a woman's preventive health strategy.
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<PAGE>
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 healthy
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. Furthermore, two other phenomena were
found to occur: (i) 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 (ii) 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.
The BreastCare(TM)/BreastAlert(TM) measures underlying breast tissue
temperature and not skin surface temperature by retaining emitted heat when the
BreastCare(TM)/BreastAlert(TM) 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)/BreastAlert(TM)
takes into consideration that the average temperature patterns of a healthy
woman's breast are closely symmetrical. This method detects abnormalities by
comparing the temperature differences in the corresponding mirror image areas of
a woman's breast.
Recently, the scientific foundation for the BreastCare(TM)/BreastAlert(TM)
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: (i) A tumor significantly elevates overall rates of metabolic
activity and (ii) 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 only two of a number
of measurable host alterations and each is associated with asymmetric heat
distribution.
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SUMMARY CLINICAL TESTING HISTORY
Development and clinical trials of the BreastCare(TM)/BreastAlert(TM) were
completed between 1980 and 1984. This testing showed that the
BreastCare(TM)/BreastAlert(TM) is capable of detecting lesions in the breast
earlier than through clinical examination by sensing metabolic changes in the
breast. Biopsy and screening clinical trials were conducted at well-established
U.S. institutions to assess and validate BreastCare(TM)/BreastAlert(TM)
usefulness in detecting breast cancer at Memorial Sloan-Kettering Hospital in
New York, at M.D. Anderson Memorial Hospital in Houston, at Brotman Memorial
Hospital at UCLA, and at Guttman Breast Diagnostic Institute in New York. The
BreastCare(TM)/BreastAlert(TM) was found to be accurate in terms of the
documented sensitivity of the BreastCare(TM)/BreastAlert(TM) (true positive for
cancer) and specificity (true negatives - no cancer detectable by accepted
medical methods) in relation to the biopsy (the "Gold Standard" diagnostic
procedure), clinical breast examination and mammography.
BREASTCARE(TM)/BREASTALERT(TM) TEST RESULTS vs. BIOPSY FINDINGS: In the first
study in 1984, the BreastCare(TM)/BreastAlert(TM) 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)/BreastAlert(TM) 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). The frequency of false negatives was higher among patients who
underwent biopsies of both breasts (less than 3% of breast cancers are believed
to be bilateral generally).
The biopsy results were subjected to a breakdown by the size of the cancer
detected and the patient's age. The threshold tumor size detectable with the
BreastCare(TM)/BreastAlert(TM) is five millimeters and up, an early-stage
cancer; out of a total of eight cancers under 1.0 centimeters which were
diagnosed during the screening study, seven tested positive using the
BreastCare(TM)/BreastAlert(TM). It appears that the
BreastCare(TM)/BreastAlert(TM) 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)/BreastAlert(TM)
results by age suggests an especially high efficacy in detecting suspicious
abnormalities in younger women. This is noteworthy because a pre-screening
method is critically needed for women under 50 who have not been urged or who
have chosen 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)/BreastAlert(TM) will be used adjunctively with
palpation and mammography.
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BREASTCARE(TM)/BREASTALERT(TM) TEST RESULTS VS. CLINICAL FINDINGS VS.
MAMMOGRAPHY AND PHYSICAL EXAMINATION: In the second clinical trial study in
1984, the BreastCare(TM)/BreastAlert(TM) was studied prospectively in 2,805
asymptomatic women for the test's ability to detect abnormalities suspicious of
breast cancer. Specifically, the BreastCare(TM)/BreastAlert(TM) 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)/BreastAlert(TM) test (a sensitivity index of 86.7% against
biopsy). Of the 2,706 women who had no suspicion of cancer based on mammogram
and/or clinical examinations, 2,340 had negative BreastCare(TM)/BreastAlert(TM)
results (a specificity index of 86.5%).
The BreastCare(TM)/BreastAlert(TM) is accurate, both in terms of
sensitivity and specificity. Notably, the very low false positive rate (true
negatives with a positive BreastCare(TM)/BreastAlert(TM) test) of 13.5% for the
initial screening trial of BreastCare(TM)/BreastAlert(TM) actually assumes two
additional circumstances: (1) that no mammographically undetectable cancers
occurred; and (2) that the rate of subsequent cancers 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
BreastCare(TM)/BreastAlert(TM) can be assumed if abnormal thermal distribution
is a risk marker for future disease incidences, as had 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.
In conclusion, these studies have demonstrated the following with respect
to use of the BreastCare(TM)/BreastAlert(TM):(i) the
BreastCare(TM)/BreastAlert(TM) measures differences in temperature between
corresponding areas of the left and right breasts, (ii) the
BreastCare(TM)/BreastAlert(TM) is a safe device; no adverse reactions were
observed, (iii) minimal variances were found due to clinical influences of
hormones, (iv) a positive test result was found to be a strong indication that a
breast abnormality exists which warrants further examination by a physician with
respect to the possibility of breast cancer; and (v) it is advisable to confirm
a positive test result with a repeat test. The best results were achieved upon
arising in the morning, a time which is characterized by low body temperature in
normal tissue (a positive result was confirmed with a retest). Although a
negative test result was found to indicate a greatly reduced likelihood of
cancer, it does not mean that the woman is free of breast abnormalities,
including cancer. The BreastCare(TM)/BreastAlert(TM) may fail to detect the very
slow growing (cold) tumors which have a relatively low rate of metabolic
activity. In a study of 200 asymptomatic women, comparison of two successive
tests indicated that 12 of 178 negative scores (7%) shifted to a positive level
in the second test.
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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)/BreastAlert(TM) test on 366 women did not correlate with the
Guttman clinical staff conclusion on any breast abnormality indicating the
positive of cancer. The observed 13.5% "false positive" index does not mean that
the BreastCare(TM)/BreastAlert(TM) yielded a positive reading in 13.5% of the
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)/BreastAlert(TM) 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 have shown this to
be true and unofficial 1-year follow-ups by Sloan Kettering of the false
positive results 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).
ADDITIONAL CLINICAL STUDIES
Through the efforts of the Company, the European Institute of Oncology,
located in Milan, Italy, is now performing clinical studies on the
BreastCare(TM)/BreastAlert(TM). The study, which involves 500 women is under the
supervision of Dr. Virgilio Sacchini, a world-renowned surgical oncologist. Upon
completion of the study, Dr. Sacchini will submit the study for publication in
medical journals.
On June 11, 1999, at the International Mastology Meeting in Sao Paulo,
Brazil, Dr. Alfred Barros, surgical oncologist and president of the Brazilian
Society of Mastology, and Dr. Carlos Menke, gynecologist, professor of the
University of Rio Grande Do Sul and Mastologist of the Clinical Center of Porto
Alegre, presented the results of the Brazilian multi center clinical study of
the Company's BreastCare(TM)/BreastAlert(TM) device. The clinical study was
conducted by physician members of the Brazilian Society of Mastology using a
uniform protocol to examine the capabilities of the BreastCare(TM)/BreastAlert
(TM) with a screening method and diagnostic validation of cases suspicious of
cancer. The BreastCare(TM)/BreastAlert(TM) was compared with corresponding
mammographic (909 cases) and /or biopsy (151) results. The results were analyzed
and evaluated by Dr. Alvaro Ronco, the head of Cancer Epidemiology at Pronacam
(National Breast Cancer Program, Ministry of Public Health of Uruguay) and a
member of the New York Academy of Sciences and of the Society for
Epidemiological Research in Baltimore as follows: (i) If clinical breast
examination is normal or doubtful (absence of suspicion of cancer) and the
BreastCare(TM)/BreastAlert(TM) test is negative, the probability of absence of
cancer confirmed by biopsy is around 95%; (ii) if clinical breast examination is
suspicious of cancer and the BreastCare(TM)/BreastAlert(TM) is positive, the
probability of having cancer is about 98%; and (iii) the performance of the
BreastCare(TM)/BreastAlert(TM) is slightly better in women under 50 years old,
who are mainly pre menopausal.
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In August, 1999, the BreastCare(TM)/BreastAlert(TM), was presented by
speakers via satellite at the European School of Oncology Congress in Rio de
Janeiro, Brazil. The Chairmen were Professors Umberto Veronesi (Italy) and Jose
A. Pinotti (Sao Paulo)
Dr. Virgilio Sacchini, Surgical Oncologist of the European Institute of
Oncology Milan, Italy presented "Experience in the Clinical Application of the
BreastCare(TM)/BreastAlert(TM) in Medical Practices", via satellite, which
related to the European and Brazilian experience which discussed: 1) The need
for a low-cost, accurate test, which provides immediate results with physical
examination, and mammography; 2) A new technology called
BreastCare(TM)/BreastAlert(TM) , which can supply the need; 3) That there is
evidence of recent clinical studies in South America and Europe that suggest the
evaluation of heat on the surface of the breast, that
BreastCare(TM)/BreastAlert(TM) can be an auxiliary modality in diagnosing breast
cancer; 4) With the new modality, objective results are produced immediately;
and, 5) That the technology is based on cellular epithelial increases in
temperature when abnormal metabolic process happens, which is proliferation of
atypical epithelial.
Dr. Carlos Menke, Gynecologist, professor of University of Rio Grande Do
Sul and Mastologist of the Clinical Hospital of Porto Alegre also spoke on the
Brazilian experience with the clinical studies. Management is very confident
with the results of the studies i.e., when clinical examination is normal and
BreastCare(TM)/ BreastAlert(TM) is negative, the probability of the absence of
breast cancer is 95%, and if clinical examination is suspicious and
BreastCare(TM)/BreastAlert(TM) is positive, the probability of the presence of
cancer is 98%.
In September 1999, the BreastCare(TM)/BreastAlert(TM) was presented at its
exhibition and several symposiums at the III North East Mastology Congress in
Salvador-Bahia-Brazil. Dr. Ezio Novais Dias, president of the Congress, is a
renowned gynecologist and mastologist at the San Rafael Hospital in
Salvador-Bahia. Dr. Dias is vice president of the International Society of
Mastology, President of the Brazilian Mastology School and a member of the
Company's Brazilian Medical Board.
The Company's BreastCare(TM)/BreastAlert(TM) was given extensive exposure
at the Congress by some of the most renowned mastologists in South America, as
well as, in the world. Dr. Jose Antonio Ribeiro Filho, Gynecologist and
Mastologist, and President of the Brazilian Academy of Medicine coordinated a
symposium on "BreastCare(TM)/ BreastAlert(TM); A New Method of Diagnosis of
Breast Cancer."
Also Dr. Alvaro Ronco, head of Cancer Epidemiology at Pronocam (National
Breast Cancer Program, Ministry of Public Health of Uruguay), member of the New
York Academy of Sciences (New York) and of the Society for Epidemiological
Research (Baltimore) presented the "Epidemiology Aspects with
BreastCare(TM)/BreastAlert(TM)."
Dr. Alfredo Barros, Gynecologist and Mastologist at University Medical
Hospital in Sao Paulo and president of the Brazilian Mastology Society gave the
results of the Brazilian Mastology Society's "BreastCare(TM)/BreastAlert(TM)
clinical studies." Dr. Carlos Henrique Menke, gynecologist, professor at
University of Rio Grande Do Sul and Mastologist at the Clinical Center of Porto
Alegre, presented "Clinical Applications of BreastCare(TM)/BreastAlert(TM)."
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The Company anticipates that such studies, as well as future studies, will
play a vital role for future screening projects in hospital and clinical
settings.
REGIONAL REPORT: SOUTH AMERICA
The Company has focused a substantial portion of its resources in South
America. The Company's efforts, though not well funded, have provided an
important proving ground for the Company's operating model, which consists of
(i) regionalized production and assembly, supported by local marketing partners;
(ii) the support of opinion leaders, medical societies and mastologists; (iii)
public and medical awareness of the advantages of the
BreastCare(TM)/BreastAlert(TM) screening; and (iv) organized forums and training
for doctors by region. The Company intends to deploy this model in other regions
throughout the world. A summary of the Company's efforts in South America are as
follows:
In January, 1998, the Company organized a wholly-owned subsidiary, Scantek
Medical S.A., Inc., a Uruguayan company, to distribute the
BreastCare(TM)/BreastAlert(TM)in South America.
The Company entered into an exclusive license agreement (the "License
Agreement"), dated September 22, 1997 and amended February 18, 1998, with
Sandell Corp. S.A. ("Sandell"), a Uruguayan corporation, whereby the Company
granted Sandell an exclusive license to market and distribute the
BreastCare(TM)/BreastAlert(TM) in Brazil, Venezuela, Columbia, Costa Rica,
Ecuador, Nicaragua, Paraguay, Panama, Peru, Bolivia, Argentina and Uruguay. As
of June 30, 1999, upon mutual consent of both parties, the Company terminated
the License Agreement with Sandell. In connection with the termination of the
License Agreement, the Company wrote off the balance of the $400,000 license fee
due the Company and approximately $103,000, which represented its investment in
Sandell.
During September 1998, the Company commenced the sale of its
BreastCare(TM)/BreastAlert(TM) in Brazil, Uruguay and Paraguay through its South
American licensee. During February 1999, the Brazilian economy declined and the
Brazilian currency lost fifty (50%) percent of its value. Brazil increased the
import and value - added tax from approximately twenty-one (21%) percent in
December 1998 to approximately seventy-four (74%) percent in February 1999. Due
to these factors, sales substantially decreased in Brazil, which represents
approximately eighty (80%) percent of the Company's expected revenue. The
Company is establishing a production facility in Brazil. This will eliminate the
high value-added tax and hopefully will be able to facilitate sales. The Company
terminated its license agreement with its former licensee in South America and
key personnel for the former licensee have joined the Company and continue to
play a major role in the Company's South American marketing and sales. The
Company's Brazilian subsidiary, Scantek Medical do Brasil Ltda, plans to
manufacture, market and distribute the BreastCare(TM)/BreastAlert(TM) in Brazil
and export to other South American countries.
In July 1999 the Company, through its Brazilian subsidiary Scantek Medical
do Brasil LTDA, executed a letter of intent with another entity to create a
joint venture with exclusive rights to import, manufacture, market and
distribute the BreastCare(TM)/BreastAlert(TM) in Brazil. After completing its
due diligence the Company terminated the letter of intent.
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Through its Brazilian subsidiary, the Company signed an agreement with the
State of Pernambuco in December 1999. The State of Pernambuco has the second
largest concentration of hospitals in Brazil offering quality care and is also
the most desirable location for production, shipping, financing and tax
incentive. The Company is establishing a 2,550 square meter manufacturing
facility in Recife, Pernambuco at the new port of Suape. The Company has broken
ground, and anticipates construction to be completed by the first half of
calendar year 2001. The Company will ship the production equipment for arrival
by the time construction is completed.
The Company is in advanced negotiations with the state of Brasilia, Sao
Paulo, Bahia and Pernambuco to provide for statewide breastcare screening
programs. The total BreastCare(TM)/BreastAlert(TM) units under consideration for
these programs is 200,000, which the Company anticipates will commence when the
Scantek Medical do Brasil Ltda manufacturing faciltity is operational. The
statewide programs are pilots, and if successful, may lead to a larger screening
program. The combined female population of these regions is 25 million.
The State of Pernambuco and the federal government has offered various
incentives including acreage, at a reduced price, to build the facility, a 75%
reduction in income taxes through 2013, free shipping outside the state, and in
connection with the federal programs offered in Northeast Brazil, financing
programs to help fund the operations and capital improvements.
On May 11, 2000 the Company's Brazilian subsidiary received final approval
to participate in the Sudene Program, a federal program organized to develop the
Northwest of Brazil. Scantek Medical do Brasil, Ltda was approved to receive
funding for approximately $3 million in the Sudene federal program under Finor
Article 9. Final documentation will be presented to Sudene in October, 2000,
with funding expected in 60 to 90 days.
The Company has a contractual arrangement with Multiconsultoria led by Dr.
Gustavo Krause, who is the former Secretary of Treasury of the State of
Pernambuco, former Mayor of the city of Recife, former Governor of the State of
Pernambuco, former Minister of Environment and former Minister of Treasury of
Brazil. The Multiconsultoria is working with Sudene to arrange financing for the
Scantek Medical do Brasil, Ltda project and is coordinating the necessary steps
to finalize the project with the State of Pernambuco
On June 1, 2000 Scantek Medical do Brasil Ltda signed letters of commitment
with the Infantile Maternal Institute of Pernambuco ("IMIP") and Unimed Recife
("Unimed").
IMIP will use the BreastCare(TM)/BreastAlert(TM) in a pilot screening
program for the detection of breast cancer. Scantek Medical do Brasil Ltda is
supporting the pilot program by donating BreastCare(TM)/ BreastAlert(TM) units.
The IMIP will reaffirm its social commitment by developing and incorporating the
BreastCare(TM)/BreastAlert(TM) usage in its pilot screening program.
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Unimed, a Brazilian healthcare provider, will incorporate the
BreastCare(TM)/BreastAlert(TM) into the program of approved examination
procedures for the detection of breast cancer. Unimed Recife is part of Unimed,
a national organization that is a major health care provider for over 11 million
participants in Brazil. Scantek Medical do Brasil Ltda is supporting this
pioneering institution in the private sector of the medical community in Recife
with the first sale to Unimed for 3,000 BreastCare(TM)/BreastAlert(TM) units.
Both IMIP and Unimed programs will be molded after the methodology used at
the Gynecology and Obstetrics of the University of Medicine of Sao Paulo
University.
The Company plans to ship the BreastCare(TM)/BreastAlert(TM) from the
United States until the production facility in Brazil is operational.
FEDERAL PROGRAM
In October, 1999, the Company donated 2,100 BreastCare(TM)/ BreastAlert(TM)
units to Fiocruz, a federal agency in Recife, Pernambuco-Brazil to be used in a
pilot screening project for 2,000 women over 40 years of age. Dr. Alexandre
Bezerra de Carvalho, Director of CPqam/Fiocruz, of the Ministry of Health
organized the government-sponsored project specifically for validation of
BreastCare(TM)/BreastAlert(TM)'s usefulness in a major breast cancer-screening
program being organized in Brazil.
This pilot program is intended to prove the viability of the
BreastCare(TM)/BreastAlert(TM) as a low-cost, accurate test to increase the
indexes of early detection of breast cancer in Brazil. With the assistance of
SUS (Public System of Health), the Primary Assistance Program uses Sanitary
Agents (skilled health personnel) to screen indigent women for breast cancer
with the BreastCare(TM)/BreastAlert(TM) test. The Company is confident of the
acceptance of the use of BreastCare(TM)/BreastAlert(TM) by Agents of Health
(ACS), the Ministry of Health and Secretaries of Health.
BreastCare(TM)/BreastAlert(TM) has proven its value in the Fiocruz pilot cancer
project. The Company is anticipating to receive confirmation from the government
of Pernambuco to confirm BreastCare(TM)/BreastAlert(TM) usage in its screening
program.
As is known, in developed countries, the strategy of early detection of
breast cancer is based on the wide use of mammography for women over 40 years of
age. In developing countries the lack of mammography equipment, trained human
resources and financial resources are major constraints to use this strategy.
According to Dr. Bezerra de Carvalho, Brazil would need 4,000 mammography
machines to assist the population of approximately 120 million people that uses
the Public System of Health of which about 14.5 million women who are over 40
years of age. This gives a good picture of the dimension of the problem in
Brazil.
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SAO PAULO
In December, 1999, BreastCare(TM)/BreastAlert(TM) has been integrated into
a very important Brazilian Breast Cancer Prevention Collaborative Project in Sao
Paulo Brazil. The Collaborative Project is being coordinated by Professor Jose
Aristodemo Pinotti, and is being implemented by the Gynecology Clinic of the
University Medical School of Sao Paulo, with the support of the Brazilian
Mastology Society, Anna Bove Foundation and "Fundacao Pro Mulher" at the
Clinical Hospital of the University at Sao Paulo.
The Company's BreastCare(TM)/BreastAlert(TM) is being used in adjunct with
clinical breast examination and the Gail Risk Factor (criteria used to measure
ones risk for breast cancer) in a pilot breast cancer screening program at the
Gynecology Clinic of the University Medical School of Sao Paulo. This pilot
breast cancer-screening center is the first collaborative project to establish
Breast Cancer Screening Centers and the integration of BreastCare(TM)/
BreastAlert(TM) in the detection process.
The cases detected at the Breast Cancer Screening Centers will be properly
guided to diagnosis and treatment. This process of referral will be facilitated
by the fact that "PRO-MULHER" (a private, non-profit institution) is linked to
Gynecologic services under Dr. Pinotti at Sao Paulo University, which have
substantially all the facilities for diagnosis and treatment of breast cancer.
Brazil and its various states are currently back to where it started in
terms of Breast Cancer Control Programs, but are undergoing a transition to
provide better screening for women.
The new Pilot Breast Cancer Screening Center at the Gynecology Clinic of
the University of Medicine of Sao Paulo University is a first step in this
transition.
REGIONAL REPORT: CHILE AND SINGAPORE
On April 15, 2000, D-Lanz Development Group, Inc. ("D-Lanz") and the
Company entered into an agreement to amend its previous license agreement dated
April 29, 1997 and amended June 11, 1999. D-Lanz will have a change in control
and the License will be assigned to a new corporation, Global Agri-Med
Technologies, Inc. ("Global"). The Company agreed to assign and transfer the
license to Global, which includes the exclusive license in Chile and Singapore.
In addition, the Company has agreed to give Global non-exclusive license
extensions to Africa, Korea, and South Asia. Global must receive final clearance
from the Company before any participation or distribution can proceed in any
city, state, territory or country in the non-exclusive extensions as stated
above. Both parties have agreed to update certain terms in the previous
agreement that will be beneficial to both parties.
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REGIONAL REPORT: EUROPE
Management of the Company is working to replicate the model it established
in South America, in Europe as well. The Company, although progressing in
Europe, is not as advanced as the Company's South American business, due to the
limited availability of human and financial resources.
The Company entered into a letter of understanding with Grupo Grifols, a
publicly held medical products manufacturer and distributor, headquartered in
Barcelona, Spain. Grupo Grifols has approximately $600 million in sales.
Pursuant to this letter of understanding, the Company intends to grant to Grupo
Grifols the exclusive right to sell the BreastCare(TM)/BreastAlert(TM) to the
public and private markets of Portugal and Spain. Grupo Grifols has agreed to
purchase the BreastCare(TM)/BreastAlert(TM) from the Company at a price of
approximately $10.00 (U.S. dollars) per unit. No final agreement has been
executed with respect to this arrangement between the Company and Grupo Grifols.
On July 14, 1999, the Company granted an exclusive license to NuGard
HealthCare Ltd. ("NuGard"), an Irish Company, to market the Company's
BreastCare(TM)/BreastAlert(TM) in Ireland and the United Kingdom. Pursuant to
this licensing agreement, NuGard will pay a non-refundable licensing fee of
$350,000 in various stages, of which $59,000 was received as of June 30, 2000,
and the Company received common shares equivalent to fifteen (15%) percent of
NuGard's total outstanding common shares. The purchase price will range from $10
to $15 per unit - FOB US. The license agreement requires minimum purchase of
5,000 units a month and payments of licensing fees, which have been postponed
until the license agreement can be renegotiated.
Through the efforts of the Company, the European Institute of Oncology,
located in Milan, Italy, is now performing clinical studies on the
BreastCare(TM)/BreastAlert(TM). The study, which involves 500 women, began in
January 1999 under the supervision of Dr. Virgilio Sacchini, a world-renowned
surgical oncologist. Upon completion of the study, Dr. Sacchini will submit the
study for publication in medical journals.
In order to sell medical devices to the new European Community, a
Certification Europe ("CE") is required, which is based primarily upon
documentation of a compliant Quality Control System. In August 1999, the Company
received a CE for the BreastCare(TM)/BreastAlert(TM).
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REGIONAL REPORT: UNITED STATES
The Company 's goals in North America for the immediate future are to
review and reorganize marketing and sales, utilizing the Company's experience
and approach it has used in South America. However, in order to accomplish this,
additional funding will be needed to implement a new marketing and sales
strategy in order to re-launch the BreastCare(TM)/BreastAlert(TM), which it
anticipates will begin 10 to 12 months after financing is completed.
Pursuant to a License Agreement, dated March 17, 1995, as amended on July
31, 1995, October 20, 1995 and May 31, 1996, together with three extensions on
February 26, 1996, March 17, 1996 and April 29,1996, the Company granted
HumaScan Inc. ("HumaScan") an exclusive license to manufacture and sell the
BreastCare(TM)/BreastAlert(TM) in the United States and Canada. On March 15,
1999, pursuant to a Settlement Agreement, dated as of the 11th day of March,
1999, the Company regained the rights to market and sell its
BreastCare(TM)/BreastAlert(TM) in the U.S. and Canada. Pursuant to the
Settlement Agreement, all licensing agreements between the Company and HumaScan,
which gave HumaScan the right to manufacture, market and sell the
BreastCare(TM)/BreastAlert(TM), were terminated. Pursuant to the original and
amended licensing agreements, HumaScan was indebted to the Company for failure
to pay license fees, royalties and other sums of money. In exchange for the
cancellation of $575,000 of indebtedness, due to it by HumaScan and for the
payment by the Company to HumaScan of an additional $340,000, HumaScan agreed to
assign certain special manufacturing equipment, furniture, raw materials, tools,
materials, laboratory equipment and inventory of HumaScan for the manufacture of
the BreastCare(TM)/BreastAlert(TM). In addition, the Company received 150,000
shares of HumaScan's common stock as part of the Settlement Agreement.
The Company has two complete sensor manufacturing and assembly lines for
the production of the BreastCare(TM)/BreastAlert(TM) product. The value of these
two manufacturing lines is estimated by the Company to be approximately $5.5
million. One complete manufacturing line will be shipped to Brazil.
On July 11, 2000 the Company was issued a new patent for its Differential
Temperature Sensor Device For Use in the Detection of Breast Cancer. The patent
No. 6,086,247 will expire on February 5, 2018, twenty (20) years from the date
of filing. The patent was filed on the invention for improvements over the prior
art. The invention provides a foam breast sensor pad and on one face a two-sided
adhesive layer which secures the sensors to the pad and provides perimeter
adhesive around the sensors for good contact with the breasts to be examined.
Also, the disk-shaped pad has two cutouts creating a mushroom-like shaped pad
and has a nipple hole in the middle.
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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 a number of regulations
which dictate the method by which new products are allowed to enter the United
States market (Title 21, CFR Section 807, Premarket Notification), and the
documentation and control of manufacturing processes (Title 21, CFR Section 820,
Good manufacturing Practices for the Manufacturing, Storage and Installation of
Medical Devices).
Subject to the potential changes in regulatory status, 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 has received
permission to market the BreastCare(TM)/BreastAlert(TM). On January 24, 1984,
the FDA determined that the BreastCare(TM)/BreastAlert(TM) is substantially
equivalent to a device marketed in interstate commerce and accordingly may be
freely marketed without further FDA authorization. Also included under Part 807
is a requirement for product registration and listing, which the Company
believes has been satisfied.
Management believes that the proprietary nature of the product is protected
under patent rights issued in the United States and certain foreign countries.
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)/BreastAlert(TM) will be sold.
Most countries require product registration before you can sell. In South
America, the Company's subsidiary, Scantek Medical S.A., Inc., and its marketing
partners have applied for and have received product registration in Brazil,
Uruguay, Argentina and Peru. Paraguay and Bolivia have no registration
requirements to sell. In addition, the Company has applied for and received a
Certification Europe (CE), which is required, as of June, 1998, of all products
marketed in the European Union.
PATENTS
The proprietary nature of the BreastCare(TM)/BreastAlert(TM) 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)/BreastAlert(TM) 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.
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U.S. patents for the BreastCare(TM)/BreastAlert(TM)include:
-- Patent No. RE 32,000, granted and issued on October 8, 1985; this patent is
a reissue of Patent No, 4, 190,058 for a "Device For Use in Early Detection
of Breast Cancer", which was granted and issued on February 26, 1980 and
has since expired.
-- 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"; this patent is a partial
continuation of Patent No. 4,190,058 above
-- Patent No. RE 4,624,264 granted November 24, 1986; this patent has been
reinstated and expires November 25, 2003.
-- Patent No. 6,086,247 granted on July 11, 2000, for Differential Temperature
Sensor Device for Use in the Detection of Breast Cancer and Breast Disease;
this patent expires February 5, 2018.
Foreign patents for the BreastCare(TM)/BreastAlert(TM) include:
-- Belgium Patent No. 884,382; issued July 18, 1980; expires July 18, 2000
-- Israel Patent No. 58422; issued March 1, 1983; expires October 9, 1999
-- Venezuela Patent No. 44,664; registered April 20, 1987; will automatically
be extended upon shipment of products from Venezuela
In addition, in accordance with the Settlement Agreement between the
Company and HumaScan, HumaScan has assigned all of its rights, title and
interests in certain U.S. patents and U.S. and foreign trademarks, including the
following patents:
-- File No. 08/854,144, filed May 14, 1997, entitled "Breast and Axilla Cancer
Screening Device and Method"
-- File No. 08/926,790, filed September 10, 1997, entitled "Differential
Temperature Measuring Device and Method
SUPPLIES AND RAW MATERIALS
Supplies and raw materials for the manufacture of the
BreastCare(TM)/BreastAlert(TM) are available from various sources. Historically,
other than on a few rare occasions, the supplies and raw materials for producing
the BreastCare(TM)/BreastAlert(TM) 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. In addition, the Company has acquired
supplies and raw materials in connection with its settlement with HumaScan.
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MARKETING AND DISTRIBUTION
The Company has created an international marketing plan for licensing and
distribution to capture a significant portion of the $6 billion annual global
breast cancer market with a device that alerts the physician and patient to the
possibility of either proliferating thermally active breast cancer cells or
certain types of thermally active breast disease.
Management believes that in emerging and developing countries, the
BreastCare(TM)/BreastAlert(TM) has the potential to become an important part of
the overall screening protocols used to detect breast disease. To market the
BreastCare(TM)/BreastAlert(TM) abroad, the Company intends to utilize the
following basic strategies:
o Foreign production: The Company intends to set up its own Regional
Production Centers overseas. All sensor manufacturing will remain in the United
States under the Company's control, unless manufacturing is established at the
Company's subsidiary.
o Foreign Licensing: The Company intends to enter into exclusive agreements
with various foreign entities, whereby the Company will either permit such
entity to distribute the BreastCare(TM)/BreastAlert(TM) or give such entity the
right to utilize the Company's trademark and patent in a specified geographical
area.
o Joint Ventures: The Company intends to enter into agreements whereby the
Company will grant one or more partners (usually partner of the host country)
the right to share in the risks, cost and management of a foreign operation. The
Company, however, will retain control of the manufacturing. The joint venture,
if established, is anticipated to be with a major medical supply manufacturer or
pharmaceutical company which could benefit from the sales and distribution of
the BreastCare(TM)/BreastAlert(TM).
o BreastCare(TM)/BreastAlert(TM) Centers: The Company anticipates that it
will establish breast care centers in cooperation with governments and private
businesses in order to utilize the BreastCare(TM)/BreastAlert(TM) with an
established protocol.
The Company intends to manufacture the BreastCare(TM)/BreastAlert(TM) for
sale to partners pursuant to distribution agreements or intends to control the
manufacturing if a joint venture is established. With respect to pursuing the
International market for distribution of the BreastCare(TM)/BreastAlert(TM), the
Company intends to enter into new markets by establishing Regional Production
centers to manufacture and distribute within each target market. Management
believes that partnerships with companies which either have working
relationships with distributors throughout the world or have a distribution
network established in the medical communities of the target markets, will be an
excellent marketing vehicle for the Company. Each agreement will be exclusive
and tailored to maximize the penetration of each market. Initially the Company
intends to establish regional production centers and distribution networks in
the U.S., Brazil, Hungary, Ireland, United Kingdom and China.
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The territories under negotiations for exclusive marketing and distribution
rights are as follows: (i) Eastern and Western European countries, (ii) Asia,
(iii) South America and (iv) Africa. In markets where there are no definite
leaders or where the distributors are highly fragmented , the Company intends to
seek two or three non-exclusive partners to cover such market. Additionally, as
an integral part of the marketing plan, the Company intends to focus in target
markets where there are the highest incidences of breast cancer, as well as in
the majority of European countries where the death rates are increasingly high,
including, but not limited to, Ireland, the United Kingdom and Germany, all of
which have higher death rates than the United States.
The Company, as it has done in the past, intends to conduct a premarket
investigation of the market before marketing is commenced and prior to
finalizing any agreements. A market profile for each market will be completed to
analyze the target markets. The profile will establish the strongest
distributors and the buying decision-makers (i.e., physicians, hospitals,
clinics, government agencies and over the counter customers). Management
believes that a standard market profile will permit comparisons between markets
at a later date and provide profiles of the types of markets that provide the
best results. In addition, the Company will expand communications with the
Ministries of Health, Department of Health and Clinical Services to investigate
the statutory controls regulating the sale of medical devices.
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.
Strategically, the Company intends to centralize manufacturing and
decentralize marketing in each geographical region. Specific markets within that
region shall be covered by individual agreements which provide for the promotion
and distribution of the BreastCare(TM)/BreastAlert(TM). Accordingly, the Company
intends to utilize centralization for control and decentralization for market
penetration. Management believes that the Company's expansion of several
regional centers for the manufacturing locations will give the Company good
access to shipping, tax considerations and low manufacturing cost, and to police
the crossover among distributors' areas where distribution is segmented.
SOUTH AMERICA MARKETING
The Company intends to open a production center in Brazil. In South
America, the development of distributorships with selling partners has been and
are further being developed to approach private hospitals, clinics and
physicians. Simultaneously, the Company intends to launch the
BreastCare(TM)/BreastAlert(TM) Centers with cooperation with some of the most
renowned physician specialists in the field of breast disease, beginning with
Brazil. Over 25 sites are anticipated to be launched within the first two years
of operations with a capacity to screen 60 women per site per day. A carefully
structured program of publications and professional meetings between such
revered specialists and the rest of the physician population
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has been underway throughout 1998, 1999 and 2000 and it is anticipated that such
will be expanded in ensuing years. This marketing approach will be directed by
the International Medical Advisory Board of the Company, consisting of some of
the top specialists in the world in the diagnosis and treatment of breast
disease. State and Federal governments are also helping to create screening
programs in accordance with the above activities.
In addition, as indicated previously, the Company signed a letter of intent
with CEC and EPIC, to create a joint venture with exclusive right to import,
manufacture, market and distribute the BreastCare(TM)/BreastAlert(TM) in Brazil.
After completing its due diligence, the Company terminated the Letter of Intent.
EUROPE MARKETING
The Company has been introducing the BreastCare(TM)/BreastAlert(TM) in
Europe at educational forums which were covered by the press and television.
Also, the Company is exhibiting the BreastCare(TM)/BreastAlert(TM) at medical
congresses to introduce the device to the physician market.
The Company intends to utilize government contracts to mass market the
BreastCare(TM)/BreastAlert(TM). Countries, such as Ireland and Spain lend
themselves to this approach, as well as do larger independent Eastern European
countries, including but not limited to, Romania, Bulgaria, Ukraine, Russia,
Greece and Turkey.
Exploration has commenced on the feasibility of establishing breast care
centers in Europe. If found to be appropriate and effective for certain
countries, the Company intends to commence development in the year 2001.
UNITED STATES AND CANADA MARKETING
The Company's first introduction of the BreastCare(TM)/BreastAlert(TM)
product was by its former United States and Canadian licensee, HumaScan which
launched the product in December 1997. Before relaunching the
BreastCare(TM)/BreastAlert(TM) the Company plans to take a carefully constructed
approach to the marketplace in the United Sates and Canada. The Company intends
to spend between nine to twelve months reviewing and analyzing the best
marketing and sales approaches focused toward the physician user and managed
care insurers. The Company intends to mirror the approach used in South America
with respect to advisement and leadership from renowned breast disease
specialists.
FUTURE MARKETS
The Company intends to market and sell the BreastCare(TM)/ BreastAlert(TM)
worldwide. It has inaugurated potential distributorships in China, Korea,
Nigeria and Kenya. The Company intends to concentrate its efforts through 2001
in South America, Europe and the United States. Simultaneously, the Company
intends to investigate and develop the marketplace in Asia, the Middle East and
the African continent. Sales are anticipated to flow from these areas beginning
in the year 2001 and on.
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COMPETITION
The Company believes that the BreastCare(TM)/BreastAlert(TM), 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 upon these differences, the Company believes
that the prospects for the BreastCare(TM)/BreastAlert(TM) as a supplement to
currently existing screening tests are very good.
The Company believes it is in a unique position because there are no known
competing low cost screening devices on the market which would compete directly
with the BreastCare(TM)/BreastAlert(TM) for use by primary care physicians As a
result, the Company believes that the BreastCare(TM)/BreastAlert(TM) will
augment other existing forms of screening and technology.
Some of the Company's future competitors may be large, well-financed, and
established companies which have greater resources for research and development,
manufacturing, and marketing than 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 can continue to produce a product which is commercially acceptable,
or, that if continued to be 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's products noncompetitive or obsolete.
FUTURE PRODUCTS
The Company believes that the BreastCare(TM)/BreastAlert(TM) 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, prostate and testicles. Although some testing was performed during
the BreastCare(TM)/BreastAlert(TM) 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.
EMPLOYEES
The Company employs a total of 13 employees. Three of these employees are
employed in the U.S. as follows: (i) two full time employees: President and
Chief Executive Officer and Vice President/ Corporate Secretary, and (ii) one
part time employee: Vice President of Corporate Development of the Company.
Additional personnel and consultants are utilized, as required, on a contractual
basis.
The remaining 10 employees are employed in South America by the Company's
two South American subsidiaries, as follows: a General Manager, a Medical
Director, four (4) other Senior employees, and four (4) support staff employees.
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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 a number of risks and uncertainties,
including, but not limited to; (a) the risk that it may be unable to raise
enough capital to fund the Company's operations, (b) the risk that the
BreastCare(TM)/BreastAlert(TM) 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 upon 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.
PUBLIC INFORMATION
The Company electronically files with the Securities and Exchange
Commission (the "SEC") all its reports, including, but not limited to, its
annual and quarterly reports. The SEC maintains an Internet site which contains
all such reports and other information with respect to the Company on its
website, http://www.sec.gov. Additional information on the Company may be
obtained from the Company's web site, http://www.scantekmedical.com.
ITEM 2. PROPERTIES
The Company occupies approximately 13,000 square feet of warehouse and
office space, all of which is leased through leases expiring in June, 2001. See
Note 13 of Notes to Consolidated Financial Statements for additional
information.
On November 19, 1999 Scantek Medical do Brasil Ltda signed an agreement
with the State of Pernambuco-Brazil to establish a production facility at the
sea port of Suape, which is approximately 45 kilometers from Reife,
Pernambuco-Brazil. The Company's subsidiary acquired approximately 40,000 square
meters of land and has broken ground to build a 2,550 square meter production
facility. The production facility will be completed in the first half of
calendar year 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or pending legal proceedings.
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, 2000.
-22-
<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 NASD. The following table
sets forth the periods indicated high and low bid quotation (as reported by the
OTC Bulletin Board) for the Common Stock:
HIGH LOW
---- ---
Fiscal Year ended June 30, 1999
First Quarter 1 3/16
Second Quarter 19/32 3/16
Third Quarter 23/32 1/4
Fourth Quarter 1/2 5/32
Fiscal Year ended June 30, 2000
First Quarter 18/32 3/16
Second Quarter 3/16 1/16
Third Quarter 18/32 1/16
Fourth Quarter 3/4 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 reflect an inter-dealer price, without retail mark-up,
markdown or commission, and may not necessarily reflect actual transactions.
(b) Holders
As of September 15, 2000, there were 201 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 Unregistered Securities
-23-
<PAGE>
On March 13, 1998, the Company issued 125,000 shares of Common Stock of the
Company pursuant to financing, to two individuals at an issue price of .5625 per
share.
On November 16, 1998, the Company sold 150,000 shares of Common Stock each
to Kenneth Courey, a former Director of the Company and Louis Gottlieb, Vice
President of Corporate Development of the Company, at a purchase price of $.3333
per share, pursuant to Section 4(2) of the Securities Act of 1933, as amended,
based upon the nature of the sale and the purchasers.
On December 1, 1998, the Company issued 75,000 shares of Common Stock of
the Company pursuant to financing, to three individuals at an issue price of
$.1875 per share.
On July 1, 1999 the Company issued Zsigmond L. Sagi, the Company's
President and Chief Executive Officer, 79,250 shares of Common Stock of the
Company pursuant to financing, at an issue price of $.416 per share.
On July 1, 1999 the Company issued Ms. Patricia Furness, the Company's
Vice-President/Corporate Secretary, 5,703 shares of Common Stock of the Company
pursuant to financing, at an issue price of $.5625 per share.
On July 1, 1999 the Company issued Mr. Louis Gottlieb, the Company's
Vice-President of Corporate Development, 25,000 shares of Common Stock of the
Company pursuant to financing, at an issue price of $.375 per share.
On July 1, 1999 the Company issued 52,500 shares of Common Stock of the
Company pursuant to financing, to two individuals including Paul Nelson (a
Director of the Company), at an issue price of $.40625 per share.
On July 7, 1999 the Company sold 45,767 shares of Common Stock to Maurice
Siegel, Vice-President and Director of the Company, at a purchase price of
$.2185 per share, pursuant to Section 4(2) of the Securities Act of 1933, based
upon the nature of the sale and the purchaser.
On July 7, 1999, the Company issued 50,000 shares of Common Stock of the
Company to Kenneth Courey, a former Director of the Company, pursuant to a
consulting contract, at an issue price of $.1875 per share.
On December 30, 1999 the Company issued 7,500 shares of Common Stock of the
Company pursuant to financing, to two individuals including Paul Nelson, a
Director of the Company, at an issue price of $.07 per share.
On March 8, 2000 the Company issued 2,500 shares of Common Stock of the
Company to Paul Nelson, pursuant to financing, at an issue price of $.53125 per
share.
On March 8, 2000 the Company issued 23,750 shares of Common Stock of the
Company to Louis Gottlieb, pursuant to financing, at an issue price of $.1875
and $.25 per share.
-24-
<PAGE>
On April 14, 2000 the Company issued 50,000 shares of Common Stock of the
Company to Louis Gottlieb pursuant to financing, at an issue price of $.25 per
share.
On April 14, 2000 the Company issued 35,200 shares of Common Stock of the
Company to Maurice Siegel, a Vice-President and Director of the Company, for
consulting services, at an issue price of $.25 per share.
On April 14, 2000 the Company issued 125,000 shares of Common Stock of the
Company to Stock Siren LLC, pursuant to advertising and public relations, at an
issue price of $.1875 per share.
On August 1, 2000 the Company issued 67,900 shares of Common Stock of the
Company to Zsigmond L. Sagi, the Company's President and Chief Executive Officer
pursuant to financing, at an issue price of $.4667 per share.
On August 1, 2000 the Company issued Ms. Patricia Furness, the Company's
Vice-President and Corporate Secretary, 8,750 shares of Common Stock of the
Company pursuant to financing, at an issue price of $.4667 per share.
On August 1, 2000 the Company issued 2,500 shares of Common Stock of the
Company to Paul Nelson, pursuant to financing, at an issue price of $.4667 per
share.
On September 27, 2000 the Company sold 750,000 shares of Common Stock to
Fernando Schver, at a purchase price of $.4667 per share, pursuant to Section
4(2) of the Securities Act of 1933, as amended, based upon the nature of the
sale and the purchasers.
-25-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes related thereto.
The discussion of results, causes and trends should not be construed to infer
conclusions that such results, causes or trends necessarily will continue in the
future.
RESULTS OF OPERATIONS
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, 2000 June 30, 1999
compared with 1999 compared with 1998
---------------------------------------
Sales (1) ........................... (76.7)% *%
License fee revenues ................ (91.8) (59.6)
Cost of sales (1) ................... 30.4 *
General and administrative
expenses ........................... 48.0 8.3
Research and development ............ (41.6) 44.7
Interest expense .................... 48.5 52.8
(*) Percentage not meaningful
REVENUES
Net sales decreased to $29,775 during the year ended June 30, 2000 from
$127,775 during the year ended June 30, 1999 as the Company is re-focusing its
South American marketing strategy in Brazil. The Company will ship the
BreastCare(TM)/BreastAlert(TM) from the United States during the fourth quarter
of calendar 2000 to South America until the manufacturing facility in Brazil is
completed and operational. Shipments to Ireland commenced in October 1999 for
test marketing and shipments to other parts of Europe will commence during the
first half of calendar 2001. Manufacturing in Brazil is planning to commence
during the first half of calendar 2001 after the Company completes construction
of its new manufacturing facility in Brazil. Until then the Company will
manufacture the BreastCare(TM)/BreastAlert(TM) in its U.S. facilities.
Manufacturing for Europe will continue in its U.S. facilities until the Company
establishes a manufacturing facility in Europe.
Net sales increased to $127,775 for the year ended June 30, 1999 from $-0-
for the year ended June 30, 1998 as the Company commenced initial shipments of
its BreastCare(TM)/BreastAlert(TM) during fiscal year 1999.
-26-
<PAGE>
License fee revenue decreased to $59,000 during the year ended June 30,
2000 from $727,500 for the year ended June 30, 1999 as the Company recognized
lower license fees from Nugard Healthcare Ltd. as compared to higher license
fees from Sandell Corp, D-Lanz Corp and HumaScan from the preceding year.
License fee revenue decreased to $727,500 during the year ended June 30,
1999 from $1,801,582 for the year ended June 30, 1998, as the Company recognized
lower license fees from Sandell and D-Lanz, as compared to the license fees from
HumaScan the preceding year. The current year license fee revenue was further
impacted, as $400,000 of the license fee revenue from Sandell was written off
against the current year revenue.
COST OF SALES
Cost of sales increased to $537,216 during the year ended June 30, 2000
from $411,834 during the year ended June 30, 1999 primarily due to depreciation
expenses of $276,844 on the production equipment, compared to $198,288 for the
same annual period ended June 30, 1999.
Cost of sales increased to $411,834 for the year ended June 30, 1999 from
$-0- for the year ended June 30, 1998 primarily due to the initial shipments of
its BreastCare(TM)/BreastAlert(TM) during the first quarter of the Company's
current fiscal year. Depreciation expense of approximately $198,288 on the
production equipment also increased the cost of sales for the year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 48.0% to $1,699,922 for the
year ended June 30, 2000 compared to $1,148,449 for the year ended June 30,
1999. This increase is primarily due to increases in consulting services and
travel expenses in connection with the Company's South American marketing
strategies in Brazil.
General and administrative expenses increased 8.3% to $1,148,499 for the
year ended June 30, 1999 compared to $1,060,766 for the year ended June 30,
1998. This increase is primarily due to increases in consulting, travel and
outside services mainly attributable to the Company's South American operations,
offset in part by decreased legal fees.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 41.6% to $286,223 during the
year ended June 30, 2000 from $490,482 during the year ended June 30, 1999. The
decrease is primarily attributable to decreased salaries incurred by the Company
in the experimental area of development of its product.
Research and development expenses increased 44.7% to $490,482 for the year
ended June 30, 1999 from $339,037 for the year ended June 30, 1998. The increase
is primarily attributable to stock-based bonuses given to two officers of the
Company working in the experimental area of development, for deferring their
salaries so the Company could use those funds for working capital.
-27-
<PAGE>
INTEREST EXPENSE
Interest expense was $417,109 for the year ended June 30, 2000 compared to
$280,978 for the year ended June 30, 1999. The 48.5% increase was attributable
to the increase in the Company's short-term debt.
Interest expense was $280,978 for the year ended June 30, 1999 compared to
$183,889 for the year ended June 30, 1998. The 52.8% increase was primarily
attributable to increased short-term loans and officer loans coupled with
imputed interest on stock issued in consideration for the short term loans.
OTHER INCOME
The Company was required to sell marketable securities to meet a margin
call on its secured margin loan, resulting in a gain on marketable securities of
approximately $400,000 for the year ended June 30, 1998.
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 and maintaining of domestic and international trademarks and international
patent protection; licensing and pre-marketing activities; and, attempts to
raise the necessary capital to expand the Company's capacity. 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. In addition, the Company's
auditors' report for the year ended June 30, 2000 dated August 17, 2000,
expressed an opinion as to the Company continuing as a going concern.
During September 1998, the Company commenced the sale of its
BreastCare(TM)/BreastAlert(TM) in Brazil, Uruguay and Paraguay through its South
American licensee. During February 1999, the Brazilian economy declined and the
Brazilian currency lost fifty (50%) percent of its value. Brazil increased the
import and value - added tax from approximately twenty - one (21%) percent in
December 1998 to approximately seventy - four (74%) percent in February 1999.
Due to these factors, sales substantially decreased in Brazil, which represents
approximately eighty (80%) percent of the Company's expected revenue. The
Company is establishing a production facility in Brazil. This will eliminate the
high value - added tax and hopefully will be able to facilitate sales. The
Company terminated its license agreement with its former licensee in South
America but key personnel for the former licensee have joined Scantek. The
Company's Brazilian subsidiary plans to manufacture, market and distribute the
BreastCare(TM)/BreastAlert(TM) in Brazil and export to other South American
countries.
The Company commenced its distribution operations in South America during
the second half of calendar 2000, while shipments to Ireland commenced in
October 1999 for test marketing and shipments to other parts of Europe will
commence during the first half of calendar 2001. However, until cash flow
generated from the shipment of the BreastCare(TM) device is sufficient to
support the Company's operations, the Company needs financing to fund its
current
-28-
<PAGE>
overhead and various capital requirements. As of June 30, 2000, the Company
borrowed $1,644,715 from unaffiliated third parties, of which approximately
$429,715 was advanced since June 30, 1999. These loans are payable by the
Company on various dates through December 2001. In addition, as of August 17,
2000, the Company's President advanced the Company an additional $227,600 since
July 1999. These loans have supported the Company through the prior fiscal year
and the current fiscal year, and the Company expects the cash flow from sales
commencing in the first quarter of calendar 2001 to cover the operations of the
Company in calendar 2001 and 2002, providing the Company is successful in
raising additional capital to support the operations until cash flows generated
for the sales of the BreastCare(TM)/BreastAlert(TM) commences.
As previously noted, the Company terminated its license agreement with its
South American licensee. The Company will manufacture, market and distribute the
BreastCare(TM)/BreastAlert(TM) throughout South America through the Company's
South American subsidiaries.
In July 1999, the Company, through its Brazilian subsidiary Scantek Medical
do Brasil Ltda, executed a letter of intent with another entity to create a
joint venture with exclusive rights to import, manufacture, market and
distribute the BreastCare(TM)/BreastAlert(TM) in Brazil. After completing its
due diligence, the Company terminated the letter of intent.
Through its Brazilian subsidiary, the Company signed an agreement with the
State of Pernambuco in December 1999. The State of Pernambuco has the second
largest concentration of hospitals in Brazil offering quality care and is also
the most desirable location for production, shipping, financing and tax
incentives. The Company is establishing a 2,550 square meter manufacturing
facility in Recife, Pernambuco at the new port of Suape. The Company has broken
ground, and anticipates construction to be completed by the first half of
calendar 2001. The Company will ship the production equipment for arrival by the
time construction is complete.
The State of Penambuco has offered various incentives, including acreage,
at a reduced price, to build the facility, a 75% reduction in taxes through
2013, free shipping outside the state, and in connection with the federal
programs offered in Northeast Brazil, financing programs to help fund the
operations and capital improvements.
The Company plans to ship the BreastCare(TM)/BreastAlert(TM) from the
United States until the production facility in Brazil is operational.
On September 30, 2000, the Company and its Brazilian subsidiary executed an
agreement with a Brazilian investment group. Scantek Medical Inc. will sell
36% of its equity in Scantek Medical do Brasil Ltda for two million ($2,000,000)
dollars to the Brazilian company investment group.
The new partner will play a major roll in expediting the Brazilian
operations, including the construction of the new manufacturing facility,
expanding Scantek Medical do Brasil Ltda's operations, marketing and sales. The
$2,000,000 will be funded in various stages and milestones until the Sudene
Federal Funding from the government is completed.
-29-
<PAGE>
In connection with the agreements, the Brazilian investment group purchased
750,000 shares of Scantek Medical Inc. common stock for $350,000. The Company
has guaranteed to redeem these shares within twelve months at a price of not
less than $350,000. If the total market value at the time of redemption is
greater than $350,000 the Company will guarantee the $350,000 plus fifty (50%)
percent of the profit generated.
On July 14, 1999, the Company granted an exclusive license to NuGard
HealthCare Ltd. ("NuGard"), an Irish Company; to market Scantek's
BreastCare(TM)/BreastAlert(TM) in Ireland and the United Kingdom. Pursuant to
the licensing agreement, NuGard will pay a non-refundable licensing fee of
$350,000 in various stages, of which $59,000 was received as of June 30, 2000,
and the Company received common shares equivalent to fifteen (15%) percent of
NuGard's total outstanding common shares. The purchase price will range from $10
to $15 per unit - FOB US. The license agreement requires minimum purchases of
5,000 units a month and payments of licensing fees, which have been postponed
until the license agreement can be renegotiated.
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)/BreastAlert(TM) in the international market. The Company entered
into an agreement with Zigmed Inc., pursuant to which Zigmed Inc. will
manufacture the sensor production equipment needed for manufacturing of the
BreastCare(TM)/BreastAlert(TM) device for the contract price of $1,850,680. The
Company, as of June 30, 2000, has advanced Zigmed Inc. payments of $1,068,304
and issued Zigmed Inc. 100,000 shares of the Company's common stock (valued at
$1.00 per share) against the contract price. The balance of $782,376 will be
paid when the Company raises the additional capital.
The Company's success is dependent on raising sufficient capital to
establish a fully operable production and assembly facility to manufacture the
BreastCare(TM)/BreastAlert(TM) for the international market. The Company
believes the BreastCare(TM)/BreastAlert(TM) will be commercially accepted
throughout the international market. The Company does not have all the financing
in place at this time, nor may it ever, to meet these objectives.
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.
-30-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
This statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires the recognition of all
derivatives as either assets or liabilities in the statement of financial
position and measurement of these instruments at fair value. The accounting for
change of the fair value of a derivative is dependent upon the intended use of
the derivative. SFAS No. 133 will be effective in the Company's first quarter in
the year ending June 30, 2001 and retroactive application is not permitted.
Management does not believe that this statement will have a material impact on
the Company.
-31-
<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, 2000 and 1999 F-3
Consolidated Statements of Operations,
Years Ended June 30, 2000, 1999, 1998 F-4
Consolidated Statements of Stockholders'
Equity, Years Ended June 30, 2000, 1999, 1998 F-5
Consolidated Statements of Cash Flows,
Years Ended June 30, 2000, 1999, 1998 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-26
-32-
<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 (the "Company") as of June 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' deficiency, and
cash flows for each of the three years ended June 30, 2000. 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.
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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended June 30, 2000
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 engaged in
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 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, GOODMAN & COMPANY, P.C.
Certified Public Accountants
Eatontown, New Jersey
August 17, 2000
F-2
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
--------
2000 1999
---- ----
ASSETS
Current Assets:
Cash ..................................... $ 2,898 $ 5,516
Marketable securities .................... 20,735 409,272
Accounts receivable ...................... 24,000 --
Inventories .............................. 721,315 898,796
Prepaid expenses ......................... 8,511 84,287
----------- -----------
Total Current Assets ................. 777,459 1,397,871
----------- -----------
Property and equipement - net ................ 1,548,016 1,803,974
Other assets - net ........................... 101,174 160,179
----------- -----------
TOTAL ASSETS ............................. $ 2,426,649 $ 3,362,024
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Short-term debt .......................... $ 860,593 $ 524,271
Current portion of long-term debt ........ 300,000 --
Accounts payable ......................... 1,263,095 1,210,861
Accrued interest ......................... 539,333 224,279
Accrued salaries ......................... 1,332,472 1,106,119
Accrued expenses ......................... 528,406 84,213
----------- -----------
Total Current Liabilities ............ 4,823,899 3,149,743
----------- -----------
Long-term debt ............................... 2,604,609 2,577,009
----------- -----------
Total Liabilities .................... 7,428,508 5,726,752
----------- -----------
Commitments and Contingencies
Stockholders' Deficiency:
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
shares; outstanding 18,810,540 and
18,070,200 shares ....................... 18,810 18,070
Additional paid-in-capital ............... 3,726,976 3,433,002
Cumulative other comprehensive loss ...... (281,265) (165,885)
Deficit .................................. (8,466,380) (5,649,915)
----------- -----------
Total Stockholders' Deficiency ....... (5,001,859) (2,364,728)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY .............................. $ 2,426,649 $ 3,362,024
=========== ===========
See notes to consolidated financial statements
F-3
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales ...................................... $ 29,775 $ 127,775 $ --
License fees ................................... 59,000 727,500 1,801,582
------------ ------------ ------------
88,775 855,275 1,801,582
------------ ------------ ------------
Costs and expenses:
Cost of sales .................................. 537,216 411,834 --
General and administrative
expenses ..................................... 1,699,922 1,148,449 1,060,766
Research and development ....................... 286,223 490,482 339,037
------------ ------------ ------------
2,523,361 2,050,765 1,399,803
------------ ------------ ------------
Income (loss) from operations .................... (2,434,586) (1,195,490) 401,779
------------ ------------ ------------
Other income (expense):
Interest and dividends ......................... 223 -- 21,507
Gain on sale of marketable
securities .................................... 25,007 -- 413,504
Loss on investments ............................ -- (103,100) --
Interest expense ............................... (417,109) (280,978) (183,889)
Miscellaneous .................................. 10,000 -- 1,900
------------ ------------ ------------
(381,879) (384,078) 253,022
------------ ------------ ------------
Net earnings (loss) .............................. $ (2,816,465) $ (1,579,568) $ 654,801
============ ============ ============
Earnings (loss) per common
share - basic .................................. $ (0.15) $ (0.09) $ 0.04
============ ============ ============
Earnings (loss) per common
share - diluted ................................ $ (0.15) $ (0.09) $ 0.03
============ ============ ============
Weighted average number of
common shares outstanding - basic .............. 18,431,820 17,679,575 17,220,200
============ ============ ============
Weighted average number of
common shares outstanding - diluted ............ 18,431,820 17,679,575 18,742,501
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Cumulative
Retained Other Additional
Comprehensive Earnings Comprehensive Common Paid-In
Total Income (Loss) (Deficit) Income (Loss) Stock Capital
----------- ------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 ..................... $ 3,824,113 $(4,725,148) $ 5,566,615 $ 17,220 $ 2,965,426
Issuance of stock warrants for services
(issued at $.55 to $1.125 per share) .... 27,780 27,780
Net unrealized loss on
marketable securities ................... (2,944,999) $(2,944,999) (2,944,999)
Net earnings .............................. 654,801 654,801 654,801
-----------
Comprehensive loss .................... $(2,290,198)
===========
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 .................... 1,561,695 (4,070,347) 2,621,616 17,220 2,993,206
Common stock issued in lieu of
compensation (issued at $.1875 per share) 65,625 350 65,275
Sale of common stock (at $.3333 per share) 100,000 300 99,700
Common stock issued for loan financing
(issued at $.1875 to $.5625 per share) .. 84,375 200 84,175
Issuance of stock options and warrants
for services (issued at $.1875 to $1.125
per share) .............................. 190,646 190,646
Net unrealized loss on marketable
securities .............................. (2,787,501) $(2,787,501) (2,787,501)
Net (loss) ................................ (1,579,568) (1,579,568) (1,579,568)
-----------
Comprehensive loss .................... $(4,367,069)
===========
-----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 ..................... (2,364,728) (5,649,915) (165,885) 18,070 3,433,002
Sale of common stock (at $.2185 per share) 10,000 46 9,954
Common stock issued for loan
financing and services rendered
(issued at $.01 to $.5625 per share) .... 199,254 694 198,560
Issuance of stock warrants for services
(issued at $.1875 to $.75 per share) .... 85,460 85,460
Net unrealized loss on marketable
securities .............................. (115,380) $ (115,380) (115,380)
Net loss .................................. (2,816,465) (2,816,465) (2,816,465)
-----------
Comprehensive loss .................... $(2,931,845)
===========
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 .................... $(5,001,859) $(8,466,380) $ (281,265) $ 18,810 $ 3,726,976
===================================================================================================================================
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss) ......................... $(2,816,465) $(1,579,568) $ 654,801
Adjustments to reconcile net
earnings (loss) to net cash
used in operating activities:
Depreciation and amortization ............... 367,065 288,655 84,220
Net gain on sale of marketable
securities ................................ (25,007) -- (413,504)
Non-employee stock based
compensation .............................. 85,460 84,375 --
Non-cash officers compensation .............. -- 195,418 --
Other non-cash items ........................ 199,254 60,853 27,780
Changes in operating assets
and liabilities ........................... 1,259,815 512,755 (1,015,074)
----------- ----------- -----------
Net Cash (Used in)
Operating Activities ................... (929,878) (437,512) (661,777)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of marketable
securities .................................. 298,164 -- 1,168,445
Purchase and deposits of property
and equipment ............................... (43,500) (1,202,980) (447,203)
Purchase of marketable securities ............. -- -- (345,342)
----------- ----------- -----------
Net Cash Provided by (Used in)
Investing Activities ...................... 254,664 (1,202,980) 375,900
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings ...................... 473,215 1,150,000 101,202
Proceeds from officer loans ................... 309,413 342,281 317,000
Repayment of officer loans .................... (76,084) (1,000) --
Repayment of notes ............................ (43,948) (1,202) (994,789)
Proceeds from sale of common stock ............ 10,000 100,000 --
----------- ----------- -----------
Net Cash Provided by (Used in)
Financing Activities ...................... 672,596 1,590,079 (576,587)
----------- ----------- -----------
Net (decrease) in Cash .......................... (2,618) (50,413) (862,464)
Cash - beginning of period ...................... 5,516 55,929 918,393
----------- ----------- -----------
Cash - end of period ............................ $ 2,898 $ 5,516 $ 55,929
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
(Continued)
F-6
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Changes in operating assets and
liabilities consist of:
(Increase) in accounts receivable ...... $ (24,000) $ -- $ --
(Increase) decrease in inventory ....... 177,481 (898,796) --
Decrease in due from licenses .......... -- 801,900 248,100
(Increase) decrease in prepaid
expenses ............................. 75,776 (60,770) 47,191
(Increase) in marketable securities
non-current .......................... -- -- (300,000)
(Increase) in other assets ............. (8,602) 80,490 (92,115)
Increase (decrease) in accounts
payable and accrued expenses ......... 1,039,160 1,342,431 458,332
Increase (decrease) in deferred
income ............................... -- (752,500) (1,376,582)
----------- ----------- -----------
$ 1,259,815 $ 512,755 $(1,015,074)
=========== =========== ===========
Supplementary information:
Cash paid during the year for:
Interest ............................... $ 38,583 $ 103,924 $ 155,709
=========== =========== ===========
Income Taxes ........................... $ 450 $ 5,637 $ --
=========== =========== ===========
Non-cash investing activities:
Unrealized loss on
marketable securities ................ $ (115,380) $(2,787,501) $(2,944,999)
=========== =========== ===========
Non-cash financing activities
Conversion of accounts payable
and accrued expenses to common
stock .................................. $ 199,254 $ 84,375 $ --
=========== =========== ===========
Conversion of accounts payable and accrued
expenses to stock options and warrants . $ 85,460 $ 190,646 $ 27,780
=========== =========== ===========
Conversion of accrued officers
salaries to common stock ............... $ -- $ 65,625 $ --
=========== =========== ===========
Details of settlement agreement:
Fair value of assets received .......... $ 915,000
Liabilities forgiven ................... 575,000
-----------
Net cash paid .......................... $ 340,000
===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Scantek Medical, Inc. and its subsidiaries (the "Company"), operates in one
industry segment and is engaged, in developing, manufacturing, marketing,
and licensing the BreastCare(TM)/BreastAlert(TM). The
BreastCare(TM)/BreastAlert(TM) 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.
During the year ended June 30, 1999, principal operations commenced and the
Company commenced shipments of the BreastCare(TM)/BreastAlert(TM) in South
America. The Company also regained rights to manufacture and sell the
BreastCare(TM)/BreastAlert(TM) in the United States of America, Canada and
their territories and possessions. See Note 6 of Notes to Consolidated
Financial Statements for further information. Accordingly, the Company is
no longer considered a development stage enterprise, as it was through June
30, 1998. There is no assurance that commercially successful products will
be developed, nor that the Company will achieve a profitable level of
operations.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has experienced losses during its development stage. Losses and
negative cash flows from operations have continued in the current fiscal
year and subsequent to June 30, 2000. As of June 30, 2000, the Company has
a working capital deficit of approximately $4.5 million.
The 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 commercial acceptability
of the BreastCare(TM)/BreastAlert(TM) to create sales that will help the
Company achieve a profitable level of operations. However, there is no
assurance that additional capital will be obtained or the
BreastCare(TM)/BreastAlert(TM) will be commercially successful. This raises
substantial doubt about the ability of the Company to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
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.
F-8
<PAGE>
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 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.
MARKETABLE SECURITIES
The Company classifies its investment in equity securities, as "available
for sale", and accordingly, reflects unrealized losses as a separate
component of stockholders' deficiency.
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.
INVENTORIES
Inventories are stated at the lower of weighted average cost or market.
REVENUE RECOGNITION
Revenue is recognized when the BreastCare(TM)/BreastAlert(TM) are shipped
and title passes to customers.
Revenue from licensing the BreastCare(TM)/BreastAlert(TM) is usually
recognized when licensees commence operations and substantial performance
has occurred. The Company historically has amended or renegotiated its
licensees' agreements. Therefore, the Company recognizes license fee income
when received.
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 the 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-9
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
EVALUATION OF LONG-LIVED ASSETS
Long-lived assets are assessed for recoverability on an ongoing basis. In
evaluating the fair value and future benefits of long-lived assets, their
carrying value would be reduced by the excess, if any, of the long-lived
asset over management's estimate of the anticipated undiscounted future net
cash flows of the related long-lived asset. As of June 30, 2000, management
concluded that no impairment exists.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of the 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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding
during the year. For the year ended June 30, 1998, diluted earnings per
common share are computed by dividing net earnings by the weighted average
number of common and potential common shares outstanding during the year.
Potential common shares used in computing diluted earnings per share relate
to stock options and warrants which, if exercised, would have a dilutive
effect on earnings per share. The number of potential common shares
outstanding were 14,402,170, 6,418,205 and 2,013,178 for the years ended
June 30, 2000, 1999 and 1998, respectively. During the years ended June 30,
2000 and 1999, potential common shares were not used in the computation of
diluted loss per common share, as their effect would be antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments including cash, amounts due from licensees,
accounts payable, accrued expenses and short term debt, it was assumed that
the carrying amount approximated fair value 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.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). This Statement establishes accounting at reporting standards for
derivative instruments and hedging activities. It requires the recognition
of all derivatives as either assets or liabilities in the statement of
financial position and measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative is dependent upon
the intended use of the derivative. SFAS No. 133 will be effective in the
Company's first quarter in the year ending June 30, 2001 and retroactive
application is not permitted. Management does not believe that this
Statement will have a material impact on the Company.
F-10
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in order to
conform with the current year's presentation.
2. INVESTMENT IN SUBSIDIARIES
(a) In July 1999, the Company organized Scantek Medical do Brazil LTDA, a
Brazilian Company and a wholly owned subsidiary, to distribute the
BreastCare(TM)/BreastAlert(TM) in Brazil. The subsidiary will
manufacture the BreastCare(TM)/BreastAlert(TM) for South America in
its proposed production facility in the state of Pernambucco, which
the Company expects to be completed by the first half of calendar
2001. Construction cost is anticipated to be approximately $1,000,000.
(b) In January, 1998, the Company organized a wholly-owned subsidiary,
Scantek Medical S.A. Inc., a Uruguayan company, to distribute the
BreastCare(TM)/BreastAlert(TM) in South America.
3. MARKETABLE SECURITIES
<TABLE>
<CAPTION>
Estimated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 2000:
Marketable securities-
current:
Common stock ......... $ 2,000 $ 20,735 $ 20,735 $ 2,000
========== ========== =========== ========
Warrants ............. $ 300,000 $ -- $ -- $300,000
========== ========== =========== ========
June 30, 1999:
Marketable securities-
current:
Common stock ........ $ 275,157 $ 409,272 $ 318,000 $183,885
========== ========== =========== ========
Marketable securities-
non-current:
Warrants ............ $300,000 $ -- $ -- $300,000
========== ========== =========== ========
</TABLE>
Gross realized gains were $145,912 in 2000, $-0- in 1999 and $435,352 in
1998. Gross realized losses were $120,905 in 2000, $-0- in 1999 and $21,848
in 1998.
4. INVENTORIES
June 30,
------------------------
2000 1999
--------- ---------
Raw materials ............... $ 614,138 $ 783,175
Finished goods .............. 107,177 115,621
--------- ---------
$ 721,315 $ 898,796
========= =========
F-11
<PAGE>
5. PROPERTY AND EQUIPMENT
June 30,
--------------------------
2000 1999
---------- ----------
Land ............................. $ 43,500 $ --
Equipment ........................ 2,014,545 2,014,545
Furniture and fixtures ........... 27,489 27,489
Leasehold improvements ........... 16,525 16,525
---------- ----------
2,102,059 2,058,559
Less accumulated depreciation .... 554,043 254,585
---------- ----------
$1,548,016 $1,803,974
========== ==========
Depreciation expense for the years ended June 30, 2000, 1999 and 1998 was
$299,458, $221,049 and $16,612, respectively.
6. OTHER ASSETS
June 30,
----------------------
2000 1999
-------- --------
Patent costs ......................... $676,069 $676,069
Security deposits .................... 33,352 24,750
-------- --------
709,421 700,819
Less accumulated amortization ........ 608,247 540,640
-------- --------
$100,174 $160,179
======== ========
7. HUMASCAN AGREEMENT/SETTLEMENT
On March 15, 1999 pursuant to a Settlement Agreement ("Agreement") dated as
of the 11th day of March 1999, between the Company and HumaScan, Inc.
("HumaScan"), the Company regained the rights to market and sell its
BreastCare(TM)/BreastAlert(TM) in the United States and Canada.
Pursuant to the Agreement, all licensing agreements between the Company and
HumaScan which gave HumaScan the right to manufacture, market and sell the
BreastCare(TM)/BreastAlert(TM), were terminated. Pursuant to the original
and amended licensing agreements, HumaScan was indebted to the Company for
failure to pay license fees, royalties and other sums of money. In exchange
for the cancellation of $575,000 of indebtedness due to the Company by
HumaScan and for the payment by the Company to HumaScan of an additional
$340,000, HumaScan agreed to assign certain special manufacturing
equipment, furniture, raw materials, tools, materials, laboratory equipment
and inventory of HumaScan for the manufacture of the
BreastCare(TM)/BreastAlert(TM).
The Company recognized $375,000 as license fee income in its statement of
operations for the year ended June 30, 1999, that was previously written
off in accordance with the amended licensing agreement. The Company
recorded raw materials and finished goods in the amount of approximately
$859,000, which represents the fair market value of the inventory received.
Equipment with an initial acquisition cost of approximately $2.5 million
has been recorded for approximately $59,000, which represents the cost the
Company paid HumaScan as part of the Agreement.
F-12
<PAGE>
8. LICENSE AGREEMENTS
The Company entered into an exclusive license agreement, dated September
22, 1997, and amended February 18, 1998, with Sandell Corporation 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 BreastCare(TM)/BreastAlert(TM) in Brazil, Venezuela,
Columbia, Costa Rica, Ecuador, Nicaragua, Paraguay, Panama, Peru, Bolivia,
Argentina and Uruguay. The Sandell Agreement was for a term of fourteen
(14) years. Under the Sandell Agreement, Sandell was 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. Upon
execution of the agreement the Company received $100,000. As of June 30,
1999, upon mutual consent of both parties, the Company terminated its
agreement with Sandell. In connection with the termination of the
agreement, the Company wrote off the balance of the $400,000 license fee
due the Company, and approximately $103,000, which represented its
investment in Sandell. The Company will manufacture, market and distribute
the BreastCare(TM)/BreastAlert(TM) throughout the majority of South America
through the Company's South American subsidiaries.
On July 19, 1999, the Company executed a letter of intent with Contrutoro
CEC LTDA ("CEC") and EPIC - Empressa de Participacano, Investmentoe
Consultoria s/c LTDA. ("EPIC") to create a joint venture with exclusive
rights to import, manufacture, market and distribute the
BreastCare(TM)/BreastAlert(TM) in Brazil. After completing its due
diligence, the Company terminated its letter of intent.
On July 14, 1999, the Company granted an exclusive license to NuGard
HealthCare Ltd. ("NuGard"), an Irish Company; to market the Company's
BreastCare(TM)/BreastAlert(TM) in Ireland and the United Kingdom. Pursuant
to the licensing agreement, NuGard will pay a non-refundable licensing fee
of $350,000 by June 30, 2001, of which $59,000 was received as of June 30,
2000, and recorded as income. The purchase price for the
BreastCare(TM)/BreastAlert(TM) will range from $10 to $15 per unit - FOB
US. The license agreement requires minimum purchases of 5,000 units a month
and payments of license fees, which have been postponed until the license
agreements can be renegotiated. The Company also received common shares
equivalent to fifteen (15%) percent of NuGard's total outstanding common
shares. The shares received have no value and nothing has been recorded.
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)/BreastAlert(TM) in Chile and Singapore.
HTI paid the Company a licensing fee of $250,000, which has been recorded
as license fee income. During April 1997, HTI was acquired by D-Lanz
Development Group, Inc. ("D-Lanz"). 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, and the
Company recorded the investment in the shares for $2,000. 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.
F-13
<PAGE>
On April 15, 2000, D-Lanz and the Company entered into an agreement to
amend its previous license agreements. D-Lanz will have a change in control
and the License will be assigned to a new corporation, Global Agri-Med
Technologies, Inc. ("Global"). The Company agreed to assign and transfer
the license to Global, which includes the exclusive license in Chile and
Singapore. In addition, the Company has agreed to give Global non-exclusive
license extensions to Africa, Korea, and South Asia. Global must receive
final clearance from the Company before any participation or distribution
can proceed in any city, state, territory or country in the non exclusive
extensions as stated above.
The Company agreed to not less than 10% of Global's total issued and
outstanding shares, equating to approximately 2,000,000 shares of Global
and $27,500 in cash, which the Company has recorded as income. The payments
extinguishes the Company's right to minimum royalties in any year until the
first full calendar year following the fiscal year in which Global becomes
profitable. The shares will be delivered, prior the establishment of a
trading market for Global shares. The terms in this agreement will be
deemed to amend the prior agreement, and thus will govern the prior
agreement in the terms related to the previous agreement. Both parties have
agreed to update certain terms in the previous agreement that will be
beneficial to both parties. At June 30, 2000, the Company wrote down the
marketable securities to $-0- as there was no quoted market value for the
marketable securities.
F-14
<PAGE>
9. DEBT
Short-term debt at June 30, is as follows:
2000 1999
-------- --------
Unsecured notes, interest
at 10% to 16% per year, due on
various dates through 12/31/00 (1) ..... $830,593 $500,000
Unsecured officer loans, due
7/20/00, interest at prime plus
2% (11.5% at June 30, 2000) (2) ........ 30,000 24,271
-------- --------
$860,593 $524,271
======== ========
Long-term debt at June 30, is as follows:
2000 1999
---------- ----------
Secured note due September 30,
2001, interest at 12% per year.
The loan is secured by production
equipment ........................... $ 850,000 $ 750,000
Unsecured officer loans, due
December 31, 2001 interest
at prime plus 2% (11.5% at
June 30, 2000) (3) .................. 1,166,603 939,003
Unsecured notes, interest at prime
plus 2% (11.5% at June 30, 2000)
due December 31, 2001 (4) ........... 888,006 888,006
---------- ----------
2,904,609 2,577,009
Current portion of long-term
debt ................................ 300,000 --
---------- ----------
$2,604,609 $2,577,009
========== ==========
Annual maturities on long-term debt as of June 30, 2000 during the next
five years are:
Year Ending June 30,
2001 ................. 300,000
2002 ................. 2,604,609
2003 ................. --
2004 ................. --
2005 ................. --
----------
$2,904,609
==========
F-15
<PAGE>
(1) The holders of these notes received as additional consideration 386,250
shares of the Company's common stock. For the year ended June 30, 2000 and
1999 the Company recorded interest and consulting expense in the amount of
$50,184 and $6,250, respectively and for the year ended June 30, 1999
recorded interest expense of $84,375 in connection with this financing.
(2) The unsecured note payable represents loans made to the Company by the
Company's Vice President and Secretary. Interest expense for the year ended
June 30, 2000 and 1999 amounted to $1,223 and $946, respectively. In
consideration for the loan, the Company issued 5,703 shares of the
Company's common stock and recorded additional interest expense in the
amount of $3,208 for the year ended June 30, 2000.
(3) The unsecured note payable represents loans made to the Company by Mr.
Zsigmond Sagi ("Mr. Sagi"), the Company's president and Chief Executive
Officer. Interest expense for the years ended June 30, 2000, 1999 and 1998
amounted to $105,452, $74,348 and $31,906, respectively. Accrued interest
at June 30, 2000 and 1999 was $147,604 and $43,652, respectively. In
consideration for loans, the Company issued 79,250 shares of the Company's
common stock and recorded additional interest expense in the amount of
$32,969 for the year ended June 30, 2000.
(4) The holder of the note was a corporation controlled by Mr. Sagi. 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, former Vice President of Finance International. The note
terms were renegotiated with the lenders with principal payments due
December 31, 2000 and interest at prime plus two (2%) percent. The notes
have been extended to December 31, 2001. Accrued interest at June 30, 2000
and 1999 was $230,880 and $142,080, respectively. Interest expense for the
year, ended June 30, 2000, 1999 and 1998, amounted to $88,800, $88,800 and
$71,040, respectively.
10. INCOME TAXES
At June 30, 2000, the Company had a net operating loss ("NOL") carryforward
of approximately $8,000,000 for financial reporting purposes and
approximately $4,600,000 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 losses 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 2012.
F-16
<PAGE>
A reconciliation of taxes on income at the federal statutory rate to
amounts provided is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax provision (benefit) computed
at the Federal statutory rate ............. $(958,000) $(537,000) $ 223,000
Increase (decrease) in taxes
resulting from:
Utilization of Federal net
operating loss carryforward ........... -- -- (223,000)
Effect of unused tax losses ................. 958,000 537,000 --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
2000 1999
-------------------------- --------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net operating
loss carry-
forward ................................... $(5,729,000) $(2,292,000) $(3,180,000) $(1,272,000)
Deferred start-
up expenses ............................... (2,229,000) (892,000) (2,051,000) (820,000)
Unrealized (losses)
on marketable
securities ................................ (281,000) (112,000) (166,000) (66,000)
Valuation
allowance ................................. 8,239,000 3,296,000 5,397,000 2,158,000
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
11. SEGMENTS - GEOGRAPHIC AREAS
The Company does not have reportable operating segments as defined in the
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information". The method for
attributing revenues to individual countries is based on the destination to
which finished goods are shipped. The Company operates facilities in the
United States and South America.
F-17
<PAGE>
One hundred (100%) percent of the sales ($127,775) of the
BreastCare(TM)/BreastAlert(TM) for the year ended June 30, 1999 were to the
Company's South American licensee, Sandell Corporation S.A. ("Sandell"), a
related party, in which the Company owns 35% of the outstanding shares.
Sales of the BreastCare(TM)/BreastAlert(TM) are not recorded by the Company
until Sandell ships the BreastCare(TM)/BreastAlert(TM) to unrelated
entities. Revenues include license fees received by the Company in
connection with various arrangements contracted throughout the world. As of
June 30, 1999 the Company has terminated its license agreement with
Sandell. See Note 7 of Notes to Consolidated Financial Statements for
further information.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from unrelated entities
and countries of Company's domicile:
United States .................... $ 59,420 $ 727,500 $ 1,801,582
South America .................... 24,000 127,775 --
Ireland .......................... 5,355 -- --
----------- ----------- -----------
$ 88,775 $ 855,275 $ 1,801,582
=========== =========== ===========
Total Revenues:
United States .................... $ 59,420 $ 832,936 $ 1,801,582
South America .................... 24,000 127,775 --
Ireland .......................... 5,355 -- --
Less: intergeographic revenue ........ -- (75,436) --
----------- ----------- -----------
$ 88,775 $ 855,275 $ 1,801,582
=========== =========== ===========
Loss from operations:
United States .................... $(1,880,632) $ (952,368) $ 405,871
South America .................... (553,954) (243,122) (4,092)
----------- ----------- -----------
$(2,434,586) $(1,195,490) $ 401,779
=========== =========== ===========
Assets:
United States .................... $ 3,125,614 $ 3,645,404 $ 5,212,438
South America .................... 118,599 127,883 18,360
Less: intergeographic eliminations ... (887,564) (411,263) (22,451)
----------- ----------- -----------
$ 2,426,649 $ 3,362,024 $ 5,208,347
=========== =========== ===========
Capital Expenditures:
United States .................... $ -- $ 1,202,980 447,203
South America .................... 43,500 -- --
----------- ----------- -----------
$ 43,500 $ 1,202,980 $ 447,203
=========== =========== ===========
Depreciation and amortization expense:
United States .................... $ 367,065 $ 288,655 $ 84,220
South America .................... -- -- --
----------- ----------- -----------
$ 367,065 $ 288,655 $ 84,220
=========== =========== ===========
</TABLE>
F-18
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENTS - GEOGRAPHIC AREAS (Continued)
Transfers between geographic areas include raw materials manufactured in
the United States which are shipped to South America to be manufactured
into finished products. Loss from operations represents total revenue less
operating expenses.
Identifiable assets are those assets of the Company that are identified
with the operation of each geographic area.
12. STOCK-BASED COMPENSATION
On April 14, 2000, the Company issued 238,170 shares of the Company's
common stock to three (3) consultants for services rendered to the Company
in the amount of $88,438 for the year ended June 30, 2000.
13. STOCK OPTIONS AND WARRANTS
The Company has adopted the disclosure-only provisions of the 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 issuance
of stock options and warrants been determined based on the fair value at
the grant date for awards in fiscal years ended 2000 and 1999, consistent
with the provision of SFAS No. 123, the Company's net loss and net loss per
share would have increased to the pro-forma amounts indicated below:
June 30,
-------------------------------
2000 1999
------------ ------------
Net (loss) - as reported ..... $ (2,816,465) $ (1,579,568)
Net (loss) - pro-forma ....... (3,260,223) (1,722,680)
Loss per share - basic
- as reported .............. $(.15) $(.09)
- pro-forma ................ $(.18) $(.10)
Loss per share - diluted
- as reported .............. $(.15) $(.09)
Loss per share - diluted
- pro-forma ................. $(.18) $(.10)
F-19
<PAGE>
13. STOCK OPTIONS AND WARRANTS (Continued)
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 2000 and 1999, for both years:
dividend yield of 0%, expected volatility of 145% to 161%, risk free
interest rate of 5.0% and expected lives of 2 1/2 years.
The Company has granted 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,
2000.
(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,
2000.
(c) The following options and warrants were granted outside the two March
7, 1995 Plans during the year ending June 30, 2000:
On December 30, 1999 the Company granted warrants to purchase 190,000
shares of the Company's common stock at an exercise price of $.07 per
share, the fair value at the date of grant, to the Company's attorneys, for
legal services, which were charged to general and administrative expenses,
in the amount of $9,728. The warrants are exercisable immediately and
expire December 29, 2004.
On December 30, 1999, the Company granted options to purchase up to
5,428,571 shares of the Company's common stock at an option price of $.07
per share, the fair value at the date of grant, for the conversion of
accrued salaries to the Company's President and Chief Executive Officer.
The options are exercisable immediately and expires December 29, 2004.
On December 30, 1999, the Company granted options to purchase up to
1,428,572 shares of the Company's common stock at an option price of $.07
per share, the fair value at the date of grant, for the conversion of
accrued salaries to the Company's Vice President and Secretary. The options
are exercisable immediately and expires December 29, 2004.
On December 30, 1999, the Company granted warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $.07 per
share, the fair value at the date of grant, to consultants for financial
consulting services rendered, which was charged to general and
administrative expense, in the amount of $5,120. The warrants are
exercisable immediately and expires December 29, 2004.
F-20
<PAGE>
13. STOCK OPTIONS AND WARRANTS (Continued)
On December 30, 1999, the Company granted warrants to purchase 600,000
shares of the Company's common stock at an exercise price of $.07 per
share, the fair value at the date of grant, to the Company's President and
Chief Executive Officer. The warrants are exercisable immediately and
expire December 29, 2004.
On December 30, 1999, the Company granted warrants to purchase 340,000
shares of the Company's common stock at an exercise price of $.07, the fair
value at the date of grant, to the Company's Vice-President and Secretary.
The warrants are exercisable immediately and expire December 29, 2004.
On December 30, 1999, the Company granted options to three directors
totaling 40,000 shares each (120,000 shares) of the Company's common stock
at an exercise price of $.07, the fair value at the date of grant. The
options are exercisable immediately and expire December 29, 2004.
On December 30, 1999, the Company granted warrants to purchase 750,000
shares of the Company's common stock at an exercise price of $.07, the fair
value at the date of the grant, to employees of the Company. The warrants
are exercisable immediately and expire December 29, 2004.
On May 14, 1999, the Company granted 4,375,027 options to officers and
employees to purchase the Company's common stock at an exercise price of
$.21875 per share, the fair value at the date of grant. The options are
exercisable immediately and expire May 14, 2004.
On December 14, 1998 the Company granted warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $.1875 per
share, the fair value at the date of grant, to consultants in exchange for
professional services rendered which were charged to general and
administrative expense, in the amount of $3,981. The warrants are
exercisable immediately and expire November 30, 2003.
On August 5, 1998, the Company granted options to two directors totaling
40,000 shares each (80,000 shares) of the Company's common stock at an
option price of $.5625 per share, the fair value at the date of grant. The
options are exercisable immediately and expire August 5, 2003.
During the year ended June 30, 1998, the Company granted 400,000 warrants
to purchase the Company's common stock at exercise prices ranging from $.55
to $1.125, the fair value on the date of grant, to consultants for services
rendered, which were charged to general and administrative expenses, in the
amount of $27,780. The warrants are exercisable immediately and expire on
dates ranging from July 31, 2000 to January 26, 2003.
On January 26, 1998, the Company granted options to officers of the Company
to purchase a total of 450,000 shares of the Company's common stock at an
exercise price of $.55 per share, the fair value at the date of grant. The
options are exercisable immediately and expire January 25, 2003.
F-21
<PAGE>
Information regarding the Company's Stock Option Plan and Warrants, for
fiscal years ended 2000, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercised Exercised Exercised
Shares Price Shares Price Shares Price
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options and warrants outstanding
beginning of year ............... 6,418,205 $.28 2,013,178 $.54 1,163,178 $.49
Options and warrants exercised .... -- -- -- -- -- --
Options and warrants granted ..... 8,957,143 .07 4,555,027 .22 850,000 .60
Options and warrants expired ...... (973,198) .48 (150,000) .63 -- --
---------- ---- --------- ---- --------- ----
Options and warrants outstanding,
end of year ..................... 14,402,170 $.15 6,418,205 $.28 2,013,178 $.54
========== ==== ========= ==== ========= ====
Option and warrants price range
at end of year .................. $ .07 $.19 to $.56 $.38 to $1.125
Option and warrants price range
for exercised shares ............ -- -- --
Options and warrants available
for grant ....................... 1,000,000 1,000,000 1,000,000
</TABLE>
F-22
<PAGE>
The weighted exercise price and weighted fair value of options and warrants
granted by the Company for the fiscal years ended 2000, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Exercised Fair Exercised Fair Exercised Fair
Price Value Price Value Price Value
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
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 $ .07 $ .05 $ .22 $ .14 $ .56 $ .38
</TABLE>
The following table summarizes information about fixed-price stock options
and warrants outstanding at June 30, 2000:
<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 1999 Life Price 1999 Price
----------------- ------------ ----------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
$ .07 8,957,143 4.5 years $ .07 8,957,143 $ .07
$ .19 to $.38 4,515,027 3.8 years $ .22 4,515,000 $ .22
$ .55 to $1.13 930,000 2.6 years $ .60 930,000 $ .60
---------- -----------
14,402,170 14,402,170
========== ==========
</TABLE>
F-23
<PAGE>
14. RELATED PARTY TRANSACTIONS
a) On December 1, 1998 the Company issued 200,000 and 150,000 shares of the
Company's common stock to Mr. Sagi and the Company's Vice
President/Secretary, respectively, in consideration for deferring their
current year salaries. In connection with the transaction the Company
recorded a compensation expense in the amount of $65,625 for the year
ending June 30, 1999.
b) 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 8 of Notes to Consolidated Financial Statements for further
information. The principal amount of the note at June 30, 2000 and 1999 was
$177,601 for Mr. Sagi and Mr. Civelli. Interest expense for the year ended
June 30, 2000, 1999 and 1998 was $17,760, $17,760 and $14,208 each, for Mr.
Sagi and Mr. Civelli. As of June 30, 2000 and 1999 accrued interest in the
amount of $46,176 and $28,416 was due Mr. Sagi and Mr. Civelli.
c) On November 16, 1998, the Company sold a total of 300,000 shares of the
Company's common stock to a Director of the Company and an officer of the
Company. The Company received $100,000 net proceeds from the sale.
d) On July 1, 1999, the Company issued 79,250 and 5,703 shares of the
Company's common stock to Mr. Sagi and the Company's Vice-President and
Secretary, respectively, in consideration for loan financing for
operations. In connection with the transaction the Company recorded accrued
interest expense in the amount of $36,177 for the year ending June 30,
2000.
e) On July 1, 1999, December 30, 1999 and March 8, 2000, the Company issued
a total of 7,500 shares of the Company's common stock to a Company director
in consideration for loan financing for operations. In connection with the
transaction the Company recorded accrued interest expense in the amount of
$2,419 for the year ending June 30, 2000.
f) On July 7, 1999, the Company issued 50,000 shares of the Company's
common stock to a former director of the Company as part of his employment
agreement. In connection with the transaction the Company recorded
compensation expense in the amount of $9,375 for the year ending June 30,
2000.
g) On July 7, 1999, the Company sold 45,767 shares of the Company's common
stock to an officer and director of the Company. The Company received
$10,000 net proceeds from the sale. On April 14, 2000, the Company also
issued 35,200 shares of the Company's common stock to the same officer and
director in exchange for consulting services worth $8,800.
F-24
<PAGE>
14. RELATED PARTY TRANSACTIONS (Continued)
h) The Company and Zigmed Corporation ("Zigmed") have entered into various
agreements. Zigmed is owned and controlled by two sons of Mr. Sagi, who,
prior to 1990, owned Zigmed. The Company has contracted with Zigmed to
manufacture its sensor production equipment needed for its production
centers. The Company sublets warehouse space to Zigmed for $1,970 per month
and received $23,640 and $20,000 as rental income from Zigmed for the years
ended June 30, 2000 and 1999. The Company has also contracted with Zigmed
for the production of the BreastCare(TM)/BreastAlert(TM) sensors. Zigmed
provided material, labor and product testing services of $74,430 and
$42,109 for the years ended June 30, 2000 and 1999. The Company owes Zigmed
approximately $63,000 and $17,000 as of June 30, 2000 and 1999 for labor.
See Note 13 of Notes to Consolidated Financial Statements for further
information.
15. 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 and
amended its lease on April 15, 1999 to include an additional 6,000 square
feet adjacent to its corporate headquarters. The lease has been extended
through June 30, 2001. The Company also rents warehouse space in Uruguay,
on a month to month basis, costing approximately $1,350 a month and office
space in Brazil, on a month to month basis, costing approximately $350 a
month.
Future minimum lease payments for operating leases are as follows:
Years Ending June 30,
---------------------
2001 ..................... 119,600
2002 ..................... --
2003 ..................... --
2004 ..................... --
Thereafter ............... --
--------
$119,600
========
Rent expense for the years ended June 30, 2000, 1999 and 1998 was
approximately $104,000, $86,000 and $68,000, respectively.
Employment Agreements
The Company has entered into employment contracts 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.
F-25
<PAGE>
Production Agreements
The Company intends to construct strategic regional production centers
throughout the world to manufacture, assemble and market the
BreastCare(TM)/BreastAlert(TM). The Company has entered into an amended
agreement with Zigmed pursuant to which Zigmed will manufacture the sensor
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. As of June 30, 2000, the Company has
advanced Zigmed $1,068,304. See Note 4 of Notes to Consolidated Financial
Statements.
The Company's Brazilian subsidiary has signed an agreement to construct a
2,550 square meter manufacturing facility in Recife, Pernambuco - Brazil at
the new port of Suape. The Company has broken ground and anticipates
construction to be completed by the first half of calendar 2001. The
Company's Brazilian subsidiary purchased the land for $43,500 and
anticipates the building cost to approximate $1,000,000.
Financial Agreements
On May 11, 2000 the Company's Brazilian subsidiary received final approval
to participate in the Sudene Program, a federal program organized to
develop the Northeast area of Brazil. Scantek do Brasil Ltda was approved
to receive funding of approximately $3 million in the Sudene federal
program under Finor Article 9. Final documentation has been submitted to
Sudene in October,2000. Funding is anticipated to be received within 60 to
90 days. The terms of the agreement include a repayment of $1,000,000 over
seven years. The funding is secured by 10% of the outstanding shares of the
Brazilian subsidiary and various renegotiated terms to be completed by the
Company.
16. SUBSEQUENT EVENT
On September 30, 2000, the Company and its Brazilian subsidiary executed an
agreement with a Brazilian investment group. Scantek Medical Inc. will
sell 36% of its equity in Scantek Medical do Brasil Ltda for two million
($2,000,000) dollars to the Brazilian investment group.
The new partner will play a major roll in expediting the Brazilian
operations, including the construction of the new manufacturing facility,
expanding Scantek Medical do Brasil Ltda's operations, marketing and sales.
The $2,000,000 will be funded in various stages and milestones until the
Sudene Federal Funding from the government is completed.
In connection with the agreement, the Brazilian investment group purchased
750,000 shares of Scantek Medical Inc. common stock for $350,000. The
Company has guaranteed to redeem these shares within twelve months at a
price of not less than $350,000. If the total market value at the time of
redemption is greater than $350,000 the Company will guarantee the $350,000
plus fifty (50%) percent of the profit generated.
F-26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table and biographical outlines set forth the directors, and
officers within the Company, positions 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 Age Business Experience
---- --- -------------------
Zsigmond L. Sagi, Ph.D. 67 President, Chairman of
the Board, and Chief
Executive Officer
Patricia B. Furness 53 Vice President, Corporate
Secretary and Director
Maurice Siegel, Ph.D. 70 Vice President of
Research and
Development and Director
Louis Gottlieb 72 Vice President of
Corporate Development
Paul Nelson 70 Director
-33-
<PAGE>
ZSIGMOND L. SAGI, PH.D., has served as President, Chairman of the Board,
Chief Executive Officer and Chief Scientist of the Company since October, 1991.
Mr. Sagi has over 30 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)/BreastAlert(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 master's in mechanical engineering in 1954 and his doctorate in Physics in
1956 from the Technical University of Hungary.
PATRICIA B. FURNESS, has served as the Vice President, Secretary and
Director of the Company since 1991. In addition to managing marketing and public
relations for the Company, Ms. Furness is also responsible for coordinating
product and business information to the medical and financial community and for
coordinating clinical 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 University in Boone, North Carolina in 1969 and graduate
course study in Human Relations.
MAURICE SIEGEL, PH.D., has served as the Company's Vice President of
Research and Development since 1991 and as a Director of the Company since
August, 1997. Since 1989, Mr. Siegel served in the same capacity with Scantek
Medical Corp., the Company's predecessor. From 1980 to 1984, Mr. Siegel was
responsible for the continuing research and development of the
BreastCare(TM)/BreastAlert(TM). He supervised the analytical and manufacturing
operation and was involved in the process of receiving FDA medical device
approval for the BreastCare(TM)/BreastAlert(TM)for sale to the professional
market. Mr. Siegel 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 been self employed and 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.
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, Mr. Gottlieb was Treasurer and a board member of South Shore
Association for Independent Living. Since 1973 he has served as 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.
-34-
<PAGE>
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, whereby he served
as President and a Director of such company; Mr. Nelson has since sold his
ownership in such company. Mr. Nelson received a Bachelor of Science Degree from
the University of North Carolina in Chapel Hill, North Carolina.
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, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The following sets forth, for the fiscal years ended June 30, 2000, 1999
and 1998, the annual and long-term compensation paid or accrued of the Company's
named officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation Awards
Securities
Name and Annual Compensation Underlying
Principal Position Year Salary Bonus Other Options/SARs (#) Compensation
------------------ ---- ------ ----- ----- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Zsigmond L. Sagi ............ 2000 $190,000 $ $-- 6,028,571 $--
President, Chairman ......... 1999 190,000 $ 37,500 $-- 2,847,900 $--
of the Board, Chief ......... 1998 190,000 -- $-- 300,000 $--
Executive Officer
Patricia Furness ............ 2000 90,000 -- $-- 1,768,572 $--
Vice President .............. 1999 90,000 28,125 $-- 1,427,127 $--
Secretary and ............... 1998 90,000 -- $-- 150,000 $--
</TABLE>
EMPLOYMENT AGREEMENTS
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, incentive bonus plans and severance benefits.
Mr. Furness's base salary was increased to $90,000 effective July 1997.
In December 1998, the Company issued 200,000 and 150,000 shares of the
Company's common stock to Mr. Sagi and Ms. Furness for deferring their current
year salaries.
-35-
<PAGE>
The following table contains information regarding the grant of stock
options during the year ended June 30, 2000 to the named Executive Officers.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable
Percent Value at Assumed
Number of of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to Exercise or For Option Term (3)
Options/SARs Employees Base Price Expiration ---------------------
Name Granted (#) in 2000 ($/sh.) Date 5% ($) 10% ($)
---- ----------- ------- ------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Zsigmond
L. Sagi (1) ......... 6,028,571 67.3% $.07 12/29/2004 84,400 168,880
Patricia
Furness (2) ......... 1,768,572 19.7% $.07 12/29/2004 24,760 49,520
</TABLE>
(1) On December 30, 1999 the Company issued 5,428,571 options to purchase the
Company's common stock to Mr. Sagi for accrued salaries. An additional 600,000
options were issued as a bonus for deferring salary.
(2) On December 30, 1999 the Company issued 1,428,572 options to purchase the
Company's common stock to Ms. Furness for accrued salaries. An additional
340,000 options were issued as a bonus for deferring salary.
(3) Amounts represent hypothetical gains that could be achieved if the listed
options were exercised at the end of the option term. These gains are based on
assumed rates of stock price appreciation of 5% and 10% compounded annually from
the date the options were granted to their expiration date, based upon fair
market value of the Common Stock as of the date the options were granted. Actual
gains, if any, on stock option exercises and stock holdings are dependent upon
the future performance of the Company and overall financial market conditions.
There can be no assurance that amounts reflected in this table will be achieved.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information regarding stock options
exercised by the Named Officers during the year ended June 30, 2000, including
the aggregate value of gains on the date of exercise. In addition, the following
table provides data regarding the number of shares covered by both exercisable
and non-exercisable stock options at June 30, 2000. Also reported are the values
for "in-the-money" options, which represent the positive spread between the
exercise price of existing options and either $.75 the closing sale price of the
Company's common stock on June 30, 2000.
-36-
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Realized
Value
(Market) Number of Value of
Price Securities Unexercised
Common on Underlying Unexercised In-The-Money
Shares Exercise Options/SARs at Year Options/SARs at Year
Acquired Date Less End # End $
on Exercise ------------------ -------------
Name Exercise # Price ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C>
Zsigmond
L. Sagi ............... 9,176,471 -- 9,176,471 -- 6,882,353 --
Patricia
Furness ............... 3,345,699 -- 3,345,699 -- 2,509,274 --
</TABLE>
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.
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<PAGE>
<TABLE>
<CAPTION>
------------------------------ ---------------------------- --------------------------- ----------------
TITLE OF CLASS NAME & ADDRESS OF AMOUNT & NATURE OF PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIAL OWNER
------------------------------ ---------------------------- --------------------------- ----------------
<S> <C> <C> <C>
Common Stock Zsigmond L. Sagi 14,468,188 51.7%
19 Lockley Court
Mountain Lakes, NJ 07046 (2), (3), (4), (5), (6)
------------------------------ ---------------------------- --------------------------- ----------------
Common Stock 361 Acquisition Corp. 2,121,250 11.3%
885 W. Georgia St.
Suite 1200
Vancouver, BC (7)
Canada V6L 3E8
------------------------------ ---------------------------- --------------------------- ----------------
Common Stock Patricia B. Furness 4,427,153 19.9%
25 Beechway Road
Mountain Lakes, NJ 07046 (8), (9), (10), (11)
------------------------------ ---------------------------- --------------------------- ----------------
Common Stock Louis Gottlieb 526,250 2.8%
20 N. Central Avenue
Valley Stream, NY 11580 (15)
------------------------------ ---------------------------- --------------------------- ----------------
Common Stock Paul Nelson 189,500 .01%
69 Lookout Road
Mountain Lakes, NJ 07046 (12) (16)
------------------------------ ---------------------------- --------------------------- ----------------
Common Stock Maurice L. Siegel 155,767 .01%
560 W. 43rd Street
New York, NY 10036 (13), (14)
------------------------------ ---------------------------- --------------------------- ----------------
Common Stock All Directors & Officers 19,766,858 61.2%
as a Group (consisting of
5 persons)
------------------------------ ---------------------------- --------------------------- ----------------
</TABLE>
(1) There were 19,639,690 shares of Common Stock outstanding as of September 30,
2000.
(2) Includes 200,000 shares of the Company's Common Stock issued on December 1,
1998 to Mr. Sagi for deferring annual salary.
(3) Includes 2,847,900 shares issuable to Mr. Sagi upon the exercise of options
granted on May 14, 1999 for the conversion of accrued salary; 5,428,571 shares
issuable to Mr. Sagi upon the exercise of options granted on December 30, 1998
for the conversion of accrued salary; 900,000 shares issuable to
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<PAGE>
Mr. Sagi upon the exercise of options granted in January 1998 and December 1999
for deferring accrued salary.
(4) Includes 535,785 shares received upon the dissolution of SMC Corp. (See
"Certain Relationships and Related Transactions").
(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 79,250 shares issued to Mr. Sagi on July 1, 1999 and 67,900 shares
issued on August 1, 2000 in connection with financing for the Company.
(7) 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").
(8) Includes 10,000 shares owned by Ms. Furness' children, as to which Ms.
Furness disclaims beneficial ownership.
(9) Includes 150,000 shares of the Company's Common Stock issued to Ms. Furness
for deferring annual salary.
(10) Includes 1,427,127 shares issuable to Ms. Furness upon the exercise of
options granted on May 14, 1999 for the conversion of accrued salary; 1,428,572
shares issuable to Ms. Furness upon the exercise of options granted on December
30, 1999 for the conversion of accrued salary; 490,000 shares issuable to Ms.
Furness upon the exercise of stock options granted in January 1998 and December
1999 for deferring annual salaries; 40,000 shares issuable to Ms. Furness upon
the exercise of options granted in August 1996.
(11) Includes 5,703 shares issued to Ms. Furness on July 1, 1999 and 8,750
shares issued on August 1, 2000 in connection with financing for the Company.
(12) Includes 40,000 shares issuable to Mr. Nelson upon the exercise of options
granted on December 30, 1999.
(13) Includes 80,000 shares of the Company's Common Stock, issuable upon the
exercise of options granted on August 5, 1998 and December 30, 1999 to Mr.
Siegel.
(14) Includes 35,200 shares issued to Mr. Siegel, in connection with financing
for the Company.
(15) Includes 290,000 shares of the Company's Common Stock issued to Louis and
Ruth Gottlieb, in connection with financing for the Company.
(16) Includes 2,500 shares issued to Mr. Nelson in connection with financing for
the Company.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) On December 1, 1998, the Company issued 200,000 and 150,000 shares of
the Company's common stock to Mr. Zsigmond Sagi, the Company's President
and Chief Executive Officer and Ms. Patricia Furness, the Company's Vice
President/Corporate Secretary, respectively, in consideration for deferring
their current year salaries. In connection with this transaction, the
Company recorded compensation expense in the amount of $65,625 for the year
ended June 30, 1999.
(b) The Company and SMC Corp. entered into various agreements with an
investment banking firm ("361 Acquisition Corp.") 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. On March 31, 1998,
SMC Corp. dissolved and distributed the note receivable of $888,006 from
the Company to its five shareholders in equal amounts of $177,601,
including Mr. Sagi (the Company's President and Chief Executive Officer),
Carlo Civelli (former Vice President of Finance International of the
Company), Kilham Management, Malir Enterprises Corp., and Zurow Investment
S.A. The note terms were renegotiated with the lenders with principal
payments due September 30, 1999 and interest at prime plus two (2%)
percent. As of June 30, 2000, accrued interest in the amount of $147,601
was due Mr. Sagi. The notes have been extended to December 31, 2001.
(c) On November 16, 1998, the Company sold 150,000 shares of the Company's
common stock to Kenneth Courey, a former Director of the Company and to
Louis Gottlieb, Vice President of Corporate Development; the Company
received $100,000 net proceeds from the sale.
(d) The Company intends to construct regional production centers throughout
the world to manufacture, assemble and market the
BreastCare(TM)/BreastAlert(TM). Accordingly, the Company entered into an
agreement dated August 25, 1996, as amended, with Zigmed, Inc. ("Zigmed"),
a company owned by the two sons of Mr. Zsigmond Sagi; Zigmed, Inc. was
owned by Mr. Sagi prior to 1990. Pursuant to such agreement, Zigmed agreed
to manufacture the sensor production equipment for such 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, 2000, the
Company has advanced Zigmed $1,068,304.
(e) The Company and Zigmed have entered into various agreements. The
Company sublets warehouse space to Zigmed for $1,970 per month and received
$23,640 and $20,000 as rental income from Zigmed for the years ended June
30, 2000 and 1999. The Company has also contracted with Zigmed for the
production of the BreastCare(TM)/BreatAlert(TM) sensors. Zigmed provided
material, labor and product testing services of $74,430 and $42,109 for the
years ended June 30, 2000 and 1999. The Company owes Zigmed approximately
$63,000 and $17,000 as of June 30, 2000 and 1999 for labor. See Note 14 of
Notes to Consolidated Financial Statements for further information.
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<PAGE>
(f) The Company has borrowed funds from Mr. Zsigmond Sagi, the Company's
President and Chief Executive Officer. The promissory note to Mr. Sagi
bears interest at prime plus two (2%) percent, 10% at June 30, 2000, and is
payable on December 31, 2001. The principal amount of the note is
$1,166,603 at June 30, 2000. Subsequent to the balance sheet date, Mr. Sagi
advanced an additional $120,500. Interest expense for the year ended June
30, 2000 was $138,421.
(g) On July 1, 1999 the Company issued 5,703 shares of the Company's common
stock to the Company's Vice-President/Corporate Secretary, in consideration
for loan financing for operations. In connection with the transaction the
Company recorded interest expense in the amount of $3,208 for the year
ending June 30, 2000.
(h) On July 1, 1999, December 30, 1999 and March 8, 2000, the Company
issued a total of 7,500 shares of the Company's common stock to a Company
director in consideration for loan financing for operations. In connection
with the transaction the Company recorded interest expense in the amount of
$2,419 for the year ending June 30, 2000.
(i) On July 7, 1999, the Company issued 50,000 shares of the Company's
common stock to a former director of the Company as part of his employment
agreement. In connection with the transaction the Company recorded
compensation expense in the amount of $9,375 for the year ending June 30,
2000.
(j) On July 7, 1999, the Company sold 45,767 shares of the Company's common
stock to an officer and director of the Company. The Company received
$10,000 net proceeds from the sale. On April 14, 2000, the Company also
issued 35,200 shares of the Company's common stock to the same officer and
director in exchange for consulting services worth $8,800.
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<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements and supplementary financial
information are filed as part of this Annual Report on Form 10-KSB:
Page
----
1. Financial Documents:
Independent Auditors' Report ......................... F-1
Consolidated Balance Sheets, June 30,
2000 and 1999 ........................................ F-3
Consolidated Statements of Operations,
Years Ended June 30, 2000, 1999 and 1998 ............. F-4
Consolidated Statements of Stockholders'
Equity, Years Ended June 30, 2000, 1999 and 1998 ..... F-5
Consolidated Statements of Cash Flows,
Years Ended June 30, 2000, 1999 and 1998 ............. F-6 - F-7
Notes to Consolidated Financial
Statements ........................................... F-8 - F-26
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<PAGE>
2. Financial Statement Schedules:
All schedules are omitted because they are inapplicable, not required or
the information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K:
There were no reports on Form 8-K during the quarter ended
June 30, 2000.
(c) The following Exhibit Index sets forth the applicable exhibits
(numbered in accordance with Item 601 of Regulation S-B) which are required to
be filed with this Annual Report on Form 10-KSB.
Exhibit
Number Title
------- -------
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 ended 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.
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.
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<PAGE>
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 ended 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 ended 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.
10.13 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.
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<PAGE>
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 ended 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 ended 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 ended June 30, 1997.
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 ended June 30, 1997.
10.24 Amendment to Licensing Agreement between HumaScan, Inc. and Scantek
Medical Inc. dated May 15, 1998 -- Incorporated by Reference to Exhibit
10.1 of the Company's Form 8-K filed May 27, 1998.
10.25 Amendment to Licensing Agreement with Scantek Medical, Inc. and Sandell
Corp. S.A. dated February 18, 1998 -- Incorporated by Reference to
Exhibit 10.25 of the Company's Form 10-KSB for the year ended June 30,
1998.
10.26 Settlement Agreement between Scantek Medical, Inc and HumaScan, Inc.
dated March 11, 1999 -- Incorporated by reference to Exhibit 10.1 of the
Company's Form 8-K filed April 2, 1999.
10.27 Amendment to Lease Agreement between Scantek Medical, Inc. and Pablito,
L.L.C. dated April 15, 1999--Incorporated by reference to Exhibit 10.27
of the Company's Form 10-KSB for the year ended June 30, 1999.
10.28 Distribution Agreement with Scantek Medical, Inc. and Nugard HealthCare
Ltd. dated July 14, 1999. --Incorporated by reference to Exhibit 10.28
of the Company's Form 10-KSB for the year ended June 30, 1999.
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<PAGE>
10.29* A Business Implantation Agreement with Scantek Medical S.A. and the
Government of Pernambuco dated November 19, 1999.
10.30* Consulting Agreement with Scantek Medical Inc. and Multiconsulteria S/C
LTDA dated November 1999.
10.31* Letter of Approval for funding with Scantek Medical Inc./Scantek Medical
do Brasil Ltda and North East Brazil Federal Program of Sudene Finor
Article 9 dated May 11, 2000.
10.32* Letter of Intent Agreement with Scantek Medical Inc. and Scantek
Medical do Brasil Ltda and Instituto Materno Infantil de Pernambuco
dated May 31, 2000.
10.33* Suape Land Purchase Agreement with Scantek Medical do Brasil Ltda and
the State of Pernambuco dated May 25, 2000.
10.34* Letter of Commitment for BreastCare(TM) usage and purchase order with
Scantek Medical do Brasil Ltda and Unimed Recife-Cooperativa de Trabalho
Medico dated June 1, 2000.
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.
21 Subsidiaries of the Registrant: (i) Scantek Medical S.A., Inc.,
incorporated in Uruguay; and (ii) Scantek Medical do Brasil, LTDA,
incorporated in Brazil.
27 Financial Data Schedule.
99.1 Reinstatement of Patent No. RE.4,624,264 United States, Extension to
November 25, 2003, dated August 12, 1997 -- Incorporated by reference of
the Company's Form 10-KSB for the year ended June 30, 1998.
------------
* These exhibits are in Portuguese. A translation will be filed as an
amendment to this form 10KSB.
-46-
<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: October 12, 2000
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<PAGE>
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,
Chief Executive Officer
and Director
/s/ PATRICIA B. FURNESS
---------------------------------
Patricia B. Furness
Vice President, Corporate Secretary
and Director
/s/ PAUL NELSON
---------------------------------
Paul Nelson
Director
/s/ MAURICE SIEGEL
---------------------------------
Maurice Siegel
Vice-President and Director
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