UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-08149
SCANNER TECHNOLOGIES CORPORATION
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(Name of small business issuer in its charter)
New Mexico 85-0169650
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14505 21st Avenue North, Suite 220, Minneapolis, MN 55447
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(Address of principal executive offices, Zip code)
(763) 476-8271
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(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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. [X]
The issuer's revenues for its most recent fiscal year were $1,241,215.
The aggregate market value of the voting stock held by non-affiliates of the
Company at March 12, 2003, was $7,864,578, assuming that all executive officers,
directors and 10% shareholders known to the registrant are affiliates.
The Registrant had 10,041,459 shares of Common Stock, no par value, outstanding
as of March 12, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Traditional Small Business Disclosure Format (Check one) [ ] Yes [X] No
SCANNER TECHNOLOGIES CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
Page No.
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PART I.
Item 1. Description of Business. 3
Item 2. Description of Property. 7
Item 3. Legal Proceedings. 7
Item 4. Submission of Matters to a Vote of Security Holders. 7
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters. 8
Item 6. Management's Discussion and Analysis or Plan of Operation. 8
Item 7. Financial Statements. 13
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure. 13
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 14
Item 10. Executive Compensation. 15
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. 17
Item 12. Certain Relationships and Related Transactions. 18
Item 13. Exhibits and Reports on Form 8-K. 18
Item 14. Controls and Procedures. 18
SIGNATURES 19
CERTIFICATION 20
FINANCIAL STATEMENTS F-1
EXHIBITS
2
INTRODUCTORY STATEMENT
This Annual Report on Form 10-KSB includes forward-looking statements within the
meaning of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
These statements are based on our beliefs and assumptions and on information
currently available to us. Forward-looking statements include, among others, the
information concerning possible or assumed future results of operations of
Scanner Technologies Corporation and its subsidiary set forth under the heading
"Management's Discussion and Analysis or Plan of Operation." Forward-looking
statements also include statements in which words such as "may," "will,"
"should," "could," "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "predict," "potential," or similar expressions are used.
Forward-looking statements are not guarantees of future performance. Our future
results and shareholder values may differ materially from those expressed in
these forward-looking statements. We caution you not to put undue reliance on
any forward-looking statements included in this document.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL BUSINESS DEVELOPMENT
Scanner, f/k/a Southwest Capital Corporation ("Southwest Capital"), was
incorporated in 1964 under the laws of New Mexico. Originally formed to provide
financial services to small businesses, the Company divested itself of such
operations in 1990 and did not operate any business from 1992 until July 2002
when it merged with Scanner Technologies Corporation, a privately held Minnesota
corporation that had been formed in 1990 for the purpose of inventing,
developing and marketing vision inspection solutions for the semiconductor
industry. The Company is the legal entity surviving such merger; it changed its
name to "Scanner Technologies Corporation" and has continued to operate the
business of the private corporation.
The Company's principal offices are located at 14505 21st Ave. N., #220, in
Minneapolis, Minnesota. Outside of the U.S., Scanner has offices in Geneva,
Switzerland, and in Singapore, primarily engaged in sales of Scanner products.
To comply with local laws, the office in Singapore is operated by Scanner's
wholly-owned subsidiary, Scanner Technologies Corporation International, a
Minnesota corporation.
INDUSTRY
Scanner invents, develops and markets vision inspection devices that are used in
the semiconductor industry for the inspection of integrated circuits.
Integrated circuits can be divided into two general categories:
Leaded devices: These are integrated circuits with fragile leads
extending from the perimeter of the package that provide the electrical
interconnects between the integrated circuit and the other components
that constitute an electronic product.
Ball array devices: These are integrated circuits that have an array of
small conductive spheres, or balls, mounted to the bottom of the
integrated circuit package. These balls serve the same function as the
leads in the first category.
Integrated circuits are designed to be assembled to circuit substrates or
printed circuit boards which are key components of familiar products such as
personal computers, cell phones, TV's, automotive electronics, games, toys, DVD
and CD players, satellites and avionics to name a few. Each and every lead or
ball must be accurately placed as defined by the integrated circuit package
specification to insure a
3
reliable interface between the lead/ball and the circuit substrate. Any
misalignment, due to bent leads, imperfectly placed or damaged balls, or missing
balls will result in a defective product.
The manufacture of integrated circuits is a complex sequence of discrete steps
that requires precise process controls and verification through testing.
[GRAPHIC]
TYPICAL ASSEMBLY PROCESS FLOW
Wafer Back Grinding --> Wafer Dicing --> 1st Op Inspection --> Die Attache -->
Wire Bond -- > 2nd Op Inspection --> Molding --> Singulation Trim & Form Ball
Attach --> 1st Vision Inspection --> Electrical Test --> 2nd Vision Inspection
--> Pack & Ship
The last three steps prior to the final "Pack & Ship" - "1st Vision Inspection,"
"Electrical Test" and "2nd Vision Inspection" are the focus of Scanner's design
efforts. During the final stages of the manufacturing process, "Singulation Trim
& Form Ball Attach" and "Electrical Test", the integrated circuits can be
damaged requiring the "1st Vision Inspection" and "2nd Vision Inspection."
SCANNER PRODUCTS
Three-dimensional (3D) Inspection Modules
Many manufacturers of integrated circuit devices use robotic inspection systems
with a pick and place mechanism to automatically inspect and sort integrated
circuits in the manufacturing process. Such an inspection system uses machine
vision technology to test both leaded and ball array devices to ensure that the
devices conform to the specifications, then sorts them into pass or fail
categories. The inspection system can also perform other operations such as
inspecting the nomenclature printed on the package of the integrated circuit and
sealing the good parts into tape. The 3D inspection modules developed and
manufactured by Scanner form the machine-vision element of such inspection
systems.
Customers purchasing Scanner's modules are generally included in the following
two groups:
Original Equipment Manufacturers (OEM) which integrate Scanner's
modules into robotic inspection systems they produce for sale to end
users; and
End users themselves, i.e. the manufacturers and assemblers of
integrated circuits.
Scanner has developed the following core products as inspection modules:
UltraVim Module, used for 3D inspections of leaded devices and 2D
inspections of ball devices.
4
UltraVim Plus Module, used for 3D inspections of leaded devices as well
as of ball devices.
UltraMark, used for the inspection of the nomenclature printed or
etched on integrated circuits to insure that the markings are correct
and legible.
The UltraVim Module and the UltraVim Plus Module incorporate the patented
technology that Scanner licensed from Mr. and Mrs. Beaty. The patents were
transferred to the Company on July 31, 2002.
The Company believes that Scanner's inspection modules have the following
competitive advantages when compared with similar products offered by Scanner's
competitors:
o Scanner's modules do not have to be adjusted for various
users, thereby reducing the operator skill required to operate
the inspection system and, therefore, lowering the associated
labor rate to the end user.
o Scanner's modules are easy to set up and do not require
extensive training, thereby reducing device changeover costs
and lowering operator training and support costs to the end
user.
o Scanner's modules make the high speed inspection of integrated
circuits possible, thereby increasing the manufacturing
efficiency while reducing the total number of machines
required, which results in increased profits to the end user.
o The automatic calibration of Scanner's modules insures
accurate inspections resulting in increased yields and profits
to the customer and lowers the operator skill required to
maintain the equipment and the associated labor rate to end
user.
Three-dimensional (3D) Inspection Systems
In July 2002, Scanner introduced the first in a series of products of
three-dimensional inspection systems under the product line name "VisionFlex."
As of the date of this Report, Scanner has not sold any of these inspection
systems. Certain customers of Scanner have requested VisionFlex systems for
evaluation purposes. Scanner expects the first of these evaluations to be
completed in the second quarter of 2003.
MARKETS FOR SCANNER'S PRODUCTS
According to various news reports, global semiconductor sales amounted to $139
billion in 2001. Worldwide semiconductor equipment sales totaled $28 billion in
2001. In North America, the largest market for semiconductor equipment
worldwide, sales for semiconductor equipment totaled $8.2 billion in 2001.
Forecasts for semiconductor sales in 2002 varied from predictions of a 4-5%
decline from 2001, to no growth, to a maximum of a 3% growth. Analysts agreed,
however, that in 2003, a combination of inventory depletion, order rates and
market dynamics should result in a double-digit increase in worldwide
semiconductor sales. Most observers expected the semiconductor equipment market
to follow suit and resume growth in 2003. According to a news release published
in May 2002 by Semiconductor Equipment and Materials International (SEMI), an
international industry association, the orders received by semiconductor
equipment manufacturers have steadily increased since November 2001. Analysts'
predictions may prove to be incorrect, however, and Scanner can provide no
assurance as to when or if the semiconductor equipment market will resume
growth.
Scanner's modules range in price between $37,000 to over $78,000 each. Systems
utilizing Scanner modules range in price between $150,000 to over $350,000 each.
The first vision inspection in a standard assembly process is followed by the
electrical test that is in turn followed by a second vision inspection. During
the electrical test, the leads/balls of the integrated circuit must make
physical contact with the tester that carries the risk of damaging the
integrated circuit itself. This risk makes the second vision inspection
necessary to ensure that the integrated circuit complies with the device
specifications before shipment. A substantial portion of Scanner's sales are
derived from the integration of the UltraVim or the UltraVim Plus Module into
existing test handlers, thereby eliminating the need for the stand-alone second
vision inspection.
5
SALES AND MARKETING
Scanner sells its products through direct sales offices in San Jose, California,
Singapore and Geneva, Switzerland and, in key geographical markets, through
sales representatives throughout the world. For Japan, Scanner has a distributor
agreement with Yamatake Honeywell.
MANUFACTURING
Scanner designs its own products and out-sources the manufacturing of parts. The
Company's research and development, engineering and designing operations, as
well as the system assembly, are located at the facility in Tempe, Arizona. The
vision inspection modules that are sold to our OEM customers or built into the
systems we are currently developing ourselves are assembled at the Company's
facility in Minneapolis, Minnesota.
COMPETITION
The market for the inspection of integrated circuits is dominated by two
competing technologies: laser based inspections and vision based inspections.
Numerous companies, several of them public companies with greater financial
resources and a longer operating history, compete with Scanner for a market
share. One competitor that uses the laser technology for its stand-alone
inspection systems is Robotic Vision Systems Inc. (Nasdaq: RVSI). ICOS Vision
Systems Corp. N.V. of Heverlee, Belgium (Nasdaq: IVIS) offers both inspection
modules and stand-alone systems for the inspection of integrated circuits.
Semiconductor Technologies & Instruments produces inspection systems that use a
combination of vision and laser for the three-dimensional inspection of ball
array devices.
PROPRIETARY RIGHTS
Nine U.S. patents have been issued to date for Scanner's innovative technologies
and additional patents are pending in the United States and strategic countries
worldwide. Prior to the merger with Southwest Capital, all patents were owned by
Elwin M. Beaty and Elaine E. Beaty. Upon completion of the merger of Southwest
Capital and Scanner, Scanner acquired all patents in exchange for (i) a one-time
payment to Mr. and Mrs. Beaty of $1, (ii) the reimbursement of all expenses for
filing fees, legal fees and other disbursements which Mr. and Mrs. Beaty have
incurred since 1991 for securing and maintaining the intellectual property
rights, which expenses equaled $370,504, and (iii) the payment of all unpaid and
accrued license fees payable to Mr. and Mrs. Beaty as of July 31, 2002, which
amounted to $89,354. At December 31, 2002, Scanner owed Mr. and Mrs. Beaty
$261,546 for these obligations. The patents essential for our product
development and manufacturing will expire in the period from May 2017 through
January 2018.
DEPENDENCE ON FEW MAJOR CUSTOMERS
Approximately 61% of the Company's revenues in 2002 were from three customers in
the United States, Taiwan and Japan.
EMPLOYEES
As of December 31, 2002, Scanner employed four (4) people at its manufacturing
facility in Tempe, Arizona, six (6) people at its facility in Minneapolis,
Minnesota, and four (4) people in its other offices in San Jose, California,
Singapore and Geneva, Switzerland. Two (2) of these employees work in
manufacturing, three (3) work in sales and marketing, one (1) provides
professional services such as training and general product assistance, five (5)
work in product development and three (3) provide
6
general administrative services. All of Scanner's employees are working
full-time. Scanner's relationships with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases manufacturing and administrative facilities in Minneapolis,
Minnesota and Tempe, Arizona and also maintains sales offices in San Jose,
California, Singapore and Geneva, Switzerland. The leases require monthly base
rents plus increases for operating expenses and/or property taxes. Approximate
future minimum lease payments are $79,300 and $12,000 in 2003 and 2004,
respectively. The Company believes that its existing facilities are adequate to
meet its current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
On July 7, 2000, the Company instituted an action against ICOS for infringement
of two patents owned by Mr. and Mrs. Beaty and licensed to Scanner, viz. U.S.
Patent Nos. 6,064,756 and 6,064,757, relating to three-dimensional inspection of
ball array devices. The action is pending in United States District Court for
the Southern District of New York and was assigned Case No. 00 Civ. 4992.
Scanner's prayer for relief includes requests for an injunction, a recall of all
of the infringing units that have been sold in the United States, damages in the
form of lost profits, a trebling of damages pursuant to 35 USC 284, attorneys'
fees and costs. In its answer to the complaint, ICOS also included counterclaims
alleging various forms of unfair competition as well as seeking a declaration
that the patents are invalid and not infringed. Discovery has been completed in
the case and a so-called Markman hearing was held on November 7 and November 8,
2001. Based on the Markman hearing, the court will determine the scope of the
patent claims at issue. The parties filed motions for summary judgment in May
2002. No trial date has been set.
In 2002, the Company brought suit against two law firms that previously
represented the Company in the aforementioned patent litigation. The Company
demanded a full and complete accounting for the fees and expenses, the payment
of which these firms demand in connection with the patent litigation. The
Company has paid the law firms the total amount of $558,652 in legal fees and
costs. The law firms claim that the Company owes them an additional $402,984.
When the Company brought the patent suit, the law firms estimated that legal
fees and costs through the discovery stage of the patent litigation would amount
to $447,000 to $585,000. The Company, therefore, contends that it does not owe
any further payments to the defendants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
intend to do so in the foreseeable future. The Company currently intends to
retain its earnings for the operation and expansion of its business. The
Company's continued need to retain earnings for operations and expansion is
likely to limit the Company's ability to pay future cash dividends.
MARKET INFORMATION
The Company's Common Stock is currently quoted on the National Association of
Securities Dealers, Inc. Over-the-Counter Bulletin Board ("OTC:BB") under the
symbol "SCNI.OB." The following table sets forth, for the period from January 1,
2001 through December 31, 2002, the range of high and low bid information for
the Company's Common Stock on the OTC:BB. The prices represent quotations
between dealers without adjustment for retail markups, markdowns, or commissions
and may not represent actual transactions
2002 2001
----------------------- -----------------------
High Low High Low
---- --- ---- ---
First Quarter 1.33 .67 2.37 1.11
Second Quarter 1.27 1.01 .95 .19
Third Quarter 4.00 1.90 .95 .19
Fourth Quarter 5.00 2.00 1.19 .67
The shares of Common Stock are subject to various governmental or regulatory
body rules, including the Securities Act of 1933 and regulations thereto, the
Securities Act of 1934 and regulations thereto, and rules promulgated by NASD,
which may affect the liquidity of the shares.
HOLDERS
There were approximately 900 holders of record of the Company's Common Stock as
of December 31, 2002.
ISSUANCE OF COMMON STOCK, WARRANTS AND STOCK OPTIONS
There were no issuances of Common Stock, warrants or stock options during the
fourth quarter of 2002.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company's revenues have been adversely affected by the continuing lack of
demand in the semiconductor marketplace, which has caused many potential
customers to cease or defer purchases of capital equipment such as that offered
by the Company. Although the Company has made efforts to manage expenses during
this downturn, the Company is confronted with working capital shortages due to
ongoing operating expenses, combined with additional expenses relating to the
merger of the Company with Scanner Technologies Corporation, a Minnesota
Corporation ("Scanner Minnesota") and the Company's ongoing patent litigation.
To address these working capital shortages, the Company is
8
attempting to raise additional equity capital through a private offering and
extend and increase its bank line of credit. These efforts are discussed in more
detail below. Assuming the availability of sufficient working capital, the
Company's success will be dependent upon its ability to develop and
commercialize new products, meet the demands of its customers, respond quickly
to changes in its market and control expenses and cash usage.
In connection with efforts to raise capital or obtain additional bank financing,
the Company may be obligated to issue additional shares of Common Stock or
warrants or other rights to acquire Common Stock on terms that will result in
dilution to existing shareholders or place restrictions on operations. The
Company may also be unsuccessful in obtaining additional equity capital or bank
financing on any terms and in that event may be obligated to cease operations
and/or attempt to negotiate with its creditors to delay payments or compromise
the amounts of its indebtedness. If the Company is unable to reach satisfactory
arrangements with its creditors, the Company will responsibly evaluate
alternatives including the possibility of seeking protection from creditors
under the bankruptcy laws. Creditors may also take action that would force the
Company into proceedings under the bankruptcy laws.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of operations is
based upon the Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. The
Company evaluates, on an on-going basis, its estimates and judgments, including
those related to bad debts, excess inventory, warranty obligations, income
taxes, contingencies and litigation. Its estimates are based on historical
experience and assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements.
o Revenue recognition and allowances;
o Inventories;
o Patent rights;
o Accounting for income taxes;
Revenue is earned primarily through sales of test equipment to third party
customers and also to a distributor. For sales to the distributor, revenue is
recognized upon shipment as the distributor has no acceptance provisions and
title passes at shipment. For sales to third party customers, title passes at
shipment, however the customer has certain acceptance provisions relating to
installation and training. These provisions require the Company to defer revenue
recognition until the equipment is installed and the customers' personnel are
trained. The Company provides the training but does not install the equipment.
As a result, revenue is recognized for third party customers once the product
has been shipped, installed and customer personnel are trained. This process
typically is completed within two weeks to a month after shipment.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
Accounts receivable, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in customer payment terms
and practices are analyzed when evaluating the adequacy of the allowance for
doubtful accounts. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances and charges against earnings may be required.
9
The Company writes down inventory for estimated excess and obsolete inventory
equal to the difference between the cost of inventory and the estimated fair
value based upon assumptions about future demand and market conditions. Any
significant unanticipated changes in demand or competitive product developments
could have a significant impact on the value of the Company's inventory, and its
reported results. If actual market conditions are less favorable than those
projected, additional inventory write-downs, and charges against earnings may be
required.
Patent rights are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not be
recoverable. Determination of recoverability is based on an estimate of
discounted future cash flows from the use of the asset. Measurement of an
impairment loss for patent rights that management expects to use is based on the
fair value of the asset as established using a discounted cash flow model.
The Company accounts for income taxes using the asset and liability approach in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in operations in the period that includes the enactment date.
Additionally, deferred tax assets are evaluated and a valuation allowance is
established if it is more likely than not that all or a portion of the tax asset
will not be utilized.
LIQUIDITY AND CAPITAL RESOURCES
The Company is attempting to raise additional capital by offering to sell up to
600,000 shares of its Common Stock at $2.50 per share through an offering
conducted in reliance on an exemption from registration under the Securities Act
of 1933, as amended (the "Offering"). Each investor will receive for each four
shares purchased one three-year warrant to purchase one share of Common Stock at
an exercise price of $3. As of April 14, 2003, the Company had received proceeds
of $162,500 from investors in the Offering. Assuming the successful completion
of the Offering, the Company believes that it will have sufficient working
capital to conduct operations through 2003, and assuming the Company achieves
operational goals, for the foreseeable future. As described above, there is no
assurance that the Company will be successful in its efforts to complete the
Offering. If adequate funds are not available or are not available on acceptable
terms, the ability to fund operations, take advantage of unanticipated
opportunities, develop or enhance products and services or otherwise respond to
competitive pressures would be significantly limited.
In March 2002, the Company obtained a line of credit from a bank. The line has a
maximum lending limit of $900,000, an interest rate based on the prime interest
rate, and a term of one year, renewable at the discretion of the bank. At
February 28, 2003, $713,000 was outstanding under this line of credit. The line
is guaranteed by certain shareholders of the Company who have pledged collateral
to secure their guarantees. The Company is currently negotiating with the bank
and the guarantors to extend the line and the guarantees for at least one year
from the original March 31, 2003 termination date of the line and increase the
amount of the line. In April 2003, the line of credit was renewed through March
31, 2004 and the Company provided the bank with a security interest in its
general business assets. The line was increased from $900,000 to $1,100,000,
with an interest rate at prime. The new line is guaranteed by certain
individuals who have pledged collateral to secure their guarantees. As of April
14, 2003, the guarantors have exercised warrants, issued in connection with
their guarantees, to purchase 250,000 shares of the Company's common stock for
$500,000 in cash and one-year notes. The $275,000 cash portion of the purchase
price is due within 30 days. The Company believes that this line of credit,
existing working capital and anticipated cash flows from operations and equity
investments will be adequate to satisfy projected operating and capital
requirements for 2003.
10
At December 31, 2002, the Company's obligations and commitments to make future
payments under debt and lease agreements is as follows:
Payments due by Period
------------------------------------------------
2003 2004 Total
-------- ------- --------
Line of credit $570,000 $570,000
Notes payable 274,886 274,886
Operating leases 79,300 12,000 91,300
-------- ------- --------
$924,186 $12,000 $936,186
======== ======= ========
Net cash used by operating activities totaled $920,433 and $496,918 in 2002 and
2001, respectively. Negative operating cashflows resulted primarily from net
operating losses which were partially offset by non-cash adjustments relating to
deferred taxes and deferred stock option compensation and by changes in
operating assets and liabilities.
Net cash used by investing activities totaled $15,280 and $31,181 in 2002 and
2001, respectively. The funds were used to purchase property and equipment.
Net cash provided by financing activities totaled $600,000 and $812,050 in 2002
and 2001, respectively. Positive financing cashflows related primarily to the
proceeds from borrowings under the bank line of credit and from the sale of
Common Stock offset by payments on debt.
The Company issued $385,506 of notes payable, including $15,000 assumed in the
merger with Southwest, in the year ended December 31, 2002.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Sales for the year ended December 31, 2002, were $1,241,215 compared to
$1,772,625 for the year ended December 31, 2001. The decline in sales is
principally due to the worldwide slow demand for semiconductor and
microelectronic devices. Therefore, manufacturers of such devices are reducing
their capital spending which negatively affects semiconductor equipment
suppliers such as the Company.
Cost of goods sold decreased by $96,318 to $361,413 in the year ended December
31, 2002, from $457,731 in 2001. The decrease was primarily related to the
decrease in sales. Cost of goods sold as a percentage of sales increased by 3.3%
to 29.1% in 2002 compared to 25.8% in 2001. This increase was the result of
higher fixed and variable manufacturing expenses.
Selling, general and administrative expenses decreased by $71,097 to $1,602,982
for the year ended December 31, 2002, compared to $1,674,079 in the prior year.
The decrease was primarily related to lower commission and other selling
expenses because of the decreased sales. These decreases were partially offset
by increased accounting and other professional costs.
Research and development expenses were $798,650 in the year ended December 31,
2002 compared to $631,514 for the year ended December 31, 2001. The increase was
the result of additional research and development activities. The Company is
currently developing its own line of robotic inspection systems for sale to end
users.
Legal fees decreased by $170,463 to $547,611 in the year ended December 31,
2002, from $718,074 in 2001. Legal fees related to the patent infringement claim
brought by the Company against a competitor were less in 2002 than 2001.
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Other income (expense) was ($22,608) in the year ended December 31, 2002,
compared to $9,803 in 2001. The change is primarily due to reduced cash
investments and increased debt.
The Company recognized an income tax benefit of $71,900 in the year ended
December 31, 2002. The benefit was limited because all of the available
carrybacks were utilized. A benefit of $395,746 was recognized in the year ended
December 31, 2001.
The net loss for the year ended December 31, 2002 was $2,020,149, or $.24 per
share, compared to a net loss of $1,303,224, or $.19 per share, in 2001. The
increase in the net loss was the result of a decrease in gross profit of
$435,092, increased net nonoperating expenses of $32,411, a decrease in income
tax benefit of $323,846 and a decrease in operating expenses of $74,424.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Sales for the year ended December 31, 2001 were $1,722,625 compared to
$6,038,929 for the year ended December 31, 2000. The primary reason for the
decrease in sales was a decline in capital spending by semiconductor and
microelectronic device manufacturers due to the worldwide slowdown in demand for
these products.
Cost of goods sold decreased by $1,399,268 to $457,731 in the year ended
December 31, 2001 from $1,856,999 in 2000. The decrease was primarily related to
the decrease in sales. Cost of goods sold as a percentage of sales decreased by
5.0% to 25.8% in 2001 compared to 30.8% in 2000. The decrease was due to the
lower fixed and variable manufacturing expenses.
Selling, general and administrative expenses decreased by $121,466 to $1,674,079
for the year ended December 31, 2001, compared to $1,795,545 in the prior year.
The decrease was primarily related to lower commissions and other selling
expenses because of decreased sales. These decreases were partially offset by
additional amortization of deferred stock option compensation and by expenses
related to the Company's design and manufacturing facility in Tempe, Arizona
which was opened in early 2001.
Research and development expenses were $631,514 in the year ended December 31,
2001 compared to $259,418 for the year ended December 31, 2000. The increase was
caused by additional employees conducting research and development.
Legal fees increased by $500,622 to $718,074 in the year ended December 31, 2001
from $217,452 in 2000. The increase was due to legal fees related to the patent
infringement claim brought by the Company against a competitor.
Other income (expense) was $9,803 in the year ended December 31, 2001, compared
to ($27,939) in 2000. The change is primarily due to increased cash investments
and reduced debt.
The Company recognized an income tax benefit of $395,746 in the year ended
December 31, 2001. The net operating loss for the year was carried back and
fully utilized for federal tax purposes. A tax provision of $626,249 was
provided relating to income before income taxes in the year ended December 31,
2000.
The net loss for the year ended December 31, 2001 was $1,303,224 compared to net
income of $1,255,327 in 2000. The net loss was the result of a decrease in gross
profit of $2,867,036, increased operating expenses of $751,252, decreased net
nonoperating expenses of $37,742, and less income taxes of $1,021,995.
12
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements, and the reports of Lurie Besikof Lapidus &
Company, LLP and Lethert, Skwira, Schultz & Co. LLP, independent auditors,
referred to in the Index to Financial Statements, appear elsewhere in this Form
10-KSB on the pages set forth.
Page
----
INDEPENDENT AUDITORS' REPORTS F-1 - F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective August 19, 2002, the Board of Directors of the Company determined to
replace Grant Thornton LLP, the independent accountant engaged by the Company
for the prior years, and replaced such firm with Lurie Besikof Lapidus & Co.,
LLP as its independent accountants.
There were not, in connection with the audits of the two years ended December
31, 2001, and the subsequent interim periods preceding the selection of Lurie
Besikof Lapidus & Co., LLP, any disagreements with Grant Thornton LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Grant Thornton LLP's
satisfaction, would have caused it to make reference to the subject matter of
the disagreement in connection with its report, nor has Grant Thornton LLP's
report on the financial statements of the Company for the two years ended
December 31, 2001 contained an adverse opinion or disclaimer of opinion or been
qualified or modified as to uncertainty, audit scope or accounting principles.
13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND OFFICERS
The Company's directors are elected at the annual meeting of stockholders and
hold office for an indefinite term that expires at the next regular meeting of
shareholders or until their successors are elected and qualified. The Company's
officers are appointed by the Board of Directors and approved and ratified by
the Board.
The names, ages, and respective positions of the officers and directors of the
Company are set forth below, as well as additional information relating to each
officer and director.
Name Age Position
---- --- --------
Elwin M. Beaty 61 President, Chief Executive Officer,
Chief Financial Officer and Director
David P.Mork 35 Senior Vice President and Director
Laurence S. Zipkin 62 Director
ELWIN M. BEATY has served as the President, Chief Executive Officer and Chief
Financial Officer and a Director of the Company since the merger of the Company
and Scanner Technologies Corporation, a privately-held Minnesota corporation
("Scanner Minnesota"), on July 31, 2002 (the "Merger"). Prior to the Merger, Mr.
Beaty served in the same capacities with Scanner Minnesota since its
incorporation in November 1990.
DAVID P. MORK has served as the Senior Vice President of the Company since the
Merger. Mr. Mork served as Senior Vice President of Scanner Minnesota from 1997
until the Merger. He has also served as a Director of the Company since the
Merger.
LAURENCE S. ZIPKIN has served as a Director of the Company since March 1995.
Prior to the Merger, he served as President, Chief Executive Officer and
Director of the Company. Mr. Zipkin is the Chairman of the Board of Oakridge
Capital Group., a New Mexico company whose shares are traded on the Nasdaq
National Market System under symbol "ORCG." Mr. Zipkin is also a Director of
Oakridge's wholly owned subsidiary Equity Securities Investments, Inc., a
Minneapolis based broker dealer that has served as an agent for the Company in
connection with proposed financing transactions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such forms received by it, the Company
believes that, during 2002, all officers, directors, and greater than 10%
shareholders complied with the applicable filing requirements.
14
ITEM 10. EXECUTIVE COMPENSATION
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
Pursuant to an employment agreement between the Company and Elwin M. Beaty,
President, Chief Executive Officer and Chief Financial Officer of the Company,
Mr. Beaty earns an annual salary of $180,000. The agreement also contains a
provision that requires the Company to pay Mr. Beaty an amount equal to the
annual salary if he is terminated without cause. The agreement can be terminated
by either the Company or Mr. Beaty with a 30-day written notice to the other.
In an agreement dated April 19, 2002, Mr. Beaty forgave the Company's obligation
to pay him accrued salary of $1,254,575 and released the Company, its
successors, its officers and directors from any liability in connection with the
accrued salary. In exchange, the Company agreed that Mr. Beaty shall receive a
certain amount of the proceeds, if any, that Scanner may receive out of
litigation involving patents that Scanner has licensed. Under the agreement, the
Company shall keep sixty percent (60%) of any proceeds of the currently ongoing
litigation and shall pay to Mr. Beaty forty percent (40%) of such proceeds until
the Company has been reimbursed for all attorney fees and other expenses
incurred in connection with the current litigation, and Mr. Beaty has received
the total amount of $1,254,575. If one party has received all the amounts owing
to such party before the other party's claim under this provision has been
satisfied, the other party shall receive one hundred percent (100%) of the
proceeds until its claim is satisfied. If any proceeds remain after such
payment, Mr. Beaty shall receive fifty percent (50%) of such remainder. He also
has a right to receive part of the proceeds, if any, that the Company may
receive out of any subsequent litigation involving the licensed patents. The
Company shall keep sixty percent (60%) of any proceeds from subsequent
litigation until its attorney fees and other expenses incurred in connection
with the current and any subsequent litigation have been reimbursed, and Mr.
Beaty shall receive forty percent (40%) of any proceeds from subsequent
litigation until he has received a total amount of $1,254,575 out of the
proceeds of the currently ongoing and any subsequent litigation. If any proceeds
out of the subsequent litigation remain after such distribution, the Company
shall pay twenty five percent (25%) of such remaining proceeds to Mr. Beaty. The
unearned compensation forgiven ($1,254,575) less the related deferred tax
benefit ($436,000) was recorded as additional paid-in capital in stockholders'
equity.
To provide David P. Mork, the Company's Senior Vice President, with an incentive
to continue his employment with the Company, and to compensate him for
compensation in recent years which the Company believes was less than he might
have received in a comparable position elsewhere, Mr. Mork was also a party to
the agreement described above regarding the distribution of litigation proceeds.
Pursuant to the agreement, the Company has agreed to pay to Mr. Mork twenty
percent (20%) of the remaining proceeds, if any, that the Company may receive
out of the currently ongoing litigation, and twenty-five percent (25%) of the
remaining proceeds, if any, that the Company may receive out of any future
litigation involving the licensed patent, and that remain after the aforesaid
payments to the Company and to Mr. Beaty have been made out of such proceeds.
15
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth certain compensation
information for services rendered in all capacities to us by our chief executive
officer and by the only other executive officer whose total salary and bonus
exceeded $100,000 during 2002.
Long Term
Annual Compensation Compensation
Fiscal ----------------------------------- ------------- All Other
Year Salary ($) Bonus ($) Other ($) Options Compensation ($)
------- ---------- --------- --------- ------------- ----------------
Laurence Zipkin 2002 0 0 0 -- 0
Former President and 2001 228,545(2) 0 0 -- 0
Chief Executive Officer 2000 0 0 0 -- 0
Elwin M. Beaty 2002 180,000 0 0 -- 18,858(3)
President and Chief 2001 180,000 0 0 -- 0
Executive Officer(1) 2000 180,000 0 0 -- 0
David P. Mork 2002 114,750 100,000 0 -- 0
Senior Vice President(1) 2001 114,500 0 0 -- 0
2000 113,400 0 0 -- 0
-----------------
(1) Amounts paid prior to July 31, 2002 were paid by Scanner Technologies
Corporation, the Minnesota corporation.
(2) Represents fair market value of 107,298 shares granted to Mr. Zipkin in
consideration of prior services.
(3) The Company pays the rent expense for Mr. Beaty's temporary residence in
Arizona.
OPTION GRANTS DURING 2002 FISCAL YEAR
The Company did not grant any stock options during year ended December 31, 2002
to the named executive officers in the Summary Compensation Table. The Company
has not granted any stock appreciation rights.
OPTION EXERCISES DURING 2002 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information as to options exercised by the named
executive officers in the Summary Compensation Table during fiscal 2002 and the
number and value of options at December 31, 2002. The Company has no outstanding
stock appreciation rights.
Number of Value of Unexercised
Shares Unexercised Options at In-the-Money Options at
Acquired Value December 31, 2002 December 31, 2002
Name on Exercise Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- ----------- ------------ ------------------------- ----------------------------
Laurence Zipkin -- -- 0 exercisable N/A
0 unexercisable
Elwin M. Beaty -- -- 0 exercisable N/A
0 unexercisable
David P. Mork(2) 264,250 $204,392 0 exercisable N/A
0 unexercisable
-----------------
(1) Value is calculated on the basis of the difference between the option
exercise price and the closing sale price for the Company's common
stock (see footnote below) at exercise date multiplied by the number of
shares underlying the option.
16
(2) The option to purchase shares of Scanner Technologies Corporation, the
Minnesota corporation ("Scanner Minnesota") was exercised on July 31,
2002 but prior to the Company's merger with Scanner Minnesota on that
date; the shares and value have been adjusted to reflect the adjustment
pursuant to the merger.
COMPENSATION TO DIRECTORS
The Company's directors do not receive any compensation from the
Company for their services.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The Company had no outstanding equity compensation plans as of December 31,
2002.
The following table sets forth, as of March 15, 2003, certain information with
respect to beneficial ownership of our Common Stock by (i) each of our executive
officers named in the summary compensation table above, (ii) each of our
directors, (iii) each person known to us to be the beneficial owner of more than
5% of our outstanding Common Stock, and (iv) all of the directors and executive
officers as a group.
Shares Owned Percentage
Beneficially & Stock
Name and Address(1) of Record(2) Outstanding(2)
------------------- ------------ --------------
Elwin M. Beaty 6,708,732(3) 62.8%
David P. Mork 726,660(4) 7.2%
Laurence S. Zipkin 518,133 5.2%
Elaine E. Beaty 6,708,732(5) 62.8%
All Executive Officers and Directors as a 7,953,525 69.2%
group (3 persons)
(1) The address for each individual is 14505 21st Avenue North, Suite 220,
Minneapolis, MN 55447, except for Mr. Zipkin, whose address is 701 Xenia Avenue
South, Golden Valley, MN 55416.
(2) For purposes of computing "beneficial ownership" and the percentage of
outstanding Common Stock held by each person or group of persons named above as
of March 15, 2003, any security which such person or group of persons has the
right to acquire within 60 days after such date is deemed to be outstanding for
the purpose of computing beneficial ownership and the percentage ownership of
such person or persons, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
(3) Includes (a) warrants to purchase 670,782 shares of Common Stock at $1.00
per share exercisable immediately, (b) 2,683,584 shares of Scanner Common Stock
owned by Elaine E. Beaty, Mr. Beaty's spouse, and (c) warrants to purchase
670,782 shares of Scanner Common Stock exercisable immediately owned by Elaine
E. Beaty, Mr. Beaty's spouse. Mr. Beaty disclaims the beneficial ownership of
the securities owned by his wife.
(4) Includes warrants to purchase 145,310 shares of Common Stock at $1.00 per
share exercisable immediately.
17
(5) Includes (a) warrants to purchase 670,782 shares of Common Stock at $1.00
per share exercisable immediately, (b) 2,683,584 shares of Scanner Common Stock
owned by Elwin M Beaty, Mrs. Beaty's spouse, and (c) warrants to purchase
670,782 shares of Scanner Common Stock exercisable immediately owned by Elwin M.
Beaty, Mrs. Beaty's spouse. Mrs. Beaty disclaims the beneficial ownership of the
securities owned by her husband.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation" for description of transaction between the Company
and Elwin M. Beaty, the Company's President, Chief Executive Officer and Chief
Financial Officer.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
See Exhibit Index following the signature page of this report.
REPORTS ON FORM 8-K:
The Company filed one report on Form 8-K/A during the quarter ended December 31,
2002. On October 11, 2002, a Current Report was filed on Form 8-K/A relating to
required financial statements of businesses acquired.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with participation of the Company's
management, including the Company's Chief Executive Officer, who is also the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based on the evaluation, the Chief Executive Officer,
who is also the Company's Chief Financial Officer, concluded that the Company's
disclosure controls and procedures are effective. There were no significant
changes in the Company's internal controls, or in other factors that could
significantly affect these controls subsequent to the date of his evaluation.
18
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.
SCANNER TECHNOLOGIES CORPORATION
DATE: April 14, 2003 By: /s/ Elwin M Beaty
----------------------------------------
Elwin M. Beaty
President, Chief Executive Officer
and Chief Financial Officer
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:
DATE: April 14, 2003 By: /s/ Elwin M Beaty
----------------------------------------
Elwin M. Beaty
President, Chief Executive Officer,
Chief Financial Officer and Director
(Principal executive officer and
principal financial and accounting
officer)
DATE: April 14, 2003 By: /s/ David P. Mork
----------------------------------------
David P. Mork
Senior Vice President and Director
DATE: April 14, 2003 By: /s/ Laurence S. Zipkin
----------------------------------------
Laurence S. Zipkin
Director
19
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Elwin M. Beaty, the Chief Executive Officer and Chief Financial
Officer of Scanner Technologies Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB of Scanner Technologies
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for the establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this annual report whether there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
By: /s/Elwin M. Beaty
---------------------------------
Dated: April 14, 2003 Elwin M. Beaty
Chief Executive Officer and
Chief Financial Officer
20
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Scanner Technologies Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of Scanner
Technologies Corporation and Subsidiary as of December 31, 2002, and the
related consolidated statement of operations, stockholders' equity and
cash flows for the year then ended. 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 auditing standards generally
accepted in the United States of America. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Scanner Technologies Corporation and Subsidiary as of December 31, 2002,
and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Lurie Besikof Lapidus & Company LLP
Lurie Besikof Lapidus & Company LLP
Minneapolis, Minnesota
February 7, 2003, except for Note 13, as to
which the date is April 14, 2003
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Scanner Technologies Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of Scanner
Technologies Corporation (a Minnesota corporation) and Subsidiary as of
December 31, 2001, and the related consolidated statement of operations,
stockholders' equity and cash flows for the year then ended. 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 auditing standards generally
accepted in the United States of America. 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 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Scanner
Technologies Corporation and Subsidiary as of December 31, 2001, and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United
States of America.
/s/ Lethert, Skwira, Schultz & Co. LLP
Lethert, Skwira, Schultz & Co. LLP
St. Paul, Minnesota
February 11, 2002, except for Note 5 and the 1st and 2nd paragraph of
Note 12 for which the date is April 19, 2002
F-2
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2002 2001
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 31,037 $ 366,750
Accounts receivable, less allowance of $40,000 168,008 483,996
Income taxes receivable 235,900 397,629
Inventory, less allowance of $32,000 in 2002 827,857 732,806
Prepaid expenses 25,152 27,430
----------- -----------
TOTAL CURRENT ASSETS 1,287,954 2,008,611
PROPERTY AND EQUIPMENT, net 52,159 63,352
PATENT RIGHTS, net 344,776 -
DEFERRED TAX ASSET - 599,200
OTHER 16,939 70,296
----------- -----------
$ 1,701,828 $ 2,741,459
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ 570,000 $ -
Notes payable to related parties 274,886 -
Accounts payable 647,521 362,997
Accrued expenses 119,885 92,206
----------- -----------
TOTAL CURRENT LIABILITIES 1,612,292 455,203
----------- -----------
ACCRUED LICENSE FEES - 131,006
----------- -----------
ACCRUED COMPENSATION - 1,254,575
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 50,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, no par value, 50,000,000 shares authorized;
10,000,982 and 7,061,196 shares issued and outstanding 3,064,941 70,612
Additional paid-in capital - 1,262,023
Stock options - 952,430
Deferred stock option compensation - (429,134)
Accumulated deficit (2,975,405) (955,256)
----------- -----------
89,536 900,675
----------- -----------
$ 1,701,828 $ 2,741,459
=========== ===========
See notes to consolidated financial statements.
F-3
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------
2002 2001
----------- -----------
REVENUES $ 1,241,215 $ 1,772,625
COST OF GOODS SOLD 361,413 457,731
----------- -----------
GROSS PROFIT 879,802 1,314,894
----------- -----------
OPERATING EXPENSES
Selling, general and administrative 1,602,982 1,674,079
Research and development 798,650 631,514
Legal fees 547,611 718,074
----------- -----------
2,949,243 3,023,667
----------- -----------
LOSS FROM OPERATIONS (2,069,441) (1,708,773)
OTHER INCOME (EXPENSE)
Other income 554 10,001
Interest expense (23,162) (198)
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (2,092,049) (1,698,970)
INCOME TAX BENEFIT (71,900) (395,746)
----------- -----------
NET LOSS $(2,020,149) $(1,303,224)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.24) $ (0.19)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 8,286,107 7,008,384
See notes to consolidated financial statements.
F-4
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
------------------------- Paid-in Stock
Shares Amount Capital Options
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 6,906,696 $ 69,067 $ 422,768 $ 632,680
Net loss - - - -
Common stock issued for cash 100,000 1,000 497,800 -
Stock options:
Issued for cash - - - 15,000
Issued for deferred compensation - - - 396,750
Cancelled - - - (48,250)
Exercised 54,500 545 341,455 (43,750)
Amortization of deferred compensation - - - -
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 7,061,196 70,612 1,262,023 952,430
Net loss - - - -
Unearned compensation forgiven, net of tax - - 818,575 -
Stock options:
Repurchased for cash - - - (15,000)
Cancelled - - - (144,750)
Exercised 507,000 5,070 935,680 (792,680)
Amortization of deferred compensation - - - -
Common stock issued for merger with
Southwest Capital Corporation 2,001,388 (27,019) - -
Additional shares issued for recapitalization 431,398 - - -
Change from par value to no par value - 3,016,278 (3,016,278) -
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 10,000,982 $ 3,064,941 $ - $ -
=========== =========== =========== ===========
[WIDE TABLE CONTINUED FROM ABOVE]
Deferred Retained
Stock Earnings
Stock Option (Accumulated
Compensation Deficit) Total
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 $ (382,320) $ 347,968 $ 1,090,163
Net loss - (1,303,224) (1,303,224)
Common stock issued for cash - - 498,800
Stock options:
Issued for cash - - 15,000
Issued for deferred compensation (396,750) - -
Cancelled 48,250 - -
Exercised - - 298,250
Amortization of deferred compensation 301,686 - 301,686
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 (429,134) (955,256) 900,675
Net loss - (2,020,149) (2,020,149)
Unearned compensation forgiven, net of tax - - 818,575
Stock options:
Repurchased for cash - - (15,000)
Cancelled 144,750 - -
Exercised - - 148,070
Amortization of deferred compensation 284,384 - 284,384
Common stock issued for merger with
Southwest Capital Corporation - - (27,019)
Additional shares issued for recapitalization - - -
Change from par value to no par value - - -
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 $ - $(2,975,405) $ 89,536
=========== =========== ===========
See notes to consolidated financial statements.
F-5
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net loss $(2,020,149) $(1,303,224)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 26,473 28,908
Amortization of patent rights 25,730 -
Deferred taxes 163,200 (1,100)
Deferred stock option compensation 284,384 301,686
Changes in operating assets and liabilities:
Accounts receivable 315,988 2,031,687
Income taxes receivable 161,729 (397,629)
Inventory (95,051) (313,153)
Prepaid expenses and other (41,269) (86,907)
Accounts payable 284,524 81,382
Accrued income taxes - (642,937)
Accrued expenses 15,660 (138,314)
Accrued license fees (41,652) (137,317)
Accrued compensation - 80,000
----------- -----------
Net cash used by operating activities (920,433) (496,918)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (15,280) (31,181)
----------- -----------
FINANCING ACTIVITIES
Net proceeds on bank line of credit 570,000 -
Payments on related party debt (103,070) -
Stock options issued (repurchased) for cash (15,000) 15,000
Proceeds from exercise of stock options 148,070 298,250
Proceeds from sale of common stock - 498,800
----------- -----------
Net cash provided by financing activities 600,000 812,050
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (335,713) 283,951
CASH AND CASH EQUIVALENTS
Beginning of year 366,750 82,799
----------- -----------
End of year $ 31,037 $ 366,750
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 23,162 $ 198
Income taxes - 644,149
Noncash operating, financing and investing activities:
Unearned compensation forgiven and transferred to capital 1,254,575 -
Deferred tax asset related to forgiven unearned compensation 436,000 -
Stock options cancelled 144,750 48,250
Note payable issued in exchange for patent rights 370,506 -
Accrued license fees transferred to related party note payable 89,354 -
Officer loan offset against related party note payable (96,904) -
Deficiency of Southwest Capital at date of merger 27,019 -
Valuation of stock options exercised and cancelled 937,430 92,000
Valuation of stock options issued - 396,750
See notes to consolidated financial statements.
F-6
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies -
The accompanying consolidated financial statements account for the merger
between Scanner Technologies Corporation (Scanner) and Southwest Capital
Corporation (Southwest) as a capital transaction in substance (and not a
business combination of two operating entities) that would be equivalent
to Scanner issuing securities to Southwest in exchange for the net
monetary liabilities of Southwest, accompanied by a recapitalization (See
Note 2). The combined entity of Scanner and its subsidiary and Southwest
are referred to as the "Company."
Nature of Business
The Company invents, develops and markets vision inspection devices that
are used in the semiconductor industry for the inspection of integrated
circuits. The Company's customer base is small in numbers, but global in
location.
Principles of Consolidation
The consolidated financial statements include the accounts of Scanner
Technologies Corporation and its wholly owned subsidiary, Scanner
Technologies Corporation International, incorporated in the United States
and registered in Singapore. All significant intercompany balances and
transactions have been eliminated.
Revenue Recognition
Revenue is earned primarily through sales of test equipment to third
party customers and also to a distributor. For sales to the distributor,
revenue is recognized upon shipment as the distributor has no acceptance
provisions and title passes at shipment. For sales to third party
customers, title passes at shipment; however, the customer has certain
acceptance provisions relating to installation and training. These
provisions require the Company to defer revenue recognition until the
equipment is installed and the customers' personnel are trained. The
Company provides the training but does not install the equipment. As a
result, revenue is recognized for third party customers once the product
has been shipped, installed and customer personnel are trained. This
process typically is completed within two weeks to a month after
shipment.
Management Estimates
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Significant management estimates relate to the valuation
allowance on deferred tax assets and payables for legal fees (See Note
12).
Fair Value of Financial Instruments
The carrying amounts of financial instruments consisting of cash and cash
equivalents, receivables, bank line of credit, notes payable, accounts
payable and accrued liabilities approximate their fair values.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-7
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies - (continued)
Accounts Receivable
Accounts receivable arise from the normal course of selling products on
credit to customers. An allowance for doubtful accounts has been provided
for estimated uncollectable accounts. Accounts receivable, historical bad
debts, customer concentrations, customer creditworthiness, current
economic trends and changes in customer payment terms and practices are
analyzed when evaluating the adequacy of the allowance for doubtful
accounts. Individual accounts are charged against the allowance when
collection efforts have been exhausted.
Inventory
Inventory is stated at the lower of cost or market with cost determined
on the first-in, first-out method. The Company has provided an allowance
for obsolescence in 2002 for estimated excess and obsolete inventory
equal to the difference between the cost of inventory and the estimate
fair value based on assumptions about future demand and market
conditions.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using accelerated methods. Leasehold
improvements are amortized straight-line over the lease term.
Patent Rights
Patent rights are stated at cost less accumulated amortization.
Amortization is provided using the straight line method over six years,
the deemed useful lives of the patents. Patent rights are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of such assets may not be recoverable. Determination of
recoverability is based on an estimate of discounted future cash flows
from the use of the asset. Measurement of an impairment loss for patent
rights that management expects to use is based on the fair value of the
assets as established using a discounted cash flow model.
Product Warranty
The Company provides an accrual for estimated incurred but unidentified
product warranty issues based on historical activity. The warranty
accrual and related expenses were not significant.
Accounting for Stock-Compensation
The Company accounts for employee stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and provides the disclosures required by Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." Options and warrants to non-employees are
accounted for as required by SFAS No. 123.
Income Taxes
The Company is taxed as a domestic U.S. corporation under the Internal
Revenue Code. Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes." Deferred income tax assets and liabilities
are recognized for the expected future tax consequences of events that
have been included in the consolidated financial statements or tax
returns. Deferred income tax assets and liabilities are determined based
on the differences between the financial statement and tax bases of
assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse. Deferred tax
assets are evaluated and a valuation allowance is established if it is
more likely than not that all or a portion of the tax asset will not be
utilized. Income tax benefit is the current tax refundable for the year
and the change during the year in deferred tax assets and liabilities.
F-8
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies - (continued)
Credit Risk
Significant concentrations of credit risk exist in accounts receivable,
which are due from customers located primarily in the Far East and the
United States.
Reclassifications
Certain reclassifications were made to the 2001 financial statements to
make them comparable with 2002. The reclassifications did not affect
previously reported stockholders' equity, net loss, or net cash flows.
Net Loss Per Share
Net loss per share - basic is determined by dividing the net loss by the
weighted-average common shares outstanding. Net loss per share - diluted
normally includes common stock equivalents (options and warrants), but
were excluded since their effect was antidulitive. For this reason,
options and warrants of 551,948 and 563,927 shares were excluded from the
calculation of diluted outstanding shares for 2002 and 2001,
respectively.
Recently Issued Accounting Standards
On January 1, 2002, the Company adopted the provisions of SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses accounting for acquired goodwill and other
intangible assets, discontinues the amortization of acquired goodwill,
and makes goodwill subject to periodic impairment testing.
On January 1, 2002, the Company adopted the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived and
for Long-Lived Assets to be Disposed Of." SFAS No. 144 requires that
long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations
or in discontinued operations. Discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses
that have not yet been incurred. SFAS No. 144 also broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a
disposal transaction.
In April 2002, the Company adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," which recinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement,
SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." The Statement also amends SFAS Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. The Statement also
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. This statement is effective for financial
statements issued on or after May 15, 2002.
The adoption of the preceding Statements did not impact the Company's
financial statements for the years presented.
F-9
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies - (continued)
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities,"
which addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." The Statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company
believes that adoption of this statement will not significantly impact
its financial statements.
2. Merger and Reorganization -
On January 16, 2002, the Company executed an Agreement and Plan of
Reorganization with Southwest Capital Corporation (Southwest), a public
company with no operations. The agreement provided for the Company to
merge into Southwest, with Southwest continuing as the surviving
corporation under the name of Scanner Technologies Corporation. On July
31, 2002, the Company completed its merger with Southwest pursuant to
which the Company was merged with and into Southwest. This merger was
treated as a recapitalization.
At the effective date of the merger each of the 7,568,196 shares of
Scanner's common stock outstanding was converted into the right to
receive 1.057 shares of the surviving company's common stock and a
five-year warrant to purchase 0.2642 shares of the surviving company's
common stock. The warrants are exercisable immediately at an exercise
price of $1.00 per share. The conversion ratio was based on the total
amount of Scanner's common stock outstanding at the effective date of the
merger. As a result, the surviving company issued an additional 7,999,594
shares of its common stock and warrants to purchase 1,999,543 shares of
common stock. Each share of common stock of Southwest issued and
outstanding, 2,001,388 shares, remained issued and outstanding and
unaffected by the merger. Southwest had a deficiency in assets of $27,019
at the date of the merger.
At the time of the merger, Scanner had outstanding warrants to purchase
225,000 shares of its common stock at $2.75 per share. At the time of the
merger, these warrants were converted into warrants to purchase a total
of 59,445 units of the surviving company's securities at $10.80 per unit,
each unit consisting of four shares of the surviving company's common
stock and a five-year warrant immediately exercisable to purchase one
share of the surviving company's common stock at $1.00 per share. At the
time of the merger, the Articles of Incorporation were amended to
authorize preferred stock, increase the number of shares the Company can
issue and to change the common stock from $.01 par value to no par value
stock.
Upon the consummation of the merger of Scanner into Southwest, the
Company became the owner of the licensed know-how in exchange for a
secured note payable to the licensor (officer/stockholder) for $1.00 and
all expenses incurred for securing and maintaining the intellectual
property patent rights, totaling $370,505. The exclusive license
agreement, which was terminated, covered the operation, manufacturing,
testing and selling of Scanner products. The agreement required a fee of
5 % of the Company's sales. License expense was $38,773 and $88,631 for
the years ended December 31, 2002 and 2001, respectively.
The following unaudited pro forma consolidated financial information,
provided for informational purposes only, assumes the merger of Scanner
and Southwest occurred on January 1, 2002. It is based on historical
information and does not necessarily reflect the actual results that
would have occurred, nor is it indicative of future results of operations
of the consolidated companies.
Year Ended December 31,
-----------------------
2002 2001
---------- ----------
Revenues $1,241,215 $1,772,625
Net loss (1,754,770) (2,980,062)
Net loss per common share -
basic and diluted ( .18) ( .30)
F-10
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Inventory -
Inventory consists of the following:
December 31,
------------
2002 2001
-------- --------
Finished goods $119,207 $ 85,195
Subassemblies 213,579 263,333
Raw materials, less allowance
of $32,000 in 2002 495,071 384,278
-------- --------
$827,857 $732,806
======== ========
4. Property and Equipment -
Property and equipment consist of the following:
December 31, Estimated
------------ Useful
2002 2001 Lives - Years
---- ---- -------------
Furniture and fixtures $114,298 $106,706 5 to 7
Machinery and equipment 61,361 53,673 3 to 7
Leasehold improvements 20,088 20,088 2 to 3
-------- --------
195,747 180,467
Less accumulated depreciation 143,588 117,115
-------- --------
$ 52,159 $ 63,352
======== ========
5. Bank Line of Credit -
In March 2002, the Company obtained a $900,000 bank line of credit with
an interest rate at prime (4.25% at December 31, 2002) and a term of one
year, renewable at the discretion of the bank. The line is guaranteed by
stockholders who received for their financial support warrants to
purchase a total of 225,000 shares of the Company's common stock at $2.75
per share.
At December 31, 2002, $570,000 is outstanding under this line. In the
subsequent merger (See Note 2), the warrants were converted into warrants
to purchase a total of 59,445 units of the Company's securities at $10.80
per unit, each unit consisting of four shares of the Company's common
stock and a warrant to purchase one share of the Company's common stock
at $1.00.
6. Notes Payable to Related Parties -
At December 31, 2002, notes payable to an officer and director, which
originated in 2002, consist of the following:
President, 8%, due August 2, 2003 $261,546
Director, non-interest bearing, due on demand, unsecured 13,340
--------
$274,886
========
The note payable to the President is collateralized by all assets of the
Company. Interest on related party debt was $10,417 for 2002.
F-11
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Stock Options and Warrants -
Stock Options
The Company has granted stock options under the Company's 1991 Stock
Options and Stock Award Plan (Plan Options) and sold stock purchase
options to outside investors (Financing Options). The 1991 Stock Options
and Stock Award Plan was terminated in 2002.
The 1991 Stock Options and Stock Awards Plan provided that 600,000
incentive stock options and nonqualified stock options may be issued to
selective employees and non-employees of the Company. The Board of
Directors determined the option price for all stock options granted under
the Plan. Option prices for incentive stock options were not less than
100% of the fair value of common stock at date of grant and not less than
110% of the fair value of common stock at date of grant for holders
possessing more than 10% of the Company's voting power. Option prices for
nonqualified stock options were not less than 100% of the fair value of
the common stock at date of grant. All options granted under the Plan
were nonqualified.
The Company sold for cash 24,750 Financing Options at $.061 per share
during 2001, exercisable at $6.00 per share. The cash was refunded in
2002.
Stock option activity with respect to the Plan Options and Financing
Options is as follows:
Weighted-Average
Options Exercise Price
------- --------------
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Beginning of year 606,750 592,500 $ .62 $ .90
Granted - 93,750 - 1.77
Cancelled (99,750) (25,000) 2.29 1.07
Exercised (507,000) (54,500) .29 5.47
-------- -------
End of year - 606,750 - .62
======== =======
With the exception of Financing Options sold in 2001 at grant date common
stock fair value of $6.00 per share, all other options granted in 2001
were granted at exercise prices less than fair market value of common
stock at date of grant. The weighted-average grant date fair value of all
options granted at less than fair value of common stock at grant date for
2001 was $5.80.
If the Company recognized stock option compensation expense based on fair
value at date of grant, consistent with the methods prescribed by SFAS
No. 123, net loss and per share disclosures would change to the pro forma
amounts below:
Year Ended December 31,
-----------------------
2002 2001
---- ----
Net loss:
As reported $(2,020,149) $(1,303,224)
Pro forma (2,035,582) (1,343,044)
Net loss per share - basic and diluted:
As reported (.24) (.19)
Pro forma (.25) (.19)
F-12
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Stock Options and Warrants - (continued)
Stock Warrants
At December 31, 2002, the Company has outstanding exercisable warrants to
purchase 1,999,543 shares of common stock at $1.00. In addition, there
are outstanding exercisable warrants to purchase a total of 59,445 units
of the Company's securities at $10.80 per unit. Each unit consists of
four shares of common stock and a five-year warrant immediately
exercisable to purchase one share of common stock at $1.00 per share. All
warrants expire July 31, 2007.
The weighted-average exercise price on all shares issuable under the
above warrants, 2,296,768 shares of common stock, is $1.18 and the
weighted-average remaining contractual life is 4.6 years.
The fair value of options and warrants is estimated at grant-date using
the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Warrants Options
-------- -------
Year Ended December 31,
-----------------------
2002 2001
---- ----
Risk-free interest rate 3.06% 4.66%
Expected life-years 5 5
Expected volatility* 0.00% 0.00%
Expected dividend rate 0.00% 0.00%
*Since the Company's stock was thinly traded, the Company is
essentially a nonpublic entity. Therefore, volatility was set at 0%
as permitted by SFAS 123.
8. Income Taxes -
Income tax benefit consists of the following:
Year Ended December 31,
-----------------------
2002 2001
---- ----
Current $(235,100) $(394,646)
Deferred 163,200 (1,100)
---------- ---------
$ (71,900) $(395,746)
========== =========
Income tax computed at the U.S. federal statutory rate reconciled to the
effective tax rate is as follows:
Year Ended December 31,
-----------------------
2002 2001
----- -----
Benefit at statutory tax rate (34.0)% (35.0)%
Benefit of net operating loss 18.9 20.0
Change in valuation allowance 17.5 ( 0.0)
Other (5.8) (8.3)
----- -----
(3.4)% (23.3)%
===== =====
F-13
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Income Taxes - (continued)
Significant components of net deferred tax assets are as follows:
December 31,
------------
2002 2001
------- -------
Deferred tax assets:
Operating loss carryovers $406,700 $235,900
Accrued compensation - 436,000
Accrued license fees - 45,900
------- -------
406,700 717,800
Deferred tax liabilities:
Other (39,600) (118,600)
Valuation allowance (367,100) -
------- -------
Net deferred tax assets $ - $599,200
======== ========
The valuation allowance was provided as it is probable the deferred tax
asset will not be realized. The valuation allowance increased by $367,100
in 2002 primarily because of the Company's inability to utilize net
operating losses.
The Company has an operating loss carryforward of approximately
$1,162,000 for U.S. federal income tax purposes which expires in 2022.
9. Employee Benefit Plan -
The Company maintains a 401(k) plan for its employees. The employees are
allowed to contribute to the Plan as provided under the law. Any matching
contributions by the Company are at the discretion of the Board of
Directors. No matching contributions have been made for the years ended
December 31, 2002 and 2001.
10. Commitments -
Operating Leases
Facilities are leased under operating leases expiring through 2004. The
leases require monthly base rents plus increases for operating expenses
and/or property taxes as defined in the leases. Total rent expense for
all leases was approximately $154,800 and $151,000 for 2002 and 2001,
respectively.
Approximate future minimum lease payments are as follows:
Year Amount
---- -------
2003 $79,300
2004 12,000
-------
$91,300
=======
Employment Agreement
The Company has an employment agreement with its President and Chief
Executive Officer at an annual pay of $180,000. The agreement contains a
provision that requires the Company to pay an amount equal to the annual
salary if he is terminated without cause.
F-14
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Major Customers and Geographic Information -
Major Customers
Approximately 61%, or $762,100, of the Company's revenues in 2002 were
from three customers; A (US) 33%; B (Taiwan) 18%; and C (Japan) 10%.
Approximately 45%, or $794,000, of the revenues in 2001 were from two
customers: C (Japan) 33% and D (US) 12%
Approximately 80%, or $167,361, of total accounts receivable at December
31, 2002 were from three customers; B (Taiwan) 40%; E (US) 30%; and F
(Hong Kong) 10%. Approximately 68%, or $358,763, of total accounts
receivable at December 31, 2001 were from four customers; D (US) 31%; B
(Taiwan)) 14%; G (Singapore) 12%; and H (Singapore) 11%.
Geographic Information
2002 2001
---------- ----------
Revenues
Taiwan $239,800 $ 71,200
Japan 120,700 588,700
Singapore 98,200 243,350
Others outside the United States 126,615 72,375
United States 655,900 797,000
---------- ----------
$1,241,215 $1,772,625
========== ==========
Property and Equipment, Net
United States $52,038 $63,150
Outside the United States 121 202
---------- ----------
$52,159 $63,352
========== ==========
12. Contingencies and Uncertainty -
In an agreement dated April 19, 2002, the Company's President and Chief
Executive Officer (President) forgave the payment of his accrued salary
and released the Company, its successors, its officers and directors from
any liability in connection with the accrued salary. In exchange, the
Company agreed that its President will receive certain proceeds, if any,
that Scanner may receive out of litigation involving patents that Scanner
had licensed. Under the agreement, the Company keeps 60% of any proceeds
of the currently ongoing litigation and pays its President 40% of such
proceeds until the Company has been reimbursed for all attorney fees and
other expenses incurred in connection with the current litigation, and
its President has received the total of $1,254,575. If one party receives
all the amounts owing to such party before the other party's claim under
this provision is satisfied, the other party receives 100% of the
proceeds until its claim is satisfied. If any proceeds remain after such
payment, the Company's President receives 50% of such remainder. He also
has a right to receive part of the proceeds, if any, the Company may
receive out of any subsequent litigation involving the licensed patents.
The Company keeps 60% of any such proceeds until its attorney fees and
other expenses incurred in connection with the current and any subsequent
litigation have been reimbursed, and its President receives 40% of any
such proceeds until he has received a total of $1,254,575 of the proceeds
of the currently ongoing and any subsequent litigation. If any proceeds
of the subsequent litigation remain after such distribution, the Company
will pay 25% of such remaining proceeds to its President. The unearned
compensation forgiven ($1,254,575) less the related deferred tax benefit
($436,000) was recorded as additional paid-in capital in stockholders'
equity.
F-15
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Contingencies and Uncertainty - (continued)
To provide the Company's Senior Vice President with an incentive to
continue his employment with the Company, and to compensate him for
compensation in recent years which the Company believes was less than he
might have received in a comparable position elsewhere, the Senior Vice
President was also a party to the agreement regarding the distribution of
litigation proceeds. The Company agreed to pay to him 20% of the
remaining proceeds, if any, Scanner receives out of any subsequent
litigation as described above involving the licensed patents, and that
remain after the aforesaid payments to the Company and its President have
been made out of such proceeds.
In 2000, the Company instituted a lawsuit against a Belgian corporation
for infringement of two of its patents. The Belgian corporation has filed
counterclaims alleging unfair competition. Discovery has been completed
in the case and a so-called Markman hearing was held in November 2001.
Based on the Markman hearing, the court will determine the scope of the
patent claims at issue. The parties filed motions for summary judgment in
May 2002. No trial date has been set. At this point, the Company will
vigorously defend the counterclaim and believes that any unfavorable
decision will not have a material or adverse effect on the consolidated
financial statements. The Company expects to incur significant additional
expenses in 2003 to pursue this lawsuit.
In 2002, the Company brought suit against two law firms that previously
represented the Company in the aforementioned patent litigation. The
Company demanded a full and complete accounting for the fees and
expenses, the payment of which these firms demand in connection with the
patent litigation. The Company has paid the law firms $558,652 in legal
fees and costs. The law firms claim that the Company owes them an
additional $402,984. When the Company brought the patent suit, the law
firms estimated that legal fees and costs through the discovery stage of
the patent litigation would be $447,000 to $585,000. The Company,
therefore, contends that it does not owe any further payments to the
defendants. At December 31, 2002, the $402,984 is included in accounts
payable in the consolidated balance sheet.
13. Subsequent Events -
In April 2003, the bank line of credit was renewed through March 31, 2004
The line was increased by $200,000 to $1,100,000 with an interest rate at
prime and the Company provided the bank with a security interest in its
general business assets. The line is guaranteed by individuals who
received for their financial support five year warrants to purchase
275,000 shares of the Company's common stock at $2.75 per share. The
Company also granted the individuals a thirty-day warrant to purchase an
additional 275,000 shares of the Company's common stock at $2.00 per
share. Provided the guarantor pays cash for at least one half of the
shares subject to their thirty-day warrant, the guarantor may provide a
promissory note payable one year from the exercise dare for the remainder
of the shares. As of April 14, 2003, the guarantors have purchased
250,000 of the shares granted under the thirty-day warrant for $500,000
in cash and one year notes at 4.25%. The $275,000 cash portion of the
purchase price is due within thirty days. The individuals who exercised
their thirty-day warrants were granted warrants to purchase an additional
500,000 shares of the Company's common stock at $2.00 per share.
Between January 1, 2003 and April 14, 2003, the Company sold 65,000
shares of common stock at $2.50, an aggregate amount of $162,500, under a
private placement offering. Warrants to purchase an additional 7,500
shares of common stock at $3.00 per share were issued in connection with
these sales. The warrants expire three years after issuance.
On April 10, 2003, the Company issued a $100,000 4.25% note payable in
exchange for cash. The note is due April 8, 2004. A warrant, which
expires on April 11, 2006, to purchase 25,000 shares of the Company's
common stock at $2.75 per share was issued in connection with the note.
The income tax receivable of $235,900 was received on March 31, 2003.
F-16
EXHIBIT INDEX
SCANNER TECHNOLOGIES CORPORATION
FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 2002
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of the
Registrant--incorporated by reference to Exhibit 2.3 to the
Registrant's Current Report on Form 8-K filed on August 15, 2002
3.2 Amended and Restated Bylaws of the Registrant--incorporated by
reference to Exhibit 2.4 to the Registrant's Current Report on
Form 8-K filed on August 15, 2002
10.1 Employment agreement dated January 1, 1991 between the Registrant
and Elwin M. Beaty--incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report Form 10-QSB for quarter ended
September 30, 2002**
10.2 License Agreement dated November 16, 1990 between the Registrant,
Elwin M. Beaty and Elaine E. Beaty--incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report Form 10-QSB for
quarter ended September 30, 2002
10.3 Agreement dated April 19, 2002 among the Registrant, Elwin M.
Beaty and David P. Mork relating to forgiveness of
salary--incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report Form 10-QSB for quarter ended
September 30, 2002
10.4 Lease Agreement between Registrant and Carleton Investors, L.L.C.
relating to Registrant's Arizona premises--incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report
Form 10-QSB for quarter ended September 30, 2002
11* Statement Regarding Computation of Earnings Per Share
21 Subsidiary of the Registrant--incorporated by reference to Exhibit
21 to the Registrant's Quarterly Report Form 10-QSB for quarter
ended September 30, 2002
99* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*Filed herewith.
**Management agreement or compensatory plan or arrangement.