SCANNER TECHNOLOGIES CORPORATION FORM 10-Q DATED JUNE 30, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,
2004 |
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-08149
SCANNER TECHNOLOGIES CORPORATION
(Name of small business issuer in its charter)
New Mexico
(State or other jurisdiction of incorporation or organization)
|
85-0169650
(IRS Employer Identification No.)
|
14505 21st Avenue North, Suite 220, Minneapolis, MN 55447
(Address of principal executive offices)
(763) 476-8271
(Issuers telephone number)
Check whether the Issuer (1) filed all reports 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 Issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No
[ ]
The Issuer had 10,454,698 shares of Common Stock, no par value, outstanding as of July 31, 2004.
Transitional Small Business Disclosure Format (Check one): Yes
[ ] No
[X]
SCANNER TECHNOLOGIES CORPORATION
FORM 10-QSB
Table of Contents
PART I. |
|
FINANCIAL INFORMATION |
|
3 |
Item 1. |
|
Financial Statements |
|
3 |
Item 2. |
|
Managements Discussion and Analysis or Plan of Operation |
|
10 |
Item 3. |
|
Controls and Procedures |
|
14 |
|
PART II. |
|
OTHER INFORMATION |
|
14 |
Item 1. |
|
Legal Proceedings |
|
14 |
Item 2. |
|
Changes in Securities and Small Business Issuer Purchases of Equity Securities |
|
14 |
Item 3. |
|
Defaults Upon Senior Securities |
|
14 |
Item 4. |
|
Submissions Of Matters To A Vote of Security Holders |
|
15 |
Item 5. |
|
Other Information |
|
15 |
Item 6. |
|
Exhibits and Reports on Form 8-K |
|
15 |
SIGNATURE |
|
|
|
16 |
EXHIBIT INDEX |
|
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
Three Months Ended June 30, | |
Six Months Ended June 30, |
|
| |
| |
|
2003 | |
2004 | |
2003 | |
2004 |
|
| |
| |
| |
| |
REVENUES |
|
|
$ | 767,981 |
|
$ | 1,752,159 |
|
$ | 891,889 |
|
$ | 3,001,943 |
|
|
COST OF GOODS SOLD | | |
| 210,002 |
|
| 489,387 |
|
| 272,209 |
|
| 841,987 |
|
|
| |
| |
| |
| |
GROSS PROFIT | | |
| 557,979 |
|
| 1,262,772 |
|
| 619,680 |
|
| 2,159,956 |
|
|
| |
| |
| |
| |
OPERATING EXPENSES | | |
Selling, general and administrative | | |
| 304,349 |
|
| 528,216 |
|
| 626,517 |
|
| 1,092,388 |
|
Research and development | | |
| 118,433 |
|
| 95,002 |
|
| 255,639 |
|
| 188,292 |
|
Legal fees | | |
| 187,995 |
|
| 64,025 |
|
| 221,327 |
|
| 132,528 |
|
|
| |
| |
| |
| |
| | |
| 610,777 |
|
| 687,243 |
|
| 1,103,483 |
|
| 1,413,208 |
|
|
| |
| |
| |
| |
INCOME (LOSS) FROM OPERATIONS | | |
| (52,798 |
) |
| 575,529 |
|
| (483,803 |
) |
| 746,748 |
|
|
OTHER INCOME (EXPENSE) | | |
Other income (expense), net | | |
| 240,033 |
|
| 11,510 |
|
| 239,995 |
|
| 333,942 |
|
Interest expense | | |
| (153,310 |
) |
| (54,616 |
) |
| (166,877 |
) |
| (206,195 |
) |
|
| |
| |
| |
| |
INCOME (LOSS) BEFORE INCOME TAXES | | |
| 33,925 |
|
| 532,423 |
|
| (410,685 |
) |
| 874,495 |
|
|
INCOME TAXES | | |
| 300 |
|
| 0 |
|
| 2,800 |
|
| 1,800 |
|
|
| |
| |
| |
| |
NET INCOME (LOSS) | | |
$ | 33,625 |
|
$ | 532,423 |
|
$ | (413,485 |
) |
$ | 872,695 |
|
|
| |
| |
| |
| |
NET INCOME (LOSS) PER SHARE BASIC | | |
$ | 0.00 |
|
$ | 0.05 |
|
$ | (0.04 |
) |
$ | 0.08 |
|
|
| |
| |
| |
| |
NET INCOME (LOSS) PER SHARE DILUTED | | |
$ | 0.00 |
|
$ | 0.04 |
|
$ | (0.04 |
) |
$ | 0.07 |
|
|
| |
| |
| |
| |
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC | | |
| 10,229,798 |
|
| 10,432,785 |
|
| 10,126,386 |
|
| 10,429,755 |
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED | | |
| 11,532,836 |
|
| 12,418,094 |
|
| 10,126,386 |
|
| 11,756,315 |
|
See notes to condensed consolidated financial statements.
3
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
December 31, 2003 | |
June 30, 2004 |
|
| |
| |
|
(audited) | |
(unaudited) |
ASSETS |
|
|
| |
|
| |
|
CURRENT ASSETS | | |
Cash | | |
$ | 170,082 |
|
$ | 299,153 |
|
Accounts receivable, less allowance of $40,000 | | |
| 984,338 |
|
| 1,371,706 |
|
Inventory, less allowance of $20,000 and $40,500 | | |
| 911,382 |
|
| 1,644,866 |
|
Prepaid expenses | | |
| 37,418 |
|
| 36,455 |
|
|
| |
| |
TOTAL CURRENT ASSETS | | |
| 2,103,220 |
|
| 3,352,180 |
|
| | |
PROPERTY AND EQUIPMENT, net | | |
| 41,294 |
|
| 48,528 |
|
PATENT RIGHTS, net | | |
| 283,025 |
|
| 252,149 |
|
OTHER | | |
| 17,873 |
|
| 29,594 |
|
|
| |
| |
| | |
$ | 2,445,412 |
|
$ | 3,682,451 |
|
|
| |
| |
| | |
LIABILITIES AND STOCKHOLDERS EQUITY | | |
CURRENT LIABILITIES | | |
Bank line of credit | | |
$ | 701,000 |
|
$ | 690,000 |
|
Notes payable | | |
| 113,340 |
|
| |
|
Accounts payable | | |
| 804,128 |
|
| 742,968 |
|
Accrued expenses | | |
| 157,709 |
|
| 223,432 |
|
Customer deposits | | |
| 20,940 |
|
| |
|
|
| |
| |
TOTAL CURRENT LIABILITIES | | |
| 1,797,117 |
|
| 1,656,400 |
|
|
| |
| |
| | |
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; |
10,426,459 and 10,454,698 shares issued and outstanding | | |
| 4,128,528 |
|
| 4,195,924 |
|
Warrants | | |
| 411,561 |
|
| 397,404 |
|
Deferred financing costs, net | | |
| (176,822 |
) |
| |
|
Notes receivable for common stock | | |
| (275,000 |
) |
| |
|
Accumulated deficit | | |
| (3,439,972 |
) |
| (2,567,277 |
) |
|
| |
| |
| | |
| 648,295 |
|
| 2,026,051 |
|
|
| |
| |
| | |
| | |
$ | 2,445,412 |
|
$ | 3,682,451 |
|
|
| |
| |
See notes to condensed consolidated financial statements.
4
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Six Months Ended June 30, |
|
| |
|
2003 | |
2004 |
|
| |
| |
OPERATING ACTIVITIES |
|
|
| |
|
| |
|
Net income (loss) | | |
$ | (413,485 |
) |
$ | 872,695 |
|
Adjustments to reconcile net income (loss) to net cash used | | |
by operating activities: | | |
Depreciation | | |
| 11,169 |
|
| 10,244 |
|
Amortization of deferred financing costs | | |
| 132,616 |
|
| 176,822 |
|
Amortization of patent rights | | |
| 30,876 |
|
| 30,876 |
|
Interest expense added to debt principal | | |
| 9,808 |
|
| |
|
Lawsuit settlement | | |
| |
|
| (322,432 |
) |
Changes in operating assets and liabilities: | | |
Accounts receivable | | |
| (176,538 |
) |
| (387,368 |
) |
Income taxes receivable | | |
| 235,900 |
|
| |
|
Inventory | | |
| (18,710 |
) |
| (733,484 |
) |
Prepaid expenses and other | | |
| (6,248 |
) |
| (10,758 |
) |
Accounts payable | | |
| 44,388 |
|
| 261,272 |
|
Accrued expenses | | |
| 4,828 |
|
| 65,723 |
|
Customer deposits | | |
| |
|
| (20,940 |
) |
|
| |
| |
Net cash used by operating activities | | |
| (145,396 |
) |
| (57,350 |
) |
|
| |
| |
INVESTING ACTIVITY | | |
Purchases of property and equipment | | |
| (3,003 |
) |
| (17,478 |
) |
|
| |
| |
FINANCING ACTIVITIES | | |
Net payments on bank line of credit | | |
| (279,000 |
) |
| (11,000 |
) |
Proceeds from notes payable | | |
| 100,000 |
|
| |
|
Payments on notes payable | | |
| (49,968 |
) |
| (113,340 |
) |
Proceeds from notes receivable for common stock | | |
| |
|
| 275,000 |
|
Proceed from the exercise of warrants | | |
| 350,477 |
|
| 53,239 |
|
Proceeds from the sale of common stock | | |
| 175,000 |
|
| |
|
|
| |
| |
Net cash provided by financing activities | | |
| 296,509 |
|
| 203,899 |
|
|
| |
| |
NET INCREASE IN CASH | | |
| 148,110 |
|
| 129,071 |
|
|
CASH | | |
Beginning of period | | |
| 31,037 |
|
| 170,082 |
|
|
| |
| |
End of period | | |
$ | 179,147 |
|
$ | 299,153 |
|
|
| |
| |
Supplemental Disclosures of Cash Flow Information: | | |
Cash paid for: | | |
Interest | | |
$ | 23,517 |
|
$ | 32,444 |
|
Income taxes | | |
| 2,800 |
|
| 1,800 |
|
|
Noncash operating, financing and investing activities: | | |
Warrants exercised | | |
| 163,110 |
|
| 14,157 |
|
Warrants issued in connection with line of credit | | |
| 574,671 |
|
| |
|
Notes receivable issued for purchase of common stock | | |
| 300,000 |
|
| |
|
See notes to condensed consolidated financial statements.
5
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. |
Basis of Presentation and Significant Accounting Policies |
|
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America for interim financial information. They do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further
information, refer to the financial statements and footnotes for the year ended December 31, 2003 included in our Annual
Report on Form 10-KSB. |
|
The Company invents, develops and markets vision
inspection products that are used in the semiconductor industry for the inspection of integrated circuits. The
Companys customer base is small in numbers and global in location. |
|
Principles of Consolidation
|
|
The condensed 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 is earned primarily through sales of inspection
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 preparation of these condensed 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 condensed
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. |
|
Fair Value of Financial Instruments
|
|
The carrying amounts of financial instruments consisting
of cash, receivables, bank line of credit, notes payable, accounts payable, accrued expenses and customer deposits
approximate their fair values. |
|
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, |
6
|
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 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 for estimated
excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based
on assumptions about future demand and market conditions. |
|
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 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. |
|
All long-lived assets are reviewed at least annually for
impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
An impairment loss is recognized when estimated discounted cash flows to be generated by those assets are less than the
carrying value of the asset. When an impairment loss is recognized, the carrying amount is reduced to its estimated fair
value, based on appraisals or other reasonable methods to estimate value. |
|
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-Based Compensation |
|
The Company has a stock-based employee compensation plan
consisting of stock options. The Company has not adopted Statement of Financial Accounting Standards (SFAS) No. 123 to
expense stock options and continues to apply the intrinsic value method under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock
options. Accordingly, any compensation cost for stock options is measured as the excess, if any, of the fair market
value of the Companys stock at the measurement date over the employees option exercise price. Any resulting
compensation expense is amortized ratably over the related vesting period. Options and warrants to non-employees are
accounted for as required by SFAS No. 123. |
|
The Company estimates the fair value of options and
warrants at the grant date using the Black-Scholes option pricing model. The model takes into consideration weighted
average assumptions related to the following: risk-free interest rate; expected live years; expected volatility; and
expected dividend rate. Since the Companys stock is thinly traded, volatility is set at 0% as permitted by SFAS
123. The costs associated with the valuation of the warrants issued in 2003 in connection with the line of credit were
recorded as deferred financing costs. These costs were amortized over the term of the line of credit, and the net
unamortized balance at December 31, 2003 was offset against stockholders equity. |
|
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 income (loss)
and per share disclosures would remain the same for the three and six |
7
|
month periods ended June 30, 2003. For the three and six
month periods ended June 30, 2004, net income and per share disclosures would change to the pro forma amounts below:
|
|
Periods Ended June 30, 2004 |
|
| |
|
Three Months | |
Six Months |
|
| |
| |
Net income: |
|
|
|
|
|
|
|
|
As reported | | |
$ | 532,423 |
|
$ | 872,695 |
|
Stock option amortization cost | | |
| 4,633 |
|
| 8,377 |
|
|
| |
| |
Pro forma | | |
$ | 527,790 |
|
$ | 864,318 |
|
|
| |
| |
Net income per share - basic: | | |
As reported | | |
$ | .05 |
|
$ | .08 |
|
Stock option amortization cost | | |
| |
|
| |
|
|
| |
| |
Pro forma | | |
$ | .05 |
|
$ | .08 |
|
|
| |
| |
Net income per share - diluted: | | |
As reported | | |
$ | .04 |
|
$ | .07 |
|
Stock option amortization cost | | |
| |
|
| |
|
|
| |
| |
Pro forma | | |
$ | .04 |
|
$ | .07 |
|
|
| |
| |
|
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. |
|
Significant concentrations of credit risk exist in
accounts receivable, which are due from customers located primarily in the Far East and the United States. |
|
Net Income (Loss) Per Share |
|
Basic net income (loss) per share is computed by
dividing the net income (loss) by the weighted-average common shares outstanding for the reported period. Diluted net
income (loss) per share reflects the potential dilution that could occur if holders of warrants and options that are not
antidilutive converted their holdings into common stock. The dilutive effect of options and warrants included 1,303,038
and 1,985,309 additional shares in the three months ended March 31, 2003 and 2004, respectively, and 1,326,560
additional shares in the six months ended June 30, 2004. |
|
Options and warrants to purchase 307,083 and 375,000
shares of common stock with a weighted average exercise price of $2.76 and $2.77 were excluded from the diluted
computation for the three months ended June 30, 2003 and 2004, respectively, because they were antidulitive. Options and
warrants to purchase 2,669,287 and 672,225 shares of common stock with a weighted average exercise price of $1.34 and
$2.59 were excluded from the diluted computation for the six months ended June 30, 2003 and 2004, respectively, because
they were antidulitive. |
2. |
Contingencies and Uncertainty |
|
In an agreement dated April 19, 2002, the Companys
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 |
8
|
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 partys 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 Companys 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.
|
|
To provide the Companys 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 patents related to three-dimensional ball array
inspection apparatus and method. In June 2003, the Company and the Belgian corporation reached a settlement concerning
one illumination source inspection systems. Pursuant to the settlement agreement, the Belgian corporation made a
one-time payment of $400,000 to the Company to settle all issues with regard to these one light source inspection
systems. The court found no infringement with regard to the two illumination source devices that the Belgian corporation
sold. The Company agreed to the settlement in order to allow it to immediately appeal the courts ruling concerning
inspection systems involving two light sources, eliminating the need, delay and expense of a trial with regard to these
systems at this stage. On April 23, 2004, the United States Court of Appeals ruled in favor of Scanner, finding that the
claim terms an illumination apparatus and illuminating in its patents encompass one or more
illumination sources and overturned the District Courts entry of summary judgment of non-infringement. The Company
intends to continue to vigorously enforce its patent rights and expects to incur significant additional expenses in 2004
to pursue their lawsuit. The Company believes that any unfavorable decision will not have a material or adverse effect
on the consolidated financial statements. In connection with the settlement in 2003, the Company paid its President
$160,000 pursuant to the agreement noted above. The $400,000 settlement less the $160,000 paid to the President was
recorded as net in other income in the consolidated financial statements for the three months ended June 30, 2003.
|
|
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, 2003, the $402,984 was
included in accounts payable in the consolidated balance sheet. |
|
A trial was conducted in December 2003 relating to the
above legal fees dispute. In January 2004, the court held that, the number of hours billed by the Defendants (law
firms) was grossly excessive. In its ruling, the court reduced the outstanding balance due the law firms by
$322,432. The Company believes that this decision will not be appealed by the law firms. Consequently, Scanner reflected
the reduction in accounts payable and recorded other income in its condensed consolidated financial statements for the
three months ended March 31, 2004. |
9
|
The Companys bank line of credit terminated on
May 1, 2004. The bank has not called the $690,000 balance on the line at the date of termination while the Company
negotiates a new line of credit or other financing arrangements. |
Item 2. |
Managements Discussion and Analysis or Plan of Operation |
|
This Quarterly Report on Form 10-QSB 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 (Scanner) set forth under the heading Managements 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. |
|
The Company generates revenues from the sale of
machine-vision inspection products used in the semiconductor industry for the inspection of integrated circuits. The
products include machine-vision modules sold to original equipment manufactures that use the modules as a component of
inspection systems they sell to end users, as well as complete machine-vision inspection systems that the Company sells
to end users. Because the Company sells relatively few of its products each year, the Companys business is
characterized by uneven quarterly results that are dependent on the timing of sales and revenue recognition.
|
|
During recent years, the Companys operations were
adversely affected by a lack of demand in the semiconductor marketplace, which caused many of the Companys
potential customers to cease or defer purchases of capital equipment such as the inspection equipment offered by the
Company. Semiconductor Equipment and Materials International (SEMI), a trade association of semiconductor equipment and
material manufacturers, estimates that sales of semiconductor equipment rose from $19.7 billion in 2002 to $21.4 billion
in 2003. SEMI expects the market for semiconductor equipment to increase by 39% in 2004 and 18% in 2005, but to decrease
in 2006 by 6.6% because new capacity is anticipated to go into production at that time. The Company believes the general
improvement in industry conditions contributed to the improvement in the Companys operations in 2003 and the first
six months of 2004. The Company will continue to be subject to the cyclical nature of the semiconductor marketplace.
|
|
In addition to general trends in the semiconductor
marketplace, the Company must compete for sales with other providers of machine-vision inspection equipment, most of
whom are larger, better financed and offer a broader selection of products. The Company must compete on the basis of
price, product performance including speed and size of defects detected, ease of use and technological advancement.
During 2003, the Company commenced sales of its VisionFlex inspection systems, which were introduced in July 2002. The
Company must continue research and development to improve existing products and introduce new products in order to
compete effectively with other providers of inspection equipment. |
|
The Company continues to operate with limited working
capital resources and must increase revenues sufficient to generate cash flow from operations or seek additional
financing, or both, in order to sustain operations. In order to obtain additional debt or equity 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 increasing revenues or obtaining additional equity financing 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. |
10
|
CRITICAL ACCOUNTING POLICIES |
|
The discussion and analysis of financial condition and
results of operations is based upon the condensed 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 affect its more significant judgments and estimates used in the preparation of its condensed consolidated
financial statements. |
- Revenue recognition;
- Allowances for doubtful accounts and excess and obsolete inventory;
- Patent rights;
- Accounting for income taxes;
- Accounting and valuation of options and warrants;
|
Revenue is earned primarily through sales of inspection
products 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. |
|
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 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 estimated excess and
obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based on
assumptions about future demand and market conditions. |
|
Patent
rights are stated at cost less accumulated amortization. Amortization is provided using
the straight-line method over six years. Patent rights are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. An impairment loss is recognized when estimated discounted
cash flows to be generated by those assets are less than the carrying value of the asset.
When impairment loss is recognized, the carrying amount is reduced to its estimated fair
value, based on appraisals or other reasonable methods to estimate value. |
|
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
|
11
|
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. |
|
The Company accounts for employee stock options under
Accounting Principles 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. |
|
The Company estimates the fair value of options and
warrants at the grant date using the Black-Scholes option pricing model. The model takes into consideration weighted
average assumptions related to the following: risk-free interest rate; expected live years; expected volatility; and
expected dividend rate. Since the Companys stock is thinly traded, the Company is essentially a nonpublic entity.
Therefore, volatility is set at 0% as permitted by SFAS 123. The costs associated with the valuation of the warrants
issued in connection with the line of credit are recorded as deferred financing costs. These costs are being amortized
over the term of the line of credit, and the net unamortized balance is offset against stockholders equity.
|
|
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 |
|
Sales for the three months ended June 30, 2004, were
$1,752,159 compared to $767,981 for the three months ended June 30, 2003. The sales increase in 2004 relates primarily
to sales of the Companys robotic inspection systems to end users and an increase in the purchases of capital
equipment by customers in the semiconductor industry. |
|
Cost of goods sold increased by $279,385 to $489,387 in
the three months ended June 30, 2004, from $210,002 in 2003. Cost of goods sold as a percentage of sales increased by
0.6% to 27.9% in 2004 compared to 27.3% in 2003. In 2004, material cost decreased 1.1% as a percent of sales. This
decrease was offset by an increase in manufacturing costs, primarily labor through increased personnel, as a percent of
sales. |
|
Selling, general and administrative expenses increased
by $223,867 to $528,216 for the three months ended June 30, 2004, compared to $304,349 in the prior period. The increase
in expenses related primarily to increases in salaries and related items, as a result of increased personnel and
marketing expenses. |
|
Research and development expenses were $95,002 in the
three months ended June 30, 2004 compared to $118,433 for the three months ended June 30, 2003. The research and
development activities related to the Companys development of its own line of robotic inspection systems for sale
to end users. |
|
Legal fees decreased by $123,970 to $64,025 in the three
months ended June 30, 2004, from $187,995 in 2003. A significant portion of the legal fees in 2003 related to the patent
infringement claims brought by the Company against a competitor. |
|
Other income (expense) was ($43,106) in the three months
ended June 30, 2004, compared to $86,723 in 2003. Interest expense was $98,694 lower in 2004 than it was in 2003, due
primarily to the amortization of the warrant valuation related to the renewal of the line of credit. In 2003, the
Company settled a portion of its litigation relating to its patent infringement claim for $400,000. In connection with
the settlement and a prior agreement, the Company paid its President $160,000. |
|
The net income for the three months ended June 30, 2004
was $532,423 compared to net income of $33,625 in 2003. The change was primarily the result of increased gross profit of
$704,793 offset by increased operating expenses of $76,466 and increased net nonoperating expense of $129,829.
|
|
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 |
|
Sales for the six months ended June 30, 2004, were
$3,001,943 compared to $891,889 for the six months ended June 30, 2003. The sales increase in 2004 relates primarily to
sales of the Companys robotic |
12
|
inspection systems to end users and an increase in the purchases of
capital equipment by customers in the semiconductor industry. |
|
Cost of goods sold increased by $569,778 to $841,987 in
the six months ended June 30, 2004, from $272,209 in 2003. Cost of goods sold as a percentage of sales decreased by 2.5%
to 28.0% in 2004 compared to 30.5% in 2003. In 2004, material cost decreased 0.5% as a percent of sales. The decrease in
manufacturing costs as a percent of sales was primarily the result of the increase in sales. |
|
Selling, general and administrative expenses increased
by $465,871 to $1,092,388 for the six months ended June 30, 2004, compared to $626,517 in the prior period. The increase
in expenses related primarily to increases in salaries and related items, as a result of increased personnel, and
marketing expenses. |
|
Research and development expenses were $188,292 in the
six months ended June 30, 2004 compared to $255,639 for the six months ended June 30, 2003. The research and development
activities related to the Companys development of its own line of robotic inspection systems for sale to end users
was in its early stages in 2003. The development process is continuing in 2004. |
|
Legal fees decreased by $88,799 to $132,528 in the six
months ended June 30, 2004, from $221,327 in 2003. A significant portion of the legal fees in both periods related to
the patent infringement claims brought by the Company against a competitor and costs relating to internally developed
new patents. |
|
Other income was $127,747 in the six months ended June
30, 2004, compared to $73,118 in 2003. In the six months ended June 30, 2004, the Company won a lawsuit relating to fees
and expenses charged by the two law firms previously handling their patent infringement claim. The court ruled that the
legal fees and expenses billed by the firms were excessive in the amount of $322,432. This amount that was included in
accounts payable at December 31, 2003 was recorded as other income in the three months ended March 31, 2004. In 2003,
the Company settled a portion of its litigation relating to its patent infringement claim for $400,000. In connection
with the settlement and a prior agreement, the Company paid its President $160,000. Interest expense was $39,318 higher
in 2004 than it was in 2003, due primarily to the amortization of the warrant valuation related to the renewal of the
line of credit. |
|
The net income for the six months ended June 30, 2004
was $872,695 compared to a net loss of $413,485 in 2003. The change was primarily the result of increased gross profit
of $1,540,276, increased net nonoperating income of $54,629 offset by increased operating expenses of $309,725.
|
|
LIQUIDITY AND CAPITAL RESOURCES (FOR THE SIX MONTHS
ENDED JUNE 30, 2004) |
|
The Company has a $1,300,000 bank line of credit with an
interest rate at prime (4.25% at June 30, 2004). The Company provided the bank with a security interest in its general
business assets. The Companys outstanding indebtedness under the line of credit was $690,000 at June 30, 2004. The
line is guaranteed by certain shareholders. |
|
The Companys bank line of credit terminated on May
1, 2004. The bank has not called the $690,000 balance on the line at the date of termination while the Company
negotiates a new line of credit or other financing arrangements. |
|
The Company believes that the new line of credit being
negotiated or other financing arrangements, existing working capital and anticipated cash flows from operations and
equity investments will be adequate to satisfy projected operating and capital requirements for the next 12 months.
|
|
Net cash used by operating activities for the six months
ended June 30, 2004 totaled $57,350. Negative operating cashflows resulted primarily from the net income of $872,695 for
the period being offset by net non-cash adjustments of $104,490 relating primarily to a lawsuit settlement and to
depreciation and amortization and by net changes in operating assets and liabilities of $825,555 relating primarily to
increases in inventory and accounts receivable and a decrease in accounts payable. |
|
Net cash used by investing activities for the six months
ended June 30, 2004 totaled $17,478. The funds were used to purchase property and equipment. |
13
|
Net cash provided by financing activities for the six
months ended June 30, 2004 totaled $203,899. The amount relates primarily to proceeds from notes receivable for common
stock and the exercise of warrants offset by net debt payments. |
|
As of the end of the period covered by this report, the
Company carried out an evaluation, under the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon
the evaluation, the Chief Executive Officer and Chief Financial Officer, concluded that the Companys disclosure
controls and procedures are effective. |
|
There were no changes in the Companys internal
control over financial reporting that occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the Companys internal control over financial reporting.
|
PART II OTHER INFORMATION
|
In 2000, the Company instituted a lawsuit against a
Belgian corporation for infringement of two of its patents. The patents related to three-dimensional ball array
inspection apparatus and method. In June 2003, the Company and the Belgian corporation reached a settlement concerning
one illumination source inspection systems. Pursuant to the settlement agreement, the Belgian corporation made a
one-time payment of $400,000 to the Company to settle all issues with regard to these one light source inspection
systems. The court found no infringement with regard to the two illumination source devices that the Belgian corporation
sold. The Company agreed to the settlement in order to allow it to immediately appeal the courts ruling concerning
inspection systems involving two light sources, eliminating the need, delay and expense of a trial with regard to these
systems at this stage. On April 23, 2004, the United States Court of Appeals ruled in favor of Scanner, finding that the
claim terms an illumination apparatus and illuminating in its patents encompass one or more
illumination sources and overturned the District Courts entry of summary judgment of non-infringement. The Company
intends to continue to vigorously enforce its patent rights and expects to incur significant additional expenses in 2004
to pursue their lawsuit. The Company believes that any unfavorable decision will not have a material or adverse effect
on the consolidated financial statements. |
Item 2. |
Changes in Securities and Small Business Issuer Purchases of Equity Securities |
|
The Company issued 2,709 and 265 shares of common stock
to two individuals in April and May 2004, respectively, upon the exercise of warrants at $1.00 per share. The Company
also issued 25,000 shares of common stock to one individual in June 2004 upon the exercise of a warrant at $2.00 per
share. The Company relied upon Section 4(2) of the Securities Act for an exemption for transactions not involving a
public offering. |
|
On April 13, 2004, in exchange for services, the Company
issued to a consultant a two-year stock option to purchase 40,000 shares of common stock of the Company at $2.00 per
share, which option vests and becomes exercisable on August 13, 2004. The Company relied upon Section 4(2) of the
Securities Act for exemptions for transactions not involving a public offering. |
Item 3. |
Defaults Upon Senior Securities |
14
Item 4. |
Submission of Matters to a Vote of Security Holders |
|
The Company held its Annual Meeting of Shareholders on
June 17, 2004. The Company did not solicit proxies pursuant to Regulation 14A under the Securities Exchange Act of 1934,
and the shareholders voted on the following matters, approving all unanimously: |
|
(i) |
Set the number of directors at two (2): |
|
For: 5,866,897 |
Against: 0 |
Abstain: 0 |
|
(ii) |
Election of Directors: |
|
|
For: |
Withhold: |
|
Elwin M. Beaty |
5,866,897 |
0 |
|
David P. Mork |
5,866,897 |
0 |
|
(iii) |
Approve 2004 Equity Incentive Plan: |
|
For: 5,866,897 |
Against: 0 |
Abstain: 0 |
|
(iv) |
Ratifying the appointment of Lurie Besikof Lapidus & Company, LLP as independent
auditors for the current fiscal year: |
|
For: 5,866,897 |
Against: 0 |
Abstain: 0 |
Item 6. |
Exhibits and Reports on Form 8-K |
|
See Exhibit Index on page following signature page. |
15
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
Scanner Technologies Corporation |
|
|
|
|
|
|
Dated: August 13, 2004 |
By: |
/s/ Elwin M. Beaty |
|
|
|
|
|
Elwin M. Beaty
Its Chief Executive Officer
and Chief Financial Officer
(Principal executive officer and principal
financial and accounting officer) |
16
EXHIBIT INDEX
SCANNER TECHNOLOGIES CORPORATION
FORM 10-QSB FOR QUARTER ENDED JUNE 30, 2004
Exhibit Number
|
Description
|
|
3.1 |
Amended and Restated Articles of
Incorporation of the Registrant--incorporated by reference to Exhibit 2.3 to the Registrants Current
Report on Form 8-K filed on August 15, 2002 |
|
3.2 |
Amended and Restated Bylaws of the Registrantincorporated 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, 2004 between the Company and Elwin M. Beaty** |
|
10.2* |
Employment Agreement dated January 1, 2004 between the Company and David P. Mork** |
|
10.3* |
Promissory Note dated March 31, 2003 in favor of Bremer Bank, N.A., Commercial
Security Agreement dated March 31, 2003 between the Company and Bremer Bank, N.A.
and Change in Terms Agreement dated March 31, 2003 between the Company and Bremer
Bank, N.A. |
|
31* |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32* |
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
*Filed herewith.
**Designates a management contract or compensatory plan or arrangement.
17