FORM 10Q JUNE 30, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 1998.
Commission file number 0-12405
IMATRON INC.
New Jersey
I.D. No. 94-2880078
389 Oyster Point Blvd, South San Francisco, CA 94080
(650) 583-9964
Indicate by check mark whether the Registrant (1) had filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
At June 30, 1998, 86,125,980 shares of the Registrant's common stock (no par
value) were issued and outstanding.
Total Number of Pages: 19
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FORM 10Q JUNE 30, 1998
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IMATRON INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - 3
June 30, 1998 (unaudited) and
December 31, 1997 (restated).
Condensed Consolidated Statements of Operations - 4
Three Month and Six Month
Periods Ended June 30, 1998 (unaudited) and
1997 (unaudited and restated).
Condensed Consolidated Statements of Cash Flows - 5
Six Month Periods Ended
June 30, 1998 (unaudited) and
1997 (unaudited and restated).
Notes to Condensed Consolidated Financial 7
Statements (unaudited).
Item 2. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations.
PART II. OTHER INFORMATION 18
SIGNATURES 19
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FORM 10Q JUNE 30, 1998
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IMATRON INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents $ 2,614 $ 8,400
Short-term investments -- 180
Accounts receivable (net of allowance for doubtful
accounts of $2,845 at June 30, 1998 and $2,490 at
December 31, 1997:
Trade accounts receivable 8,700 7,944
Accounts receivable from affiliate 1,387 1,438
Inventories 16,434 12,926
Prepaid expenses 566 397
Net current assets of discontinued operations 338 4,697
--------- ---------
Total current assets 30,039 35,982
Property and equipment, net 2,509 2,394
Other assets 1,566 1,214
Long-term net assets of discontinued operations 3,408 3,575
--------- ---------
Total assets $ 37,522 $ 43,165
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable $ 3,087 $ 2,962
Other accrued liabilities 6,819 6,961
Capital lease obligations - due within one year 56 56
--------- ---------
Total current liabilities 9,962 9,979
Deferred income on sale leaseback transactions 1,126 1,376
Deferred income on service contract 360 420
Capital lease obligations 36 65
--------- ---------
Total liabilities 11,484 11,840
--------- ---------
Minority interest in discontinued operations- Note 12 1,170 14,255
--------- ---------
Shareholders' equity
Common stock, no par value; authorized-150,000 shares; issued and
outstanding - 86,729 shares in 1998 and 78,815 shares in 1997 105,748 90,728
Deferred compensation (190) (232)
Additional paid-in capital 9,340 9,290
Notes receivable from stockholder (336) --
Accumulated deficit (89,694) (82,716)
--------- ---------
Total shareholders' equity 24,868 17,070
--------- ---------
Total liabilities and shareholders' equity $ 37,522 $ 43,165
========= =========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
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FORM 10Q JUNE 30, 1998
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IMATRON INC.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues: (Restated) (Restated)
Product sales $ 9,892 $ 7,931 $ 10,841 $ 15,722
Service 1,487 1,032 3,046 2,156
Development contracts -- 1,250 1,250 2,500
-------- -------- -------- --------
Total revenues 11,379 10,213 15,137 20,378
-------- -------- -------- --------
Cost of revenues:
Product sales 6,324 4,698 7,375 10,139
Service 1,745 905 3,213 1,613
-------- -------- -------- --------
Total cost of revenues 8,069 5,603 10,588 11,752
-------- -------- -------- --------
Gross profit 3,310 4,610 4,549 8,626
Operating expenses:
Research and development 2,053 2,454 4,039 4,626
Marketing and sales 1,155 931 2,033 1,605
General and administrative 1,044 786 2,126 1,397
-------- -------- -------- --------
Total operating expenses 4,252 4,171 8,198 7,628
-------- -------- -------- --------
Total operating income (loss) (942) 439 (3,649) 998
Other income, net 39 237 131 456
Interest expense (5) (7) (11) (46)
-------- -------- -------- --------
Income (loss)from continuing operations before
provision for income taxes (908) 669 (3,529) 1,408
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Income (loss) from continuing operations (908) 669 (3,529) 1,408
Loss from discontinued operations - Note 11 (1,191) (1,696) (2,575) (3,269)
Non-cash return to minority interest (437) (436) (874) (872)
-------- -------- -------- --------
Net loss $ (2,536) $ (1,463) $ (6,978) $ (2,733)
======== ======== ======== ========
Basic and diluted loss per common share:
Income (loss) from continuing operations-basic $ (0.01) $ 0.01 $ (0.04) $ 0.02
======== ======== ======== ========
Income (loss) from continuing operations-diluted $ (0.01) $ 0.01 $ (0.04) $ 0.02
======== ======== ======== ========
Net loss-basic and diluted $ (0.03) $ (0.02) $ (0.09) $ (0.03)
======== ======== ======== ========
Weighted average number of shares used in con-
tinuing operation per share calculation-basic 81,689 78,370 80,231 78,239
======== ======== ======== ========
Weighted average number of shares used in con-
tinuing operation per share calculation-diluted 81,689 80,745 80,231 80,629
======== ======== ======== ========
Weighted average number of shares used in net
loss per share calculation-basic and diluted 81,689 78,370 80,231 78,239
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
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FORM 10Q JUNE 30, 1998
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IMATRON INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,978) $ (2,733)
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss from discontinued operations 2,575 3,269
Depreciation and amortization 381 327
Amortization of deferred compensation 42 29
Non-cash return to minority interest 874 872
Common stock issued for services 255 158
Warrant issued for services 50 --
Provision for bad debt 355 90
Changes in operating assets and liabilities:
Accounts and notes receivable (1,060) (4,245)
Inventories (3,508) (1,215)
Prepaid expenses and deposits (169) 834
Other assets (352) 10
Accounts payable 125 (102)
Other accrued liabilities (142) 1,021
Deferred income (310) (251)
-------- --------
Net cash used in continuing operations (7,862) (1,936)
Net cash provided by (used in) discontinued operations 1,951 (1,014)
-------- --------
Net cash used in operating activities (5,911) (2,950)
Cash flows from investing activities:
Capital expenditures (496) (231)
Purchases of available-for-sale securities (885) (8,647)
Maturities of available-for-sale securities 1,065 13,183
-------- --------
Net cash provided by (used in) investing activities (316) 4,305
-------- --------
Cash flows from financing activities:
Payments of obligations under capital leases (29) (29)
Proceeds from issuance of common stock 470 735
-------- --------
Net cash provided by financing activities 441 706
-------- --------
Net increase / (decrease) in cash and cash equivalents (5,786) 2,061
-------- --------
Cash and cash equivalents, at beginning of the period 8,400 9,338
-------- --------
Cash and cash equivalents, at end of the period $ 2,614 $ 11,399
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FORM 10Q JUNE 30, 1998
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<CAPTION>
Supplemental Disclosure of Non cash Investing and Financing Activities:
<S> <C> <C>
Deferred compensation of common stock option grant of
consolidated subsidiary $ -- $ 186
======== ========
Conversion of HeartScan's Preferred Stock to Imatron Common Stock $ 13,959 $ --
======== ========
Note receivable from stockholder $ 336 $ --
======== ========
Cash paid for interest on capital lease obligations:
Continuing operations $ 10 $ 15
======== ========
Discontinued operations $ 195 $ 232
======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements
</FN>
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FORM 10Q JUNE 30, 1998
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IMATRON INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for annual consolidated financial statements. In the opinion of
management, adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. These
interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report to Shareholders for the year ended December 31,
1997.
Certain reclassifications have been made to the 1997 amounts to conform to
the current year presentation.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Imatron Inc.
and its subsidiary (the Company) HeartScan Imaging, Inc. (HeartScan). All
intercompany accounts and transactions have been eliminated in
consolidation.
For all periods presented, the Financial Statements reflect the Company's
HeartScan segment as discontinued operation.
3. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
(SFAS 130) which is effective for financial statements for periods beginning
after December 15, 1997, and establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The Company has adopted SFAS 130 as of January 1,
1998. The Company, however, does not have any components of comprehensive
income as defined by SFAS 130 and therefore, for the six months ended June
30, 1998 and 1997, comprehensive income is equivalent to the Company's net
loss.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of a
Business Enterprise" (SFAS 131) which is effective for financial statements
beginning after December 15, 1997, and establishes standards for disclosures
about segments of an enterprise. The Company has adopted SFAS 131 as of
January 1, 1998. The reportable segments under SFAS 131 do not differ from
the segments as reported in the Company's December 31, 1997 consolidated
annual financial statements either in their definition as segments or in the
basis of measurement of segment profit or loss.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which will be effective for
fiscal years beginning after June 15, 1999. The Company does not believe
that the impact of this statement will have a material effect on
thefinancial position or results of operations upon the adoption of this
accounting standard.
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4. INVENTORIES
Inventories consist of
(in thousands of dollars): June 30, December 31,
1998 1997
------------ ------------
Purchased parts and sub-assemblies $ 3,463 $ 3,212
Service parts 1,509 1,398
Work-in-process 4,404 3,611
Finished goods 7,058 4,705
============ ============
TOTAL $ 16,434 $ 12,926
============ ============
5. LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", as of December 31,
1997. SFAS No. 128 establishes standards for computing and presenting
earnings per share. Basic earnings per share is computed based on the
weighted average number of common shares outstanding, and diluted earnings
per share is computed based on the weighted average number of common shares
and dilutive potential common shares outstanding during the period. Stock
options and warrants have not been included in the computation of diluted
earnings per share as their effect would have been antidilutive. All prior
period net loss per share data was restated by the Company upon the adoption
of SFAS 128. Basic and diluted earnings per share were calculated as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30 June 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Income (loss) from continuing operations:
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ (908) $ 669 $ (3,529) $ 1,408
=========== =========== =========== ===========
Weighted average common shares
Outstanding - basic 81,689 78,370 80,231 78,239
Weighted average dilutive potential
securities - stock options and warrants -- 2,375 -- 2,390
----------- ----------- ----------- -----------
Weighted average common and
dilutive potential common shares
outstanding - dilutive 81,689 80,745 80,231 80,629
=========== =========== =========== ===========
Income (loss) from continuing operations - basic $ (0.01) $ 0.01 $ (0.04) $ 0.02
=========== =========== =========== ===========
Income (loss) from continuing operations - diluted $ (0.01) $ 0.01 $ (0.04) $ 0.02
=========== =========== =========== ===========
Antidilutive options and warrants not included
in calculation 2,159 -- 2,267 --
=========== =========== =========== ===========
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<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30 June 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net loss from discontinued operation:
<S> <C> <C> <C> <C>
Net loss from discontinued operation $ (1,191) $ (1,696) $ (2,575) $ (3,269)
=========== =========== =========== ===========
Weighted average common shares
Outstanding - basic 81,689 78,370 80,231 78,239
Weighted average dilutive potential
securities - stock options -- -- -- --
----------- ----------- ----------- -----------
Weighted average common and dilutive potential
common shares outstanding - dilutive 81,689 78,370 80,231 78,239
=========== =========== =========== ===========
Net loss from discontinued operations - basic
and dilutive $ (0.01) $ (0.02) $ (0.03) $ (0.04)
=========== =========== =========== ===========
Antidilutive options and warrants not included
in calculation 2,159 2,375 2,267 2,390
=========== =========== =========== ===========
Net loss:
Net loss $ (2,536) $ (1,463) $ (6,978) $ (2,733)
=========== =========== =========== ===========
Weighted average common shares
Outstanding - basic 81,689 78,370 80,231 78,239
Weighted average dilutive potential
securities - stock options and warrants -- -- -- --
----------- ----------- ----------- -----------
Weighted average common and
dilutive potential common shares
outstanding - dilutive 81,689 78,370 80,231 78,239
=========== =========== =========== ===========
Net loss - basic and dilutive $ (0.03) $ (0.02) $ (0.09) $ (0.03)
=========== =========== =========== ===========
Antidilutive options and warrants not included
in calculation 2,159 2,375 2,267 2,390
=========== =========== =========== ===========
</TABLE>
6. STOCK OPTION REPRICING
On February 24, 1998, the Company offered employees holding options under
the 1993 Stock Option Plan, the opportunity to exchange such options for
options with an exercise price equal to $2.56 per share, the fair market
value of the Company's stock on that date. Outstanding options to purchase
760,597 shares with an exercise price greater than fair market value on
February 24, 1998 were repriced at $2.56 per share.
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7. DIRECTORS' STOCK OPTION PLAN
On July 13, 1998 at the annual meeting, the shareholders approved the
Company's Amended and Restated Directors' Stock Option Plan, and an increase
in the number of authorized shares of common stock thereunder, from 500,000
to 1,000,000 shares.
8. RELATED PARTY TRANSACTIONS
In June 5, 1998, the Company provided a one year loan of $336,000 to the
Company's President and Chief Executive Officer for the purchase of 600,000
shares of common stock under the Company's stock option plan. These options
were due to expire on June 14, 1998. Interest is charged at the applicable
short-term federal rates as prescribed by the Internal Revenue Service and
is due quarterly. The loan is full recourse and collateralized by 600,000
shares of common stock and personal property.
9. COLLABORATION AGREEMENTS
On April 1, 1998, Imatron's obligations and Siemens' funding under the
Memorandum of Understanding terminated. In addition, Siemens surrendered its
exclusive distribution rights and Imatron assumed worldwide distribution for
its C-150 scanners. Imatron continues to provide scanner service support to
Siemens' customers under the service support agreement signed with Siemens.
For an agreed upon amount, Imatron provides all pre-installation site
planning, installation and application support, as well as, warranty and
maintenance services, as a subcontractor to Siemens. Revenues for services
are recognized ratably over the life of the contracts while other service
revenues are recognized upon completion of work.
On May 1, 1998 , the Company entered into a letter of intent whereby Imatron
will acquire a majority ownership of Positron Corporation ("Positron").
Positron designs, manufactures, markets, and services POSICAM(TM) systems,
which are medical imaging devices utilizing positron emission tomography
("PET") technology.
In conjunction with the execution of the letter of intent, the Company began
making working capital advances to Positron of up to $500,000 in order to
enable it to meet a portion of its current obligations. The financing bears
interest at 1/2% over the prime rate, is due March 1, 2000, and is secured
by all of Positron's assets. Positron has been operating under severe
liquidity and working capital constraints. At June 30, 1998, Imatron
advanced to Positron $467,688 relating to this agreement which was included
in other assets.
Under the terms of the proposed agreement, Imatron will acquire a majority
ownership of the outstanding common stock of Positron Corporation on a fully
diluted and as-if-converted basis, excluding out-of-the-money warrants and
options determined at the time of issuance for $100.
Consummation of the issuance of shares to Imatron is conditioned upon, among
other things, Positron shareholders' approval. The Company anticipates that
the acquisition will close in the fourth quarter of this year.
10. CONVERSION OF HEARTSCAN PREFERRED STOCK
On June 26, 1996, Imatron completed a private placement offering whereby
100,000 shares of HeartScan Series A Preferred Stock were sold at $160 per
share and realized net proceeds of $14,798,000. The preferred stock is
convertible into Imatron common stock at a conversion price equal to the
greater of $1.50 per share or a 27% discount on the weighted average closing
price of Imatron common stock for the 90-day period immediately preceding
June 26, 1998 and every 90 days thereafter until June 26, 2000. The
preferred stock holders may convert their shares on June 26, 1998 and every
three months thereafter until June 26, 2000.
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On June 26, 1998, pursuant to the optional exchange provision in the
HeartScan Preferred Stock Purchase Agreement, holders of HeartScan Series A
Preferred stock converted their 94,331 shares into 6,891,763 shares of
Imatron common stock at a discounted rate of $2.19 (based on 90-day weighted
average price per share of $3.00) per share. The Company reflected this
transaction in the Consolidated Balance sheet as an increase in common stock
and a decrease in minority interest in the amount of $13,959,000. As of June
30, 1998, the minority interest has a balance of $838,909 representing 5,669
shares of HeartScan Series A Preferred Stock that have not converted.
At June 30, 1998, Imatron has a 93.7% interest in HeartScan.
11. DISCONTINUED OPERATION - SALE OF HEARTSCAN SUBSIDIARY
On July 13, 1998 (the measurement date), the Company adopted a formal plan
to sell its HeartScan subsidiary in order for the Company to focus more
comprehensively on the core business of manufacturing and servicing quality
Ultrafast CT scanners. On July 22, 1998, a letter of understanding was
reached to sell substantially all of the assets of HeartScan to Lifetest
America, Inc. for approximately $7.4 million in cash and assumption of
equipment-related lease liabilities. The agreement also includes an option
to increase the purchase price by having Lifetest assume an additional $1.5
million in equipment secured debt associated with an Ultrafast CT scanner
operated by HeartScan-Iberia. The transaction is expected to close during
the third quarter of 1998. Accordingly, the operating results of the
HeartScan operations are reflected as discontinued operations for all
periods presented in the company's statements of operations and as net
assets of discontinued operations in the June 30, 1998 and December 31, 1997
balance sheets. Total revenues for HeartScan for the three month periods
ended June 30, 1998 and 1997 were $1,100,000 and $538,000, respectively.
Total revenues for HeartScan for the six month periods ended June 30, 1998
and 1997 were $2,122,000 and $1,044,000, respectively. A summary of net
assets of discontinued operation are as follows (in thousands):
June 30, December 31,
1998 1997
------------ ------------
Cash and cash equivalents $ 1,687 $ 6,025
Accounts receivable-net and other current assets 382 334
Other current liabilities ( 95) ( 94)
Lease obligations - current (1,636) (1,568)
------------ ------------
Net current assets of discontinued operation $ 338 $ 4,697
============ ============
Property, plant and equipment, net 7,102 7,966
Other assets 5 5
Lease obligations - long term portion (3,699) (4,396)
------------ ------------
Long-term net assets of discontinued operation $ 3,408 $ 3,575
============ ============
The Company expects that the discontinued operation will continue to operate
at a loss through the disposal date. However, management's current best
estimate indicates that a gain will result from disposal of the discontinued
operation.
12. RESTATEMENT
In June 1996, Imatron completed a private placement offering whereby 100,000
shares of HeartScan Series A Preferred Stock were sold at $160 per share and
realized net proceeds of $14,798,000. The preferred stock is convertible on
a ten-to-one basis into HeartScan common shares at any time. Mandatory
conversion of the preferred stock into common stock would occur upon the
successful completion of a HeartScan initial public offering. The HeartScan
Series A Preferred Stock may be exchanged at the sole option of the holder
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FORM 10Q JUNE 30, 1998
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into Imatron common stock at an exchange price of $5.00 per share until the
earlier of a) two year period following closing of the Preferred Stock
offering; or b) a HeartScan initial public offering. If there is no initial
public offering within 24 months of the Preferred Stock closing, holders may
convert the HeartScan Series A Preferred Stock into Imatron common stock, at
a conversion price equal to the greater of $1.50 per share or a 27% discount
from the weighted average closing price of Imatron common stock for the 90
day Period immediately preceding 24 months of the Preferred Stock closing
and each date that is 3 months thereafter to and including the 48th month of
the Preferred Stock closing.
In March 1997, subsequent to the Company finalizing its 1996 consolidated
financial statements, the Securities and Exchange Commission ("SEC")
announced its position on accounting for the issuance of convertible
preferred stock with a nondetachable conversion feature that is deemed "in
the money" at the date of issue (a "beneficial conversion feature"). The
beneficial conversion feature is initially recognized and measured by
allocating a portion of the preferred stock proceeds equal to the intrinsic
value of that feature to additional paid-in-capital. The intrinsic value is
calculated at the date of issue as the difference of the conversion price
and the quoted market price of the Company's common stock, into which the
security is convertible, multiplied by the number of shares into which the
security is convertible. The discount resulting from the allocation of
proceeds to the beneficial conversion feature is treated as a dividend and
is recognized as a return to the preferred shareholders over the minimum
period in which the preferred shareholders can realize that return (i.e.
from the date the securities are issued to the date they are first
convertible). The accounting for the beneficial conversion feature requires
the use of an unadjusted quoted market price (i.e. no valuation discounts
allowed) as the fair value used in order to determine the intrinsic value
dividend. Additionally preferred dividends of a subsidiary are included in
minority interest as a charge against income.
Prior to applying the accounting described above in its previously issued
financial statements, the Company had not recognized an intrinsic value
dividend on the HeartScan preferred stock which was issued in June 1996. The
discounted conversion features of this preferred stock into Imatron common
stock (the immediate conversion at $5.00 per share and the conversion in two
years from the date of the preferred stock issuance at a 27% discount) was
provided to the preferred shareholders, in essence to provide them with an
exit strategy in the absence of a HeartScan IPO. Thus, the Company did not
believe a discount should be recognized on a contingently issuable security.
Furthermore, at the time of agreeing to the terms of the transaction the $5
per share immediate conversion price was above the market price of the
Company's common stock but at the time the HeartScan preferred stock was
actually issued, the market price had increased to $5.75 and thereafter, it
dropped below $5 again. Accordingly, the Company did not believe that any
calculation of the discount should include the impact of this short-term
market fluctuation.
In December 1997, the staff of the SEC gave a speech further refining its
March 1997 announcement. Based on discussions with the staff of the SEC in
April 1998, the staff concluded that the Company should retroactively apply
its announcement because it should be applied to contingently issuable
securities and, as discussed in the December speech, the portion
attributable to the discount that could have been obtained immediately on
conversion (even though the shares had not been registered yet) should be
recognized on the day the preferred shares were issued. The balance of the
discount based on a market value of $5.75 per common share is being
recognized over two years from the date of issuance.
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The consolidated financial statements for the three and six months ended
June 30, 1997 have been restated to give effect to the accounting treatment
described above. The restatement at June 30, 1997 resulted in (1) a
reclassification in the consolidated balance sheet of $2,618,000 reducing
minority interests and increasing additional paid-in capital (equity) and
(2) the recognition of a minority interest charge in the consolidated
statement of operations amounting to $436,000 and $872,000 for the three and
six months ended June 30, 1997. The Company's net loss increased from
$1,027,000 to $1,463,000 for the three months ended June 30, 1997 and
$1,861,000 to $2,733,000 for the six months ended June 30, 1997.
The restatement of the previously issued consolidated financial statements,
in order to apply the accounting described herein for the intrinsic value of
the beneficial conversion features, does not affect the cash flows of the
Company. The minority interest is recognized as an increase in minority
interest in the balance sheet. If the preferred shareholders elect to
convert their shares to Imatron common stock, the minority interest will
then convert to Imatron equity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related Notes thereto
contained elsewhere with this document. Operating results for the three-month
and six-month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for any future periods, including the full fiscal
year. Reference should also be made to the Annual Consolidated Financial
Statements, Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
This Form 10-Q contains forward-looking statements which are subject to risks
and uncertainties. The Company's actual results may differ significantly from
the results projected in the forward-looking statements as a result of certain
risk factors set forth in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997. The Company expressly disclaims any
obligation to update any forward-looking statements.
Results of Continuing Operations:
Three months ended June 30, 1998 versus 1997
Overall revenues for the second quarter ended June 30, 1998 of $11,379,000
increased $1,166,000 or 11% compared to 1997 revenues of $10,213,000. Net
product revenues increased to $9,892,000 in 1998 from $7,931,000 in 1997
primarily because of an increase in scanner shipments to six in 1998 as compared
to five in 1997. Service revenues increased to $1,487,000 in 1998 from
$1,032,000 in 1997 due to an increase in scanners under service contracts. The
increase primarily resulted from the scanner service support agreement entered
into with Siemens. Development contract revenue of $1,250,000 recorded in 1997
represented non-refundable payment received from Siemens to compensate the
Company for its research and development efforts for which Siemens received
certain rights under the three year Memorandum of Understanding. There were no
payments received from Siemens for the second quarter of 1998 as the Memorandum
of Understanding expired on April 1, 1998.
Total cost of revenues as a percent of revenues for the second quarter of 1998
was higher at 71% as compared with 55% in 1997. Product cost of revenues as a
percent of product revenues increased to 64% in 1998 from 59% in 1997 due to
shipment of scanners with lower gross margins resulting from added options
included in the sales package. Service cost of revenues as a percent of service
revenue increased to 117% in 1998 from 88% in 1997 due to additional employees
and an increase in travel expenses related to the establishment of service
centers in Europe which support the scanner service contracts under the Siemens
service agreement. In addition, revenues on spares shipped to Imatron Japan KK,
a major customer have been deferred and the related costs were recognized due to
the customer's difficulty in remitting payment as a result of the economic and
currency uncertainties in Japan. As Imatron Japan KK is a major customer, the
Company has continued to ship spare parts inventory and has extended credit
beyond the normal terms to ensure the continued service for its 25 scanners
purchased from the Company.
Operating expenses of $4,252,000 increased $81,000 or 2% compared to 1997
expenses of $4,171,000. Research and development expenses of $2,053,000
decreased from $2,454,000 in 1997 due to a decrease in inhouse research for new
product development programs as a result of the termination of the three year
Memorandum of Understanding with Siemens. Marketing and sales expenses increased
to $1,155,000 in 1998 from $931,000 in 1997 primarily due to increases in
outside commissions related to scanner sales and headcount partially offset by a
decrease in expenses related to studies conducted on the C-150 scanners.
Administrative expenses increased $258,000 to $1,044,000 due to an increase in
bad debt expense relating to certain distributors.
Other income decreased to $39,000 in 1998 from $237,000 for the second quarter
of 1997. The decrease was attributable to lower cash balances and investments in
================================================================================
14
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FORM 10Q JUNE 30, 1998
================================================================================
interest-bearing securities primarily due to the operating loss incurred.
Interest expense represents interest incurred on capital lease obligations on
certain office equipment.
The Company incurred a non-cash charge to income of $437,000 and $436,000
recorded as return to minority interest expense in the second quarter of 1998
and 1997, respectively, in connection with certain beneficial conversion
features granted to the holders of the HeartScan convertible Series A Preferred
Stock (see Note 12 to the Notes to the Condensed Consolidated Financial
Statements).
Six months ended June 30, 1998 versus 1997
Overall revenues for the six months ended June 30, 1998 of $15,137,000 decreased
$5,241,000 or 26% compared to revenues of $20,378,000 for the same period in
1997. Net product revenues decreased to $10,841,000 in 1998 from $15,722,000 in
1997 due to seven scanners shipped in 1998 compared to ten in 1997. Certain
Asian countries are experiencing banking and currency difficulties that have
lead to economic slowdowns or recessions in those countries. This, in turn, has
resulted in reduced demand for the Company's products. For instance, the
purchasing power of the Company's Asian customers has declined as a result of,
among other things, difficulties in obtaining credit and the decline in value of
their currencies . These customers have canceled or delayed orders for the
Company's products and may cancel or delay additional orders. Scanner sales in
this region have decreased to one shipment to Japan in 1998 from four shipments
to Japan, Singapore and Korea in 1997. Service revenues increased 41% to
$3,046,000 in 1998 from $2,156,000 in 1997 due to an increase in scanners under
service contract. The increase primarily resulted from the service support
agreement entered into with Siemens. Development contract revenue decreased to
$1,250,000 in 1998 from $2,500,000 in 1997 due to the terms of the three year
Memorandum of Understanding entered into with Siemens wherein the Company
received $1,250,000 quarterly from Siemens to compensate the Company for its
research and development efforts. The Memorandum of Understanding expired on
April 1, 1998.
Total cost of revenues as a percent of revenues for the first six months of 1998
was higher at 70% as compared with 58% in 1997. Product cost of revenues as a
percent of product revenues increased to 68% in 1998 from 64% in 1997 due to
shipment of seven scanners with lower gross margins compared to ten shipments in
1997. Service cost of revenues as a percent of service revenue increased to 105%
in 1998 from 75% in 1997 due to additional employees and an increase in travel
expenses related to the establishment of service centers in Europe to support
the scanner service contracts under the Siemens service agreement. In addition,
revenues on spare parts shipped to Imatron Japan KK, a major customer, were
deferred and related costs were recognized due to the customer's difficulty in
paying as a result of the economic and currency uncertainties in Asia. As a
major customer, the Company have extended credit beyond the normal terms to
ensure the continued service for its 25 scanners purchased from the Company.
Operating expenses of $8,198,000 increased $570,000 or 7% compared to 1997
expenses of $7,628,000. Research and development expenses of $4,039,000 in 1998
decreased from $4,626,000 in 1997 due to a decrease in inhouse research for new
product development programs as a result of the termination of the three year
Memorandum of Understanding with Siemens. Marketing and sales expenses increased
to $2,033,000 from $1,605,000 in 1997 primarily due to increases in headcount
and outside commissions related to scanner sales, partially offset by a decrease
in expenses related to studies conducted on the C-150 scanners. Administrative
expenses increased to $2,126,000 in 1998 from $1,397,000 in 1997 due to
increases in salaries, investor relations and bad debt expenses relating to
certain distributors.
Other income decreased to $131,000 for the first six months of 1998 from
$456,000 in the comparable period of 1997. The decrease were attributable to
lower cash balances and investments in interest-bearing securities primarily due
to the operating loss incurred. Interest expense represents interest incurred on
capital lease obligations on certain office equipment.
The Company incurred a non-cash charge to income of $874,000 and $872,000
recorded as return to minority interest expense for the six months ended 1998
and 1997, respectively, in connection with certain beneficial conversion
features granted to the holders of the HeartScan convertible Series A Preferred
Stock (see Note 12 to the Notes to the Condensed Consolidated Financial
Statements).
================================================================================
15
<PAGE>
FORM 10Q JUNE 30, 1998
================================================================================
Liquidity and Capital Resources:
At June 30, 1998, working capital decreased to $20,077,000 compared to December
31, 1997 working capital of $31,683,000 primarily as a result of the net loss
sustained by the Company. The current ratio decreased to 3.0:1 at June 30, 1998
from 4.6:1 at December 31, 1997.
The Company's total assets decreased to $37,522,000 compared to December 31,
1997 total assets of $43,165,000. Cash used in continuing operations was
$7,862,000 for the second quarter of 1998 compared to $1,936,000 during the same
period in 1997. This increase primarily resulted from increases in net loss from
operations and inventory offset by reduced growth in accounts receivables. The
increase in inventory and decrease in growth in accounts receivable resulted
from a decrease in scanner shipments to seven in the second quarter of 1998 from
ten during the same period in 1997. Inventory also increased to meet scanner
orders placed for delivery in third quarter of 1998. Cash provided by
discontinued operations was $1,951,000 in the second quarter of 1998 compared to
cash used amounting to $1,014,000 due to decreased operating losses of HeartScan
amounting to $2,575,000 for the first six months of 1998 compared to $3,269,000
for the same period in 1997 and increased depreciation expense.
Significant uses of cash in investing activities included purchases of
securities available for sale and capital equipment. Key financing activities
for the second quarter ended 1998 included repayments of obligations under the
capital lease offset by proceeds from exercise of stock options and warrants.
The Company's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties of
the industry and global economies. Although the cash requirements will fluctuate
based on timing and extent of these factors, management believes that cash, and
cash equivalents existing at June 30, 1998 together with the proceeds from
impending sale of HeartScan , and the estimated proceeds from ongoing sales of
products and services in 1998 will provide the Company with sufficient cash for
operating activities and capital requirements through December 31, 1998.
Currently, the Company does not have significant capital commitments in 1998.
To satisfy the Company's capital and operating requirements beyond 1998,
profitable operations, additional public or private financing or the incurrence
of debt may be required. If future public or private financing is required by
the Company, holders of the Company's securities may experience dilution. There
can be no assurance that equity or debt sources, if required, will be available
or, if available, will be on terms favorable to the Company or its shareholders.
The Company does not believe that inflation has had a material effect on its
revenues or results of operations.
This Form 10Q contains forward-looking statements which involve risk and
uncertainties. The company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain risk
factors set forth in the company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Discontinued operation:
On July 13, 1998, the Company announced its intention to divest its HeartScan
subsidiary. Accordingly, the Company restated its financial statements to
reflect the classification of HeartScan as discontinued operation for all
periods presented (See Note 11 to the Company's 1998 Consolidated Financial
Statements).
During the first six months of 1998 and 1997, the Company reported losses from
discontinued operation of $2,575,000 and $3,269,000, respectively, which relate
to the discontinued operations of the HeartScan subsidiary. The decrease in
operating loss was primarily due to an increase in number of patient scans and
the closure of the Seattle center which had been consistently operating at a
loss.
================================================================================
16
<PAGE>
FORM 10Q JUNE 30, 1998
================================================================================
The Company expects that the discontinued operation will continue to operate at
a loss through the disposal date. However, management's current best estimate
indicates that a gain will result from disposal of the discontinued operation.
Year 2000 Compliance:
Many currently installed computer systems and software products are coded to
accept only 2 digit entries in the date code field. Beginning in the year 2000,
these date code fields will need to accept 4 digit entries to distinguish 21st
century dates from the 20th century dates. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. As a result, in less than two years, computer systems and/or software used
by many companies may need to be upgraded to comply with such Year 2000
requirements. The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test its internal systems, for the Year 2000
compliance. The total cost of compliance and its effect on the Company's future
results of operations is being determined as part of the detailed conversion
process.
The Company is currently seeking to ensure that the software and operating
systems included in its Ultrafast CT scanner is Year 2000 compliant. Failure (or
perceived failure) of such product to be Year 2000 compliant could significantly
adversely affect sales of the Company. Additionally, year 2000 issues could
cause a significant number of companies, including current company customers, to
reevaluate their current system needs and as a result consider deferring
purchase of Ultrafast CT scanner. Any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition.
================================================================================
17
<PAGE>
FORM 10Q JUNE 30, 1998
================================================================================
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a vote of Security Holders
The Company's Annual Meeting of Shareholders was held on July
13, 1998. At the meeting all existing directors were
re-elected. In addition, a proposal to approve the Company's
Amended and Restated Directors' Stock Option Plan and to
increase the number of authorized shares of common stock
thereunder, from 500,000 to 1,000,000 shares was approved. The
proposal received 63,464,338 shares for, 5,068,104 against and
703,496 abstentions.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
No. 27 - Financial Data Schedule as of June 30, 1998.
(b) Form 8-K Reports:
Agreements with and regarding Positron Corporation.
================================================================================
18
<PAGE>
FORM 10Q JUNE 30, 1998
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1998
IMATRON INC.
(Registrant)
/s/Gary H. Brooks
---------------------------------------
Gary H. Brooks
Vice President, Finance/Administration,
Chief Financial Officer and Secretary
================================================================================
19
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<ARTICLE> 5
<LEGEND>
The Schedule Contains Summary Financial Information Extracted From Imatron
Inc.'s Consolidated Condensed Statements Of Income And Consolidated
Condensed Balance Sheets And Is Qualified In Its Entirety By Reference To
Such Financial Statements.
</LEGEND>
<CIK> 0000720477
<NAME> Imatron Inc.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
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<EXCHANGE-RATE> 1
<CASH> 2614
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