FORM 10Q SEPTEMBER 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 September 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 October 30, 1998, 87,219,274 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 SEPTEMBER 30, 1998
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IMATRON INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART 1. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets -
September 30, 1998 (unaudited) and December 31, 1997.
Condensed Consolidated Statements of 4
Operations - Three Month and Nine Month
Periods Ended September 30, 1998 (unaudited)
and 1997 (unaudited and restated).
Condensed Consolidated Statements of 5
Cash Flows - Nine Month Periods Ended
September 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 SEPTEMBER 30, 1998
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IMATRON INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
(Unaudited)
ASSETS:
Current assets
Cash and cash equivalents $ 1,493 $ 8,400
Short-term investments -- 180
Accounts receivable (net of allowance for doubtful
accounts of $3,105 at September 30, 1998
and $2,490 at December 31, 1997:
Trade accounts receivable 7,381 7,944
Accounts receivable from affiliate 1,916 1,438
Inventories 17,193 12,926
Prepaid expenses 681 397
Net current assets of discontinued operations -- 4,697
--------- ---------
Total current assets 28,664 35,982
Property and equipment, net 2,305 2,394
Other assets 1,608 1,214
Long-term net assets of discontinued operations 3,414 3,575
--------- ---------
Total assets $ 35,991 $ 43,165
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable $ 3,954 $ 2,962
Other accrued liabilities 7,744 6,961
Capital lease obligations - due within one year 58 56
Net current liabilities of discontinued operations 96 --
--------- ---------
Total current liabilities 11,852 9,979
Deferred income on sale leaseback transactions 1,000 1,376
Deferred income on service contract 330 420
Capital lease obligations 21 65
--------- ---------
Total liabilities 13,203 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 - 87,217 shares in
1998 and 78,815 shares in 1997 106,305 90,728
Deferred compensation (170) (232)
Additional paid-in capital 9,340 9,290
Notes receivable from stockholders (451) --
Accumulated deficit (93,406) (82,716)
--------- ---------
Total shareholders' equity 21,618 17,070
--------- ---------
Total liabilities and shareholders' equity $ 35,991 $ 43,165
========= =========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
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FORM 10Q SEPTEMBER 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 5,705 $ 6,869 $ 16,546 $ 22,591
Service 1,626 1,576 4,672 3,732
Development contracts -- 1,250 1,250 3,750
-------- -------- -------- --------
Total revenues 7,331 9,695 22,468 30,073
-------- -------- -------- --------
Cost of revenues:
Product sales 4,392 4,875 11,767 15,015
Service 1,508 1,056 4,721 2,668
-------- -------- -------- --------
Total cost of revenues 5,900 5,931 16,488 17,683
-------- -------- -------- --------
Gross profit 1,431 3,764 5,980 12,390
Operating expenses:
Research and development 1,887 2,083 5,926 6,710
Marketing and sales 1,030 991 3,063 2,596
General and administrative 1,146 790 3,272 2,186
-------- -------- -------- --------
Total operating expenses 4,063 3,864 12,261 11,492
-------- -------- -------- --------
Total operating income (loss) (2,632) (100) (6,281) 898
Other income, net 11 128 142 553
Interest expense (4) (7) (15) (22)
-------- -------- -------- --------
Income (loss) from continuing operations before
provision for income taxes (2,625) 21 (6,154) 1,429
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Income (loss) from continuing operations (2,625) 21 (6,154) 1,429
Loss from discontinued operations - Note 11 (1,087) (1,521) (3,662) (4,790)
Non-cash return to minority interest -- (436) (874) (1,308)
-------- -------- -------- --------
Net loss $ (3,712) $ (1,936) $(10,690) $ (4,669)
======== ======== ======== ========
Basic and diluted loss per common share:
Income (loss) from continuing operations-basic $ (0.03) $ 0.01 $ (0.07) $ 0.02
======== ======== ======== ========
Income (loss) from continuing operations-diluted $ (0.03) $ 0.01 $ (0.07) $ 0.02
======== ======== ======== ========
Net loss-basic and diluted $ (0.04) $ (0.03) $ (0.13) $ (0.06)
======== ======== ======== ========
Weighted average number of shares used in con-
tinuing operation per share calculation-basic 86,997 78,574 82,450 78,350
======== ======== ======== ========
Weighted average number of shares used in con-
tinuing operation per share calculation-diluted 86,997 81,684 82,450 81,510
======== ======== ======== ========
Weighted average number of shares used in net
loss per share calculation-basic and diluted 86,997 78,574 82,450 78,350
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
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FORM 10Q SEPTEMBER 30, 1998
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IMATRON INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,690) $ (4,669)
Adjustments to reconcile net loss to net cash used in
operating activities:
Net loss from discontinued operations 3,662 4,790
Depreciation and amortization 292 496
Amortization of deferred compensation 62 50
Non-cash return to minority interest 874 1,308
Common stock issued for services 382 242
Warrant issued for services 50 --
Provision for bad debt 615 135
Changes in operating assets and liabilities:
Accounts and notes receivable (530) (4,965)
Inventories (4,267) (1,630)
Prepaid expenses (284) 791
Other assets (394) (809)
Accounts payable 992 (175)
Other accrued liabilities 783 33
Deferred income (466) (376)
-------- --------
Net cash used in continuing operations (8,919) (4,829)
Net cash provided by (used in) discontinued operations 1,292 (2,644)
-------- --------
Net cash used in operating activities (7,627) (7,473)
Cash flows from investing activities:
Capital expenditures (203) (352)
Purchases of available-for-sale securities (885) (8,802)
Maturities of available-for-sale securities 1,065 14,880
-------- --------
Net cash provided by (used in) investing activities (23) 5,726
-------- --------
Cash flows from financing activities:
Payments of obligations under capital leases (42) (48)
Proceeds from issuance of common stock under stock
option and warrant exercises 785 931
-------- --------
Net cash provided by financing activities 743 883
-------- --------
Net decrease in cash and cash equivalents (6,907) (864)
-------- --------
Cash and cash equivalents, at beginning of the period 8,400 9,338
-------- --------
Cash and cash equivalents, at end of the period $ 1,493 $ 8,474
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FORM 10Q SEPTEMBER 30, 1998
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Supplemental Disclosure of Non cash Investing and Financing Activities:
Deferred compensation of common stock option grant of
consolidated subsidiary $ -- $ 186
======== ========
Conversion of HeartScan's Preferred Stock to Imatron Common
stock $ 13,959 $ --
======== ========
Notes receivable from stockholders $ 451 $ --
======== ========
Cash paid for interest on capital lease obligations:
Continuing operations $ 13 $ 21
======== ========
Discontinued operations $ 292 $ 383
======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
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FORM 10Q SEPTEMBER 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
September 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. subsidiary (the Company) and its 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 nine months ended September 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 the financial position or results of operations upon the adoption of
this accounting standard.
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FORM 10Q SEPTEMBER 30, 1998
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4. INVENTORIES
Inventories consist of (in thousands of dollars):
September 30, December 31,
1998 1997
------------ ------------
Purchased parts and sub-assemblies $3,614 $3,212
Service parts 1,758 1,398
Work-in-process 4,906 3,611
Finished goods 6,915 4,705
============ ============
TOTAL $17,193 $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 Nine Months ended
September 30 September 30
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations:
Income (loss) from continuing operations $ (2,625) $ 21 $ (6,154) $ 1,429
======== ======== ========= ========
Weighted average common shares
Outstanding - basic 86,997 78,574 82,450 78,351
Weighted average dilutive potential
securities - stock options and warrants 3,110 -- -- 3,160
-------- -------- --------- --------
Weighted average common and
dilutive potential common shares
outstanding - dilutive 86,997 81,684 82,450 81,510
======== ======== ========= ========
Income (loss) from continuing operations - basic $ (0.03) $ 0.01 $ (0.07) $ 0.02
======== ======== ========= ========
Income (loss) from continuing operations -diluted $ (0.03) $ 0.01 $ (0.07) $ 0.02
======== ======== ========= ========
Antidilutive options and warrants not included
in calculation 806 -- 1,184 --
======== ======== ========= ========
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FORM 10Q SEPTEMBER 30, 1998
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<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net loss from discontinued operation:
Net loss from discontinued operation $ (1,087) $ (1,521) $ (3,662) $ (4,790)
======== ======== ========= ========
Weighted average common shares
Outstanding - basic 86,997 78,574 82,450 78,350
Weighted average dilutive potential
securities - stock options -- -- -- --
-------- -------- --------- --------
Weighted average common and dilutive potential
common shares outstanding - diluted 86,997 78,574 82,450 78,350
======== ======== ========= ========
Net loss from discontinued operations - basic
and diluted $ (0.01) $ (0.02) $ (0.04) $ (0.06)
======== ======== ========= ========
Antidilutive options and warrants not included
in calculation 806 3,110 1,184 3,160
======== ======== ========= ========
Net loss:
Net loss $ (3,712) $ (1,936) $ (10,690) $ (4,669)
======== ======== ========= ========
Weighted average common shares
Outstanding - basic 86,997 78,574 82,450 78,350
Weighted average dilutive potential
securities - stock options and warrants -- -- -- --
-------- -------- --------- --------
Weighted average common and
dilutive potential common shares
outstanding - diluted 86,997 78,574 82,450 78,350
======== ======== ========= ========
Net loss - basic and diluted $ (0.04) $ (0.03) $ (0.13) $ (0.06)
======== ======== ========= ========
Antidilutive options and warrants not included
in calculation 806 3,110 1,184 3,160
======== ======== ========= ========
</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 were repriced.
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FORM 10Q SEPTEMBER 30, 1998
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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
At September 30, 1998, the company held two notes receivable amounting
to $336,000 and $115,500 from the Company's President and Chief
Executive Officer and the Chairman of Board, respectively. These notes
arose from transactions in June 1998 and August 1998 whereby the
Company provided loans with a term of one year for the purchase of
825,000 shares of common stock under the Company's stock option plan.
Interest is charged at the applicable short-term federal rates as
prescribed by the Internal Revenue Service and is due quarterly. The
loans are full recourse and collateralized by the shares of common
stock and the personal property of the executives. The receivable is
shown on the balance sheet as a reduction in equity.
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
total capital advances were subsequently increased to $600,000 as
approved by the Company's board during its meeting on July 13, 1998.
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
September 30, 1998, Imatron advanced to Positron $567,688 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.
On July 1, 1998, the Company entered into a non-exclusive distributor
agreement with GE Medical Systems (GE) to sell Ultrafast CT scanners
throughout the United States and Canada. The agreement provides that
all contracts resulting from the joint marketing effort are written
directly by the Company. Imatron assumes installation and customer
service activities, while GE provides financing options for customers
purchasing the equipment. The contract has a term of 2 years with an
option to extend for an additional year at GE's sole discretion. This
agreement does not constitute a licensing or transfer of any Imatron's
intellectual property to GE.
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FORM 10Q SEPTEMBER 30, 1998
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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.
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 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 September 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 September 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
proposed offer to sell exclusively to Lifetest ended on October 15,
1998. As of September 30, 1998, HeartScan continued to be held for
sale. 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 September 30, 1998 and December 31, 1997
balance sheets. Total revenues for HeartScan for the three month
periods ended September 30, 1998 and 1997 were $994,000 and $668,000,
respectively. Total revenues for HeartScan for the nine month periods
ended September 30, 1998 and 1997 were $3,115,000 and $1,712,000,
respectively.
A summary of net assets of discontinued operation are as follows (in
thousands):
September 30, December 31,
1998 1997
------------ ------------
Cash and cash equivalents $1,339 $6,025
Accounts receivable-net and other current assets 318 334
Other current liabilities ( 82) ( 94)
Lease obligations - current (1,671) (1,568)
------------ ------------
Net current assets of discontinued operation $( 96) $4,697
============ ============
Property, plant and equipment, net 6,746 7,966
Other assets 5 5
Lease obligations - long term portion (3,337) (4,396)
------------ ------------
Long-term net assets of discontinued operation $3,414 $3,575
============ ============
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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 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 $5.00 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
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FORM 10Q SEPTEMBER 30, 1998
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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.
The consolidated financial statements for the three and nine months
ended September 30, 1997 have been restated to give effect to the
accounting treatment described above. The restatement at September 30,
1997 resulted in (1) a reclassification in the consolidated balance
sheet of $3,054,000 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 $1,308,000 for the three and nine months
ended September 30, 1997. The Company's net loss increased from
$1,500,000 to $1,936,000 for the three months ended September 30, 1997
and $3,361,000 to $4,669,000 for the nine months ended September 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.
13. SUBSEQUENT EVENT
On October 1, 1998, pursuant to the optional exchange provision in the
HeartScan Preferred Stock Purchase Agreement, the remaining holders of
HeartScan Series A Preferred stock converted their 5,669 shares into
604,693 of Imatron common stock at a discounted rate of $1.50 (based on
90-day weighted average price per share of $1.95) 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 $834,000. After the conversion, Imatron's ownership in
HeartScan increased to 96.4%. Currently, there are no holders of
HeartScan Series A Preferred Stock.
================================================================================
13
<PAGE>
FORM 10Q SEPTEMBER 30, 1998
================================================================================
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 nine-month periods ended September 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 September 30, 1998 versus 1997
Overall revenues for the third quarter ended September 30, 1998 of $7,331,000
decreased $2,364,000 or 24% compared to 1997 revenues of $9,695,000. Net product
revenues decreased to $5,705,000 in 1998 from $6,869,000 in 1997 due primarily
to a decrease in average sales price. The decrease in average sales price
resulted from the sale of two scanners which did not include high resolution
detectors, workstations, and first year warranty. These items were available to
the customers for $590,000 per scanner. There were four scanners sold for each
three months ending September 30, 1998 and 1997. Service revenues increased to
$1,626,000 in 1998 from $1,576,000 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 a 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 as of April 1, 1998.
Total cost of revenues as a percent of revenues for the third quarter of 1998
was higher at 80% as compared with 61% in 1997. Product cost of revenues as a
percent of product revenues increased to 77% in 1998 from 71% in 1997 due to
shipment of scanners with lower gross margins. Service cost of revenues as a
percent of service revenue increased to 93% in 1998 from 67% 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 spare
parts shipped to Imatron Japan Inc., a major customer have been deferred while
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 Inc. 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 25 scanners it has purchased from the Company.
Operating expenses for the third quarter of 1998 increased 5% to $4,063,000, or
55% of revenues, compared to $3,864,000, or 40% of revenues in 1997. Research
and development expenses of $1,887,000 decreased from $2,083,000 in 1997 due to
a decrease in in-house 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 $1,030,000 in 1998 from $991,000 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 $356,000 to
$1,146,000 due to an increase in bad debt expense relating to certain
distributors.
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14
<PAGE>
FORM 10Q SEPTEMBER 30, 1998
================================================================================
Other income decreased to $11,000 in 1998 from $128,000 for the third quarter of
1997. The decrease was 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 $436,000 recorded as return
to minority interest expense in the third quarter 1997 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).
Nine months ended September 30, 1998 versus 1997
Overall revenues for the nine months ended September 30, 1998 of $22,468,000
decreased $7,605,000 or 25% compared to revenues of $30,073,000 for the same
period in 1997. Net product revenues decreased to $16,546,000 in 1998 from
$22,591,000 in 1997 due to eleven scanners shipped in 1998 compared to fourteen
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 continue to cancel
or delay additional orders. Scanner sales in this region have decreased to one
shipment to Japan in 1998 from seven shipments to Japan, China, Singapore, and
Korea in 1997. Service revenues increased 25% to $4,672,000 in 1998 from
$3,732,000 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
$3,750,000 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 as of April 1, 1998.
Total cost of revenues as a percent of revenues for the first nine months of
1998 was higher at 73% as compared with 59% in 1997. Product cost of revenues as
a percent of product revenues increased to 71% in 1998 from 66% in 1997 due to
shipment of eleven scanners with lower gross margins compared to fourteen
shipments in 1997. Service cost of revenues as a percent of service revenue
increased to 101% in 1998 from 71% 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 Inc., 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 has extended credit
beyond the normal terms to ensure the continued service for its 25 scanners
purchased from the Company.
Operating expenses of the first nine months of 1998 increased 7% to $12,261,000,
or 55% of revenues, compared to $11,492,000, or 38% of revenues in 1997.
Research and development expenses of $5,926,000 in 1998 decreased from
$6,710,000 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
$3,063,000 in 1998 from $2,596,000 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 $3,272,000 in 1998 from $2,186,000 in 1997
due primarily to increases in investor relations and bad debt expenses relating
to certain distributors.
Other income decreased to $142,000 for the first nine months of 1998 from
$553,000 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.
================================================================================
15
<PAGE>
FORM 10Q SEPTEMBER 30, 1998
================================================================================
The Company incurred a non-cash charge to income of $874,000 and $1,308,000
recorded as return to minority interest expense for the nine 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).
Liquidity and Capital Resources:
At September 30, 1998, working capital decreased to $16,812,000 compared to
December 31, 1997 working capital of $26,003,000 primarily as a result of the
net loss sustained by the Company. The current ratio decreased to 2.4:1 at
September 30, 1998 from 3.6:1 at December 31, 1997.
The Company's total assets decreased to $35,991,000 compared to December 31,
1997 total assets of $43,165,000. Cash used in continuing operations was
$8,919,000 for nine months ended September 30, 1998 compared to $4,829,000
during the same period in 1997. This increase primarily resulted from increases
in net loss from operations, inventory, and accounts payable, 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 eleven
in 1998 from fourteen during the same period in 1997. Inventory also increased
due to scanner orders that were delayed for shipment for fourth quarter of 1998.
Accounts payable increased as a result of a decrease in cash associated with a
decrease in scanner shipments and the lengthening of customer payment terms to
meet customer requirements.
Cash provided by discontinued operations was $1,292,000 for nine months ended
September 30, 1998 compared to cash used amounting to $2,644,000 due to
decreased operating losses of HeartScan amounting to $3,413,000 for the first
nine months of 1998 compared to $4,609,000 for the same period in 1997.
Significant uses of cash in investing activities included purchases of
securities available for sale and capital equipment. Key financing activities
for the third 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 September 30, 1998 together with the proceeds from
the 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.
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 nine months of 1998 and 1997, the Company reported losses from
discontinued operation of $3,662,000 and $4,790,000, respectively, which relate
================================================================================
16
<PAGE>
FORM 10Q SEPTEMBER 30, 1998
================================================================================
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.
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:
The Company's State of Readiness
In 1997, the Company established a project team to coordinate existing Year 2000
activities and address remaining Year 2000 issues. The team has focused its
efforts on three areas: (1) information systems software and hardware; (2)
software and operating systems included in the C-150 scanner and (3) third-party
relationships.
The Company has reviewed its primary financial and other business information
systems and it believes that these systems will be able to manage and manipulate
all material data involving the transition from 1999 to 2000 without functional
or data abnormality and without inaccurate results related to such data. The
Company primarily uses ASK computer system for its Enterprise Resource Planning
(ERP) which is in the process of being upgraded to Year 2000 compliance. At this
time the estimated costs to achieve Year 2000 compliance is $30,000 to $50,000.
The Company has reviewed the software associated with the operation of its
scanners to ensure Year 2000 compliance. The Company is currently upgrading its
software with the release of Series 12.4 software that allows 4-digit space on
its images and compatibility with previous software image data. This software is
workable on XP systems only. For non-XP systems, a hardware upgrade is necessary
in order for the Series 12.4 software to function. Although images from scanners
will have "00" for the year 2000, it will not affect their functionality. Should
the customer elect not to purchase the upgrade, the Company is currently
formulating a "workaround procedure" which will likely involve manual labeling
of images to indicate the corrected dates. The Company expects this procedure to
be in place and communicated to all its affected customers by the second quarter
of 1999. Currently, Series 12.4 is in beta testing and is expected to be
released in the first quarter of 1999.
The Company has contacted all its suppliers, especially sole-source vendors, and
review is underway to ensure Year 2000 compliance. While the Company believes
the issues associated with Year 2000 compliance are being addressed, there
remains the risk that suppliers may encounter disruptions due to Year 2000
compliance or the costs associated with implementing computer system changes.
The Company's Risks and Contingency Plans
The Company believes that by the end of 1998, it will be able to fully determine
its most reasonably likely worst case scenarios whereby compliance is not
significantly achieved . Potential sources of risk include the inability of
principal suppliers to be Year 2000 ready, which could result in delays in
product deliveries from such suppliers. Contingency plans are being developed to
address these issues. Due to the general uncertainty inherent in the Year 2000
issues, the Company is unable to determine at this time whether the consequences
of Year 2000 non-compliance will have a material adverse effect on its financial
condition or results of operations.
Estimated Costs
The Company does not expect the costs associated with its Year 2000 efforts to
be substantial. Less than $500,000 has been allocated to address the Year 2000
issue. The Company's aggregate cost estimate does not include time and costs
that may be incurred by the Company as a result of the failure of any third
parties, including suppliers, to become Year 2000 ready or costs to implement
any contingency plans.
================================================================================
17
<PAGE>
FORM 10Q SEPTEMBER 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 September 30, 1998.
(b) Form 8-K Reports:
Agreements with and regarding Positron Corporation.
================================================================================
18
<PAGE>
FORM 10Q SEPTEMBER 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: November 13, 1998
IMATRON INC.
(Registrant)
/s/Gary H. Brooks
---------------------------------------
Gary H. Brooks
Vice President, Finance/Administration,
Chief Financial Officer and Secretary
================================================================================
19
<TABLE> <S> <C>
<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>
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<NAME> Imatron Inc.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,493
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<RECEIVABLES> 12,402
<ALLOWANCES> (3,105)
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