FORM 10-Q IMATRON INC. MARCH 31, 1999
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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 MARCH 31, 1999.
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 April 20, 1999, 90,780,304 shares of the Registrant's common stock (no par
value) were issued and outstanding.
Total Number of Pages: 18
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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IMATRON INC.
Table of Contents
PART 1. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998. 3
Condensed Consolidated Statements of Operations
Three Month Periods Ended
March 31, 1999 and 1998. 4
Condensed Consolidated Statements of Cash Flows
Three Month Periods Ended
March 31, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. 16
PART II. OTHER INFORMATION 17
SIGNATURES 18
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<TABLE>
FORM 10-Q IMATRON INC. MARCH 31, 1999
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IMATRON INC.
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
March 31, December 31,
1999 1998
ASSETS --------- ---------
- ------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,469 $ 1,445
Accounts receivable (net of allowance for doubtful accounts of $3,332
and $3,272 at March 31, 1999 and December 31, 1998):
Trade accounts receivable 6,031 7,228
Accounts receivable from joint venture 117 659
Inventories 13,327 14,433
Prepaid expenses 1,184 825
--------- ---------
Total current assets 22,128 24,590
Property and equipment, net 3,544 2,275
Goodwill 1,360 --
Other assets 1,399 1,631
Long-term net assets of discontinued operations 2,476 3,486
--------- ---------
Total assets $ 30,907 $ 31,982
========= =========
LIABLITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,806 $ 3,515
Other accrued liabilities 8,123 7,978
Capital lease obligations - due within one year 549 64
Net current liabilities of discontinued operations 433 220
--------- ---------
Total current liabilities 10,911 11,777
Deferred income on sale leaseback transactions 727 875
Deferred income on service contract 279 300
Capital lease obligations 323 39
--------- ---------
Total liabilities 12,240 12,991
--------- ---------
Minority interest 331 331
--------- ---------
Shareholders' equity
Common stock, no par value; 150,000 shares authorized; 90,504 and 88,295
shares issued and outstanding in 1999 and 1998, respectively 110,194 107,475
Deferred compensation (170) (170)
Additional paid-in capital 9,340 9,340
Notes receivable from stockholders (488) (488)
Accumulated deficit (100,540) (97,497)
--------- ---------
Total shareholders' equity 18,336 18,660
--------- ---------
Total liabilities and shareholders' equity $ 30,907 $ 31,982
========= =========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
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<TABLE>
FORM 10-Q IMATRON INC. MARCH 31, 1999
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IMATRON INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
<CAPTION>
Three Months ended March 31,
-----------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues
Product sales $ 3,348 $ 949
Service 1,617 1,559
Other product sales 265 --
Development contracts -- 1,250
-------- --------
Total revenue 5,230 3,758
-------- --------
Cost of revenues
Product sales 3,233 1,051
Service 1,470 1,467
Other product sales 259 --
-------- --------
Total cost of revenues 4,962 2,518
-------- --------
Gross profit 268 1,240
Operating expenses
Research and development 1,808 1,986
Marketing and sales 1,168 878
General and administrative 806 1,083
Goodwill amortization 20 --
Restructuring charges 282 --
-------- --------
Total operating expenses 4,084 3,947
-------- --------
Operating loss (3,816) (2,707)
Gain on sale of assets 1,492 --
Interest and other income 12 91
Interest expense (41) (5)
-------- --------
Loss from continuing operations before provision for income taxes (2,353) (2,621)
Provision for income taxes -- --
-------- --------
Loss from continuing operations (2,353) (2,621)
Loss from discontinued operations (690) (1,384)
Non cash return to minority interest -- (437)
-------- --------
Net loss $ (3,043) $ (4,442)
======== ========
Net loss per common share:
Loss from continuing operations - basic and diluted $ (0.03) $ (0.03)
======== ========
Loss from discontinued operations - basic and diluted $ (0.01) $ (0.02)
======== ========
Net loss - basic and diluted $ (0.03) $ (0.06)
======== ========
Number of shares used in basic and diluted per share calculations 89,798 78,995
======== ========
<FN>
The accompanying notes are an Integral part of these condensed consolidated financial statements.
</FN>
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<TABLE>
FORM 10-Q IMATRON INC. MARCH 31, 1999
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IMATRON INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,043) $(4,442)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 221 184
Net loss from discontinued operations 690 1,384
Goodwill amortization 20 --
Gain on sale of assets (1,492) --
Amortization of deferred compensation -- 21
Non-cash return to minority interest -- 437
Warrant issued for services -- 50
Common stock issued for services 340 204
Provision for bad debt 60 295
Changes in operating assets and liabilities:
Accounts and notes receivable 1,975 1,782
Inventories 1,395 (3,662)
Prepaid expenses (356) (129)
Other assets 221 58
Accounts payable (1,863) (209)
Other accrued liabilities (21) (975)
Deferred income (169) (155)
------- -------
Net cash used in operating activities: (2,022) (5,157)
Net cash provided by discontinued operations 78 1,144
------- -------
(1,944) (4,013)
------- -------
Cash flows from investing activities:
Capital expenditures (158) (289)
Acquisition of subsidiary, net of cash acquired (273) --
Purchases of available-for-sale securities -- (885)
Maturities of available-for-sale securities -- 1,065
Proceeds from disposal of assets 1,500 --
------- -------
Net cash (used in) provided by investing activities: 1,069 (109)
Cash flows from financing activities:
Payments of obligations under capital leases (26) (15)
Proceeds from issuance of common stock 925 235
------- -------
Net cash provided by financing activities 899 220
Net (decrease) increase in cash and cash equivalents 24 (3,902)
Cash and cash equivalents, at beginning of the period 1,445 8,400
------- -------
Cash and cash equivalents, at end of the period $ 1,469 $ 4,498
======= =======
Supplemental Disclosure of Noncash Investing and Financing Activities:
Cash paid for interest on capital lease obligations:
Continuing operations $ 42 $ 5
======= =======
Discontinued operations $ 65 $ 90
======= =======
Cash paid for income taxes $ -- $ --
======= =======
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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IMATRON INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited 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 March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. 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, 1998.
Certain reclassifications have been made to the 1998 amounts to conform to the
current period presentation.
Note 2 - BASIS OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the accounts
of Imatron Inc. ("Imatron") and all its subsidiaries (collectively, the
"Company"), after elimination of all intercompany transactions and accounts.
On July 13, 1998, 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. For all
periods presented, the financial statements reflect the Company's HeartScan
segment as a discontinued operation.
On January 6, 1999, Imatron acquired a 100% interest in Caral Manufacturing
("Caral") in an acquisition accounted for under the purchase method of
accounting (see Note 5). Beginning January 6, 1999, the financial position and
results of operations of Caral were consolidated with those of the Company.
On January 25, 1999, the Company acquired 9,000,000 shares of common stock of
Positron Corporation (Positron) representing a 55% interest for $100. Imatron is
working with third-party equity financing groups in an attempt to re capitalize
Positron for an aggregate amount of no less than $8,000,000 to support its
re-entry into the medical imaging market. It is expected that the equity
financing will dilute Imatron's interest in Positron to less than 20%. As such,
Imatron's controlling interest in Positron is temporary and accordingly, the
Company accounted for its investment in Positron at cost for the three month
period ended March 31, 1999.
On February 10, 1999, Imatron completed the sale of its HeartScan - San
Francisco center, to International Technology Group (see Notes 7 and 10). The
resulting net gain on sale is included in the "Gain on sale of assets" in the
Consolidated Statements of Operations for the three months ended March 31, 1999.
Note 3 - NEW ACCOUNTING PRONOUNCEMENTS
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 10-Q IMATRON INC. MARCH 31, 1999
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Note 4 - INVENTORIES
Inventories were as follows:
March 31, December 31,
1999 1998
----------------- ----------------
(In thousands)
Purchased parts and sub-assemblies $ 2,892 $ 2,863
Service parts 1,938 1,883
Work-in-progress 3,724 3,177
Finished products 4,773 6,510
----------------- ----------------
$ 13,327 $ 14,433
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Note 5 - ACQUISITIONS
CARAL MANUFACTURING
On January 6, 1999 (closing date) Imatron acquired a 100% interest in Caral
Manufacturing ("Caral"). Caral was a major vendor of Imatron and manufactures
custom-made parts for scanners.
The purchase price of the acquisition is comprised of $275,000 in cash, 629,339
shares of common stock issued at closing plus an issuance of shares of common
stock based on the security price of the Company as of June 6, 1999. The shares
issued at closing were valued at $825,000 or $1.3109 per share, which is the
weighted average stock price for the period from December 7, 1998 to December
18, 1998, the period surrounding the date the terms of the acquisition were
agreed. Should the security price of the Company's common stock fall below $2.90
per share on June 6, 1999, the Company will issue additional shares equal in
value to $500,000 minus 50% of the difference between the market price and
$1.3109 per share. The maximum number of contingent shares to be issued,
however, is limited to 500,000 shares. In accordance with EITF 97-15, the
contingency was valued at $655,450 which represents a maximum of 500,000 shares
that could be issued at the fair market price at the closing date. The
contingent shares are held at escrow agent.
The acquisition was accounted for using the purchase method of accounting, and
accordingly, the operating results of Caral were included in the Company's
consolidated financial statements from January 6, 1999 forward. The purchase
price was allocated to the underlying assets and liabilities based on their
respective estimated fair values at the date of acquisition. The fair value of
assets acquired was $687,000 and liabilities assumed was $320,000. The excess of
the aggregate purchase price over the fair market value of net assets acquired
amounting to $1,380,000 is classified as goodwill, and amortized on a straight
line method over 10 years. As of March 31, 1999, amortization expense on
goodwill was $20,000.
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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The income statement for the period ended March 31, 1999 includes Caral's
results of operations from the beginning of the period.
The following unaudited pro forma financial information presents the combined
results of operations for the period ended March 31, 1998 of Imatron and Caral
as if the acquisition had occurred as of the beginning of 1998, after giving
effect to certain adjustments, including amortization of goodwill. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had Imatron and Caral constituted a single entity
during the period ended March 31,1998:
1998
----------
(In thousands, except per share amounts)
Net sales $ 4,075
==========
Net loss $ (4,525)
==========
Loss per share - basic and diluted $ (0.06)
==========
Number of shares used in basic and
diluted per share calculations 78,995
==========
POSITRON CORPORATION
On January 25, 1999, the Company acquired 9,000,000 shares of common stock of
Positron Corporation (Positron) representing a 55% interest for $100. Imatron is
working with third-party equity financing groups in an attempt to re-capitalize
Positron for an aggregate amount of no less than $8,000,000 to support its
re-entry into the medical imaging market. It is expected that the equity
financing will dilute Imatron's interest in Positron to less than 20%. As such,
Imatron's control in Positron is temporary and accordingly, the Company has
accounted for its investment in Positron at cost for the three month period
ended March 31, 1999.
In conjunction with the execution of a letter of intent and the consummation of
the purchase business combination with Positron, the Company made working
capital advances to Positron under a $600,000 credit facility. 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 March 31, 1999, Imatron had advanced to
Positron $600,000 under this credit facility which has been included in other
assets.
Note 6 - RESTRUCTURING AND REORGANIZATION CHARGES
On February 8, 1999, the Company began implementing a restructuring plan to
reduce costs and improve operating efficiencies. The plan included elimination
of 59 positions in various departments of the Company and its HeartScan
subsidiary including disposal of its HeartScan operations (see Notes 7 and 10).
In addition, the Company put a moratorium on salary increases for its executive
personnel effective until the Company meets its financial goals and objectives.
The one-time cost associated with this reduction in staff, consisting primarily
of severance and related benefits, was $282,000 and recorded in the first
quarter of 1999. At March 31, 1999, the unpaid portion of the restructuring
charges was $185,000 and is included under other accrued expense.
Note 7 - GAIN ON SALE OF ASSETS
On February 10, 1999, the Company sold the HeartScan - San Francisco center and
related C-150 scanner and other equipment for $1,500,000. The net book value of
the center's property and equipment at that date totaled $8,000, resulting in a
net gain on sale of $1,492,000 which was included in "Gain on sale of assets" in
the Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999.
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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Note 8 - NET LOSS PER SHARE
The Company computes and discloses its net loss per share in accordance with
SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share. Basic loss per share is computed
based on the weighted average number of common shares outstanding, and diluted
loss 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 as their
effect would have been antidilutive.The computation of basic and diluted loss
per share for both continuing and discontinued operations for the three month
periods ended March 31, 1999 and 1998, are as follows:
1999 1998
---------- ----------
(In thousands, except per share amounts)
Loss from continuing operations $ (2,353) $ (2,621)
========== ==========
Loss from discontinued operations $ (690) $ (1,384)
========== ==========
Net loss $ (3,043) $ (4,442)
========== ==========
Weighted average common shares
basic and diluted 89,798 78,995
========== ==========
Basic and diluted loss per share:
Loss from continuing operations $ (0.03) $ (0.03)
========== ==========
Loss from discontinued operations $ (0.01) $ (0.02)
========== ==========
Net loss $ (0.03) $ (0.06)
========== ==========
Antidilutive options and warrants
not included in calculation 102 1,614
========== ==========
Note 9 -SEGMENT DISCLOSURES
The Company operates in three industry segments. Imatron operates in one
industry segment in which it designs, manufactures, services and markets a
computed tomography scanner; HeartScan, operates centers that perform the
coronary artery scan procedures; and Caral, engages in the business of machining
and fabrication of metal and plastic components. The Company is currently
selling its interests in HeartScan (see Note 10).
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies included in the Company's
consolidated financial statements and notes thereto for the year ended December
31, 1998. The Company evaluates performance based on profit or loss from
operations before income taxes not including non-recurring gains and losses.
The Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices.
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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The following table summarizes the results of operations for the Company's two
major business segments for each quarter ended March 31 (in thousand):
<TABLE>
<CAPTION>
Imatron Caral Eliminations Consolidated
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999:
Revenues from external customers $ 4,965 $ 265 $ -- $ 5,230
Intersegment revenues -- 111 (111) --
Total revenue 4,965 376 (111) 5,230
Operating loss (3,742) (47) (27) (3,816)
Total assets as of March 31, 1999 28,374 601 (544) 28,431
1998:
Revenues from external customers $ 3,758 $ -- $ -- $ 3,758
Intersegment revenues -- -- -- --
Total revenue 3,758 -- -- 3,758
Operating loss (2,707) -- -- (2,707)
Total assets as of December 31, 1998 28,496 -- -- 28,496
</TABLE>
Note 10 - 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 serving quality
Ultrafast CT scanners. 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 (liabilities) of
discontinued operations in the March 31, 1999 and 1998 balance sheets.
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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HeartScan statements of operations data for the three months ended March 31,
1999 and 1998 are as follows (in thousands):
1999 1998
---------- ----------
Revenues $ 710 $ 1,021
Costs and expenses 1,400 2,405
---------- ----------
Loss before income taxes (690) (1,384)
Provision for income taxes -- --
========== ==========
Loss from discontinued operations $ (690) $ (1,384)
========== ==========
The HeartScan statements of operations include costs of sales of $70,000 and
$140,000 in 1999 and 1998, respectively, related to transactions with Imatron.
A summary of the net assets of discontinued operation is as follows:
March 31, December 31,
1999 1998
------- -------
(In thousands, except per share amounts)
Cash and cash equivalents $ 577 $ 1,273
Accounts receivable - net and
other current assets 336 327
Other current liabilities (53) (92)
Lease obligations - current (1,293) (1,728)
------- -------
Net current assets (liabilities)
of discontinued operation (433) (220)
------- -------
Property, plant and equipment, net 4,760 6,381
Other assets 5 5
Lease obligations - long-term portion (2,289) (2,900)
------- -------
Long-term net assets of discontinued operation $ 2,476 $ 3,486
======= =======
The Company expects that the discontinued operation will continue to operate at
a loss through the disposal date.
On February 10, 1999, the Company sold the HeartScan - San Francisco center and
related C-150 scanner and other equipment for $1,500,000. The resulting net gain
on sale of approximately $1,492,000 was included in "Gain on sale of assets" in
the Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999.
The Company is selling each individual center separately. The sales of the
Pittsburgh, Houston, and Washington, D.C. centers of HeartScan are expected to
close in 1999.
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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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
period ended March 31, 1999 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, 1998.
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, 1998. The Company expressly disclaims any
obligation to update any forward-looking statements.
Results of Continuing Operations:
Three months ended March 31, 1999 versus 1998
Overall revenues for the three months ended March 31, 1999 of $5,230,000
increased $1,472,000 or 39% compared to revenues of $3,758,000 for the same
period in 1998. Net product revenues increased to $3,348,000 in 1999 from
$949,000 in 1998 due to shipment of two scanners in 1999 compared to one in
1998. Service revenues increased 4% to $1,617,000 in 1999 from $1,559,000 in
1998 due to an increase in scanners under service contract. Other product sales
of $265,000 in 1999 represent revenues from Caral's machining and fabrication
services. Development contract revenue of $1,250,000 recorded in 1998
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 first quarter of 1999 as the Memorandum
of Understanding expired on April 1, 1998.
Total cost of revenues as a percent of revenues for the three months of 1999 was
95% as compared with 67% in 1998. Product cost of revenues as a percent of
product revenues decreased to 97% in 1999 from 111% in 1998 due to shipment of
two scanners compared to one scanner in 1998. The high cost of product sales in
1999 was due to the decrease in production of new scanners, resulting in a
significant portion of the fixed overhead of the manufacturing facility being
expensed to cost of revenue. In 1998, the negative gross margin on product sales
was the result of selling one scanner to Siemens with no gross margin, coupled
with the fact that the Company incurred one time re-engineering costs for its
scanner manufacturing process. Service cost of revenues as a percent of service
decreased to 91% in 1999 as compared to 94% in 1998 due to a slight decrease in
overhead expenses to support scanner service contracts. Other product cost of
revenues as a percent of other product revenues was 98% in 1999.
Operating expenses for the three months of 1999 increased 3% to $4,084,000, or
78% of revenues, compared to $3,947,000, or 105% of revenues in 1998. Research
and development expenses of $1,808,000 in 1999 decreased from $1,986,000 in 1998
due to a reduction in headcount. Marketing and sales expenses increased to
$1,168,000 in 1999 from $878,000 in 1998 primarily due to increases in headcount
and outside commissions related to scanner sales. Administrative expenses
decreased to $806,000 in 1999 from $1,083,000 in 1998 due primarily to a
decrease in the bad debt provision relating to certain distributors.Goodwill
amortization amounting to $20,000 in 1999 represents the amortized portion of
goodwill related to the acquisition of Caral (see Note 5). Restructuring charges
of $282,000 relates to severance and other benefits recorded by the Company
during the first quarter of 1999 as part of the it's reorganization plan (see
Note 6).
The gain on sale of assets of $1,492,000 relates to the gain recognized from the
sale of HeartScan - San Francisco center to International Technology Group (see
Note 7). Other income decreased to $12,000 for the first three months of 1999
from $91,000 in the comparable period of 1998. 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.
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FORM 10-Q IMATRON INC. MARCH 31, 1999
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The Company incurred a non-cash charge to income of $437,000 recorded as return
to minority interest expense for the three months ended March 31, 1998, in
connection with certain beneficial conversion features granted to the holders of
the HeartScan convertible Series A Preferred Stock.
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 10).
During the three months of 1999 and 1998, the Company reported losses from
discontinued operation of $690,000 and $1,384,000, 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. In addtion, HeartScan ceased all radio and print advertising which
significantly reduced overhead costs.
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 gains will result from the disposal of the individual centers
comprising the discontinued operation.
Liquidity and Capital Resources:
At March 31, 1999, working capital decreased to $11,217,000 compared to December
31, 1998 working capital of $12,813,000 primarily as a result of the net loss
sustained by the Company. The current ratio decreased to 2.0:1 at March 31, 1999
from 2.1:1 at December 31, 1998.
The Company's total assets decreased to $30,907,000 compared to December 31,
1998 total assets of $31,982,000. Cash and cash equivalents increased to
$1,469,000 in 1999 from $1,445,000 in 1998 as a result of collections of
receivables and the cost cutting measures taken in the first quarter. Cash used
in continuing operations was $2,022,000 for three months ended March 31, 1999
compared to $5,157,000 during the same period in 1998. Cash generated from
receivables and decreased inventory purchases were offset by a reduction in
accounts payable. The decrease in accounts receivables was primarily due to
payment of outstanding invoices. The decrease in inventory resulted from a
decrease in the number of scanners in finished goods to eight in 1999 from five
during the same period in 1998 to reflect short-term projected sales. In 1998,
scanner orders were either delayed or canceled due to the uncertainty in Asia,
resulting in an increase in the number of scanners in finished goods. Accounts
payable decreased as a result of a decrease in inventory purchases.
Cash provided by discontinued operations was $78,000 for the three months ended
March 31, 1999 compared to $1,144,000 due to a decrease in cash to support
operating lossses incurred in 1998. Operating losses for the three month period
ended March 31, 1999 decreased to $690,000 as compared to $1,384,000 for the
same period in 1998.
The Company's investing activities for the three months ended March 31, 1999
included proceeds from sale of HeartScan - San Francisco center for $1,500,000
offset by the acquisition of Caral amounting to $273,000 (net of cash acquired)
and purchase of equipment totaling $158,000. In 1998, the primary source of cash
from investing activities was $1,065,000 of proceeds from the sale and maturity
of investments in marketable securities. This was offset by acquisitions of
equipment totaling $289,000 and the purchase of $885,000 of investments in
marketable securities.
Cash provided by financing activities was $899,000 for the three month period
ended March 31, 1999 as compared with $220,000 for the same period in 1998.
Significant source of cash in financing activities were proceeds of $925,000 and
$235,000 from issuance of common stock under the Company's stock option and
employee stock purchase plans during the three month period ended March 31, 1999
and 1998, respectively,
================================================================================
13
<PAGE>
FORM 10-Q IMATRON INC. MARCH 31, 1999
================================================================================
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 March 31, 1999 together with the proceeds from the
impending sale of HeartScan, and the estimated proceeds from ongoing sales of
products and services in 1999 will provide the Company with sufficient cash for
operating activities and capital requirements through December 31, 1999.
Currently, the Company's significant capital commitments in 1999 include the
purchase of a new system for its Enterprise Resource Planning.
To satisfy the Company's capital and operating requirements beyond 1999,
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.
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 the 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) and will be upgraded to Manufacturing Knowledge (MK) computer system in
1999 which is Y2K compliant. The main purpose of the upgrade is to accommodate
addtional users to the system and increases in data storage and processing. Had
the Company decided to continue to use ASK computer system for its ERP, the cost
to make the it Y2K compliant would be less than $50,000. A series of
comprehensive training classes for the MK system started in March 1999. The
Company anticipates the conversion from ASK to MK to start in June 1999 and be
fully implemented by August 1999. The Company estimates the cost for the
conversion to be less than $700,000. As of March 31, 1999, the Company has
incurred approximately $200,000 in Y2K costs. The Company anticipates that most
of its Y2K costs will be incurred during the second and third quater of 1999.
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 "functional 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. Series 12.4 completed its beta testing and was released
in the first quarter of 1999.
================================================================================
14
<PAGE>
FORM 10-Q IMATRON INC. MARCH 31, 1999
================================================================================
The Company has contacted all its suppliers, especially sole-source vendors, and
a 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. To
date, the Company has received formal responses from all of its critical
suppliers. Most of them have responded that they expect to address all their
significant Y2K issues on a timely basis. The Company regularly reviews and
monitors the suppliers' Y2K readiness plans and performance. Based on the
Company's risk assessment, selective on-site reviews may be performed. Risk
analysis has been completed with the Company's base of suppliers and contingency
plans are now being developed and tested. All testing is targeted to be complete
by June 1, 1999. In some cases, to meet Y2K readiness, the Company has replaced
suppliers or eliminated suppliers from consideration for new business. The
Company has also contracted with multiple transportation companies to provide
product delivery alternatives.
The Company's Risks and Contingency Plan
The Company is working to identify and analyze the most likely worst-case
scenarios for third-party relationships affected by Y2K. These scenarios could
include possible infrastructure collapse, the failure of power and water
supplies, major transportation disruptions, unforeseen product shortages due to
hoarding of products and sub-assemblies and failures of communications and
financial systems. Any one of these scenarios could have a major and material
effect on the Company's ability to build its products and deliver services to
its customers. While the Company has contingency plans in place to address most
issues under its control, an infrastructure problem outside of its control or
some combination of several of these problems could result in a delay in product
shipments depending on the nature and severity of the problems. The Company
would expect that most utilities and service providers would be able to restore
service within days although more pervasive system problems involving multiple
providers could last two to four weeks or more depending on the complexity of
the systems and the effectiveness of their contingency plans.
Although the Company is dedicating substantial resources towards attaining Y2K
readiness, there is no assurance it will be successful in its efforts to
identify and address all Y2K issues. Even if the Company acts in a timely manner
to complete all of its assessments; identifies, develops and implements
remediation plans believed to be adequate; and develops contingency plans
believed to be adequate, some problems may not be identified or corrected in
time to prevent material adverse consequences to the Company.
Estimated Costs
The Company does not expect the costs associated with its Year 2000 efforts to
be substantial. Less than $1,000,000 has been allocated to address the Year 2000
issue, of which approximately $200,000 has been incurred through March 31, 1999.
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 compliant or costs to implement any
contingency plans. The discussion above regarding estimated completion dates,
costs, risks and other forward-looking statements regarding Y2K is based on the
Company's best estimates given information that is currently available and is
subject to change. As the Company continues to progress with its Y2K
initiatives, it may discover that actual results will differ materially from
these estimates.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In the past the Company has held investments consisting of interest bearing
investment grade instruments consistent with the Company's investment portfolio.
The Company has also entered into credit facilities and leasing arrangements. At
March 31, 1999, the Company had money market mutual funds, certificates of
deposit and commercial paper which mature in less than three months.
Additionally, the Company maintained leases for a scanner and other equipment
that have been accounted for as capital leases with a total obligation of
$872,000 as of March 31, 1999.
The Company's foreign sales are denominated in U.S. Dollars.
The Company does not believe that it is subject to any material exposure to
interest rate, foreign currency or other market risks.
================================================================================
15
<PAGE>
FORM 10-Q IMATRON INC. MARCH 31, 1999
================================================================================
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
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
No. 27 - Financial Data Schedule as of March 31, 1999.
(b) Form 8-K Reports:
None.
================================================================================
16
<PAGE>
FORM 10-Q IMATRON INC. MARCH 31, 1999
================================================================================
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: May 13, 1999
IMATRON INC.
(Registrant)
/s/Gary H. Brooks
---------------------------------------
Gary H. Brooks
Vice President, Finance/Administration,
Chief Financial Officer and Secretary
IMATRON INC.
(Registrant)
================================================================================
17
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The Schedule Contains Summary Financial Information Extracted From Imatron
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