FY 1998 IMATRON INC. FORM 10-K/A
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number 0-12405
IMATRON INC.
a New Jersey Corporation
I.D. No. 94-2880078
389 Oyster Point Blvd, South San Francisco, CA 94080
Telephone (650) 583-9964
Securities Registered Pursuant to Section 12 (6) of the Act:
NONE
Securities Registered Pursuant to Section 12 (9) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the Registrant (1) has 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
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FY 1998 IMATRON INC. FORM 10-K/A
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The aggregate market value of the voting stock (which is the outstanding Common
Stock) of the Registrant held by non-affiliates thereof, based upon the closing
sale price of the Common Stock on February 10, 1999, on the Nasdaq National
Market System ($1.44 per share) was approximately $124,667,000. For the purpose
of the foregoing computation, only the directors and executive officers of the
Registrant were deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 10, 1999, Registrant had 89,459,174 outstanding shares of Common
Stock, no par value, which is the only class of shares publicly traded.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1999 Annual Meeting of
Shareholders, to be filed with the Commission on, or before 120 days after the
end of the 1998 fiscal year, are incorporated by reference into Part III hereof.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (x).
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE DESCRIBED IN ANY SUCH FORWARD LOOKING STATEMENTS.
RISKS INHERENT IN IMATRON'S BUSINESS AND FACTORS THAT COULD CAUSE OR CONTIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THE CONSIDERATIONS SET FORTH
UNDER "MANAGEMENT'S DISCUSSION AND ANYALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS." THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE ANY
FORWARD LOOKING STATEMENTS.
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PART I
ITEM 1 - BUSINESS
GENERAL
Imatron Inc. was incorporated in New Jersey in 1983. References in this Form
10-K to "Imatron", "the Company", "we", "our", and "us" refer to Imatron Inc., a
New Jersey Corporation. The Company is a technology-based company principally
engaged in the business of designing, manufacturing and marketing a high
performance computed tomography ("CT") scanner. This scanner uses Electron Beam
Tomography ("EBT") technology based on a scanning electron beam. The scanner is
used in large and midsize hospitals and free-standing imaging clinics. In
addition to providing service, parts and maintenance to hospitals and clinics
that operate its scanners, the Company also offers its service capability to
other manufacturers of high tech medical equipment.
HeartScan Imaging, Inc. ("HeartScan"), incorporated in Delaware in 1993, is a
diagnostic services subsidiary of the Company. HeartScan offers coronary artery
scanning ("CAS") and Coronary Artery Disease ("CAD") risk assessment services
through its four centers located in South San Francisco, California; Houston,
Texas; Pittsburgh, Pennsylvania; and Washington, D.C. In July 1996, HeartScan
completed a private placement that raised $14,798,000 in net proceeds. 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
selling, marketing, manufacturing and servicing the Company's proprietary
Ultrafast CT scanners. Currently, Imatron has a 94.3% interest in HeartScan,
which Imatron has reflected as discontinued operations for all periods presented
in the company's statements of operations and as net assets of discontinued
operations in the December 31, 1998 and 1997 balance sheets. On February 25,
1999, the Company announced the sale of its HeartScan - San Francisco business
unit effective March 1, 1999.
PRODUCT AND SERVICES
ULTRAFAST CT(R)
PRODUCT DESCRIPTION
A conventional CT scanner is a diagnostic imaging device in which a
cross-sectional (tomographic) image of a patient's anatomy is acquired from
multiple intensity readings (samplings) taken as an x-ray source mechanically
rotates around the patient during a scanning cycle. The acquired x-ray data are
processed through a complex mathematical algorithm relating variations in the
intensity of x-rays passing through a patient's body to tissue density
differences. The acquired data are subsequently reconstructed and displayed as
images on a video monitor, typically with white corresponding to high density
matter, such as bone or calcium, and with black corresponding to low density
matter, such as air. In this manner, the patient's anatomy can be displayed in a
succession of cross-sectional, anatomical gray-scale representations.
The Imatron Ultrafast CT scanner design differs significantly from conventional
CT scanners in two important ways. First, the mechanically rotating x-ray tube
technology of conventional CT scanners is replaced by a high power electron gun
that generates a focused, high-intensity electron beam which is steered along
stationary x-ray target rings to produce a rotating fan-shaped x-ray beam. This
patented electron beam technology permits significantly faster scanning speeds.
The Company's scanner can acquire CT images at a scan speed of 50 to 100
milliseconds per slice in contrast to conventional CT scanners that require
between 0.7 and 3 seconds per slice to acquire an image. Second, the Imatron
Ultrafast CT permits rapid scanning of multiple contiguous images without moving
the patient. With these features, the Ultrafast CT scanner can perform
stop-action or dynamic studies of the heart and various other organs,
contributing to the scanner's usefulness for both diagnostic imaging and
functional evaluation.
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The Ultrafast CT scanner can be operated in three scanning modes: Single Slice
mode, Multi-Slice mode and Continuous Volume Scanning mode. The Single Slice
mode can acquire up to 140 images per acquisition and can be timed to the heart
cycle with ECG triggering. This mode employs scan times from 100 milliseconds to
2 seconds as compared to 0.7 to 3 second exposure times of conventional CT
scanners. The Multi-Slice mode incorporates scan times of 50 milliseconds and
can acquire up to 180 images in 6 seconds. This mode can also be timed over the
cardiac cycle with ECG triggering. The Continuous Volume Scanning mode can
acquire up to 140 images in 15 seconds, outperforming spiral or helical scanning
modes on conventional CT scanners. Advantages include excellent slice
registration for 3D reconstruction, respiratory motion-free pulmonary imaging,
pediatric scanning, trauma, IV contrast reduction, and increased patient
throughput.
PRODUCT DEVELOPMENT
In December 1998, the Company completed its version 12.4 software development.
Software 12.4 brings the Ultrafast C-150XP and C-150LXP into full year 2000
compliance, using 4 digits for all dates. The new software version also has
algorithmic improvements which affect image quality, allowing improved images of
the head, chest, and abdomen, especially with the high resolution detector.
Software 12.4 was thoroughly tested in late 1998, and was released for general
use in January 1999 and will be provided at no charge to all hardware compatible
systems.
In March 1998, the Company developed and released for sale to its customers,
High Resolution Detector System (HRDS) for its Ultrafast CT scanners. The new
HRDS increased the spatial resolution of the single slice mode from 7 to 9.5
line pairs per centimeter and the multi-slice mode from 3 to 4.50 line pairs per
centimeter. The increased spatial resolution improved the scanner's performance,
especially in neurologic, pulmonary, and abdominal applications. It also
increased the total number of detector channels from 1,296 to 3,456, improved
image data correction during reconstruction, and enhanced overall image quality.
In addition, the Company began marketing its new workstation, the UltraAccess,
which increases the functionality and flexibility of cross-sectional scanning
when connected to the Ultrafast CT. Images can now be viewed in 2D, 3D, Maximum
Intensity Projections and real-time Multi-planar reformatting. This workstation
can also perform auto filming, auto archiving and DICOM (digital imaging and
communications in medicine) transfer. The Company believes that this
multi-tasking feature, along with superior image display and manipulation
capabilities, creates a workstation which will provide the user with increased
capacity to process, view, manipulate, and store data produced by the Ultrafast
CT scanner.
In October 1997, the Company received the 510(K) market clearance from the
Federal Food and Drug Administration ("FDA") for cardiac specific applications
included on the UltraAccess workstation. These applications include 3-D "Calcium
Scoring" and cardiac perfusion. In November 1997, the Company received 510(K)
market clearance from the FDA for its new 3456 Channel Dual Slice Detector Array
C-150 Ultrafast CT scanner.
MARKETS
The Company sells its Ultrafast CT scanner in the diagnostic medical imaging
market. This market includes several different modalities such as CT,
ultrasound, nuclear medicine, digital subtraction angiography, and magnetic
resonance imaging. These imaging modalities are based upon the ability of
x-rays, sound waves, gamma rays, or magnetic fields to penetrate human tissue
and be detected by electronic devices for image presentation on a video monitor.
In some cases, these imaging modalities compete with one another for the same
type of procedure.
These systems have been evaluated in the diagnosis of cardiac diseases, but the
extent of application of several is limited due to image degradation, artifacts,
and distortions arising from the heart's motion as it beats at a frequency
greater than the scanning speed of these systems. The fast speed of the
Ultrafast CT allows it to "freeze" the motion of the beating heart in order to
image and quantify small calcium deposits in the coronary arteries. The images
that result are sharp and free of motion related artifacts. The procedure for
accurately measuring the volume and extent of coronary artery calcification is
known as the coronary artery scan ("CAS").
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Cardiovascular disease is the number one cause of death in the United States,
accounting for more than 950,000 deaths annually. Of these deaths, coronary
heart disease accounts for approximately 500,000 deaths. Of particular
importance is the fact that in approximately 150,000 cases annually, the first,
last and only symptom of coronary heart disease is a fatal heart attack. The
Company believes that this widespread incidence of coronary heart disease in the
United States, coupled with the fact that a large number of asymptomatic
individuals (650,000) experience heart attacks each year, indicates a clear need
for a safe and effective screening test for the earliest stages of coronary
heart disease.
The correlation between calcium in the coronary arteries, atherosclerosis, and
myocardial infraction (heart attack) has been known since the 1950's. By the
mid-1960's, selective coronary angiography was introduced and soon became a
routine procedure. Since that time, coronary angiography, which demonstrates
narrowing, or occlusion, of the coronary arteries, has become the "gold
standard" for positive identification of coronary artery disease. Abnormal
results from screening tests, such as exercise electrocardiography ("ECG"),
thallium stress nuclear medicine and stress echocardiography are commonly used
as an indication for coronary angiography. These tests produce a significant
percentage of false abnormal results such that as many as 25% - 35% percent of
the coronary angiograms conducted are deemed to be normal. Since coronary
angiography is both expensive and invasive, the patient in these false abnormal
cases is unnecessarily exposed to some risk of morbidity, or even death, as well
as a significant radiation dose. In addition, statistics indicate that some
patients die suddenly after receiving a "normal" stress ECG study and are then
found, upon autopsy, to have had significant coronary artery disease. The
Company believes these statistics illustrate the inadequate predictive value of
the standard, noninvasive screening tests for diagnosing coronary artery
disease.
The Company further believes that research demonstrates that CAS has the
potential to accurately identify those people who are developing early coronary
artery disease. CAS can then serve as a feedback mechanism to monitor the
treatment of those with early coronary artery disease, a disease which may slow,
stop, or regress in response to treatment. Until now, the only way to directly
determine the effect of life-style modification and lipid-lowering pharmacologic
treatment on coronary artery disease was to perform repeated invasive, costly
coronary angiography or intravascular ultrasound.
For those patients in whom CAS detects advanced coronary artery disease,
intervention may help prevent a crippling heart attack or sudden death. The CAS
test also has great potential for reducing the costs associated with the
unnecessary treatment of those who have coronary risk factors, but show no sign
of coronary artery disease. It is estimated that 30% - 35% of people with
elevated cholesterol levels do not develop coronary artery disease. Since there
has not been, until the advent of the Ultrafast CT scanner, a method to identify
those who are beginning to develop coronary disease, individuals with a high
cholesterol reading have been treated as if they will develop heart disease. The
Company believes that CAS is a powerful and cost-effective method for detecting,
or ruling out, coronary artery disease and represents a unique market.
Currently, only the Ultrafast CT scanner can provide the necessary technological
capability to address these clinical application requirements. Notwithstanding
the foregoing, to date, CAS has not been broadly accepted as a method of
identifying coronary artery disease, and there is no assurance that a
significant market will develop for this procedure.
In addtion to the CAS test, the Company believes that EBT technology can also
perform a newly developed procedure known as Coronary CT Angiography ("CTA").
The CTA procedure utilizes an intravenous injection of x-ray contrast medium as
opposed to threading a catheter into the femoral artery to the heart as required
by conventional x-ray coronary angiography. A series of contiguous contrast
enhanced images is obtained and electronically transmitted to a powerful desktop
3-D workstation. The resulting three dimensional CT angiogram can be used to
determine the patency of coronary artery bypass grafts on the effectiveness of a
"balloon" angioplasty procedure. The combination of the Company's EBT scanner's
unparalleled image acquisition capability with new, powerful PC microprocessor
driven workstations provides unique 3-D imaging capability in the heart, lungs,
colon, and other organs.
Imatron believes that possible factors affecting the demand for CT products
include, among others, potential customers' budgetary constraints including
those imposed by government regulation, changes in the reimbursement policies of
the government and third party insurers, replacement of older equipment,
advancements in technology, and the introduction of new medical procedures.
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CUSTOMER SERVICE
The Company and its distributors provide installation, customer warranty, and
service to their respective customers. Imatron provides warranty on the
Ultrafast CT scanner during the 12-month period following installation. In
addition, the Company provides other product support services, including a
telephone hotline for customer inquiries, product enhancements and maintenance
releases. The Company also offers training at customers' locations and the
Company's facilities to both end-users and distributors.
In 1997, Imatron expanded its service business to include installation,
warranty, repair, training and support services to other manufacturers of high
tech medical equipment. Imatron entered into a two-year service support
agreement in February 1998, with AccuImage Diagnostics, to provide worldwide
customer support service for its Three-Dimensional Volume Visualization
Workstation.
The Company maintains customer support centers in South San Francisco,
California and Munich, Germany and field service personnel in the United States,
Europe and Asia for its service business. Together with its distributors, the
Company services over 113 installed EBT systems worldwide including
approximately 20 systems manufactured by vendors other than Imatron. The Company
generates service revenues under service contracts with Imatron and non-Imatron
customers, providing service on a "contract" and "time and material" basis to
such customers after the warranty period.
RESEARCH AND DEVELOPMENT CONTRACTS
For the period from March 31, 1995 to March 31, 1998, the Company and Siemens
Corporation ("Siemens") operated under a 1995 Memorandum of Understanding
whereby Siemens provided $15,000,000 to the Company's C-150 Evolution Ultrafast
CT scanner research and development program paid to the Company in quarterly
non-refundable payments. The results of the collaborative research were jointly
owned by the parties and cross licensed. For the period from March 31, 1995 to
March 31, 1998 Siemens retained exclusive distribution rights in certain
geographical regions for sales of the C-150/Evolution scanner. The Company
recognized revenue of $1,250,000, $5,000,000, and $5,000,000 under the
collaborative agreement in 1998, 1997, and 1996, respectively.
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 July 22, 1997, the Company and TeraRecon, Inc., a privately-held company
engaged in the design of high-speed image processing devices for medical imaging
systems, entered into a development agreement. The agreement requires the
delivery by TeraRecon to Imatron of a real-time image reconstruction system for
use in conjunction with Imatron's Ultrafast CT scanner. Upon completion of
prototypes and delivery, the TeraRecon RTR-2000 system will be exclusive to
Imatron's Ultrafast CT scanner and will expand the Ultrafast CT scanner's
current applications to include CT fluorography, real-time viewing of CT images,
CT guidance of minimally invasive surgical procedures and timings of contrast
studies.
In consideration for the successful development and delivery of RTR-2000
systems, the Company has agreed to issue an aggregate of 6,000,000 warrants to
purchase the Company's Common Stock at $4.50 per share. The warrants will be
issued in installments based on TeraRecon achieving certain milestones in
connection with the development of the image reconstruction system. In addition,
TeraRecon has agreed to pay Imatron an aggregate of $2,000,000 for 4,000,000 of
the 6,000,000 warrants and to make royalty payments to Imatron equal to 3% of
net sales of certain RTR-2000 systems sold to third parties. As of December 31,
1998, the Company has issued to TeraRecon warrant to purchase 4,000,000 shares
of Imatron Common Stock.
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In February 1999, the Company and TeraRecon agreed to modify the development
agreement releasing TeraRecon from its obligation to purchase the remaining
2,000,000 stock purchase warrants for $1,000,000. TeraRecon has agreed to
develop a more stable, reliable, and easier-to-maintain image reconstruction
system at no additional cost to Imatron and upgrade five units of the current
RTR-2000 systems for no more than $25,000 per unit. Imatron will cancel the 3%
royalty payment pursuant to the original agreement.
MARKETING
The Company's Ultrafast CT scanners are utilized by a variety of customers
including large teaching and research hospitals, medium-size hospitals, and
imaging clinics.
The Company sells its Ultrafast CT scanner directly and through distributors.
The Company has, or had, the following distribution arrangements:
UNITED STATES, CANADA, AND EUROPE
In April 1995, pursuant to the Memorandum of Understanding above, the Company
entered into an agreement with Siemens giving Siemens the exclusive right to
distribute the Company's C-150 scanner in the United States, Canada, Europe and
India (see "Transactions With Siemens Corporation" below). On April 1, 1998, the
exclusive distribution rights reverted to Imatron and the Company assumed
worldwide distribution for its scanners. Siemens purchased two, seven, and two,
C-150 scanners in 1998, 1997, and 1996, respectively. In 1998, the Company sold
nine C-150 scanners through its direct sales force in the United States.
On July 1, 1998, the Company entered into a non-exclusive sales agency agreement
with GE Medical Systems ("GEMS") 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 responsibilities, while GEMS provides
financing options for customers purchasing the equipment. The Company believes
that the marketing alliance with GEMS will enhance its distribution capabilities
in Northern America and penetrate the C-150 scanner market more effectively. The
contract has a term of 2 years with an option to extend for an additional year
at GEM's sole discretion. The Company has agreed to pay GEMS a commission on all
sales directly resulting from the Company's corporate alliance with GEMS. There
can be no assurance that the GEMS sales agency agreement will result in
significantly increased sales by the Company.
JAPAN
On January 7, 1994, Imatron entered into a Joint Company Agreement with Tobu
Land System Company and Kino Corporation pursuant to which a joint venture
company was established to market, sell, install and service Imatron Ultrafast
CT scanners in Japan. The joint venture was designated as Imatron Japan, Inc.
and is owned by Tobu Land System Company, Kino Corporation and Imatron in
increments of 51%, 25% and 24% respectively.
On February 3, 1994, Imatron and Imatron Japan, Inc. entered into a
Distributorship Agreement pursuant to which Imatron Japan, Inc. has been
appointed as Imatron's exclusive distributor in Japan. Imatron Japan, Inc. took
delivery of two, three, and five C-150 Ultrafast CT scanner systems from Imatron
in 1998, 1997, and 1996, respectively. Imatron Japan, Inc. also purchased two
refurbished Ultrafast CT systems in 1995. These units, paid for by irrevocable
letters of credit, are without a right-of-return provision and have no special
arrangements. In connection with these sales, the Company paid $130,000 in
commissions for each new C-150 Ultrafast CT scanner sold to Imatron Japan, Inc.
through 1996. As of 1997, these commissions were reduced to $60,000 per each new
machine sold to Imatron Japan, Inc. Due to the economic uncertainties in Japan,
Imatron Japan, Inc. was able to accept only two scanners out of the five
originally ordered for 1998.
RELIANCE ON DISTRIBUTORS
Historically, a substantial portion of the Company's sales of its scanners was
done through distributors or sales agents. There is no assurance that the
Company's distributors or sales agents will meet their contractual minimum
obligations (if any) on a timely basis. Failure by distributors to meet their
obligations could adversely affect the Company's operations and financial
position.
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SALES INFORMATION
The scanner sales price varies depending on customer requirements. In
particular, sales to Siemens, Imatron Japan, Inc. and certain distributors/sales
agents have a lower gross margin than sales to other third parties. The sales
price includes installation by field service personnel, system check and
certification, customer applications training, and a 12-month warranty. In
addition, local taxes and import duties may be added. This price, which is
higher than that of conventional CT scanners, may serve to limit sales of the
Company's scanner to larger hospitals and medical imaging clinics that are able
to generate a higher than average patient volume to offset the higher cost. Unit
scanner export sales for fiscal years ended December 31 are as follows:
1998 1997 1996
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Total export sales 6 15 8
TRANSACTIONS WITH SIEMENS CORPORATION
In March 1991, the Company entered into a Basic Agreement with Siemens
Corporation which consisted of four separate subagreements, each of which has
been subsequently modified in various respects by the parties. The four
subagreements included a $4 million term loan; a distribution agreement; a
development agreement; and a license agreement.
On March 31, 1995, the Company and Siemens entered into a three-year agreement
(the "Memorandum of Understanding" or "MOU") pursuant to which the relationship
of the parties as established by the Basic Agreement was substantially
restructured. Pursuant to the MOU, the sub-agreements of the Basic Agreement
were terminated and a number of new relationships were created. First, Siemens
agreed to exchange the Company's $4.0 million note for five patents, subsequent
to an arms-length negotiation between the two parties and to a royalty-bearing
license back to Imatron (see Patents and Licenses below). In addition, the
minimum purchase provision of the previous distribution agreement was canceled.
The sale of the patents has no material impact on the Company as Siemens granted
to Imatron a non-exclusive, irrevocable, perpetual royalty-bearing license on
the transferred patents. These patents were not part of the technology being
developed under the Collaborative Research Agreement between Siemens and
Imatron. The gain calculated as the difference between the patents' book value
of $0 and the net carrying amount of the extinguished debt of $4,000,000, was
recognized as income in 1995.
Pursuant to the fee arrangements with regard to the use of the technology under
the transferred patents, Imatron will pay to Siemens royalties of $20,000 for
each new C-150 unit (or other EBT unit produced by Imatron after April 1, 1995),
commencing with the 21st C-150 (or other Imatron EBT) unit produced in any year
and continuing thereafter for ten years after such first quarter in which such
21st unit is produced. To date, Imatron has not produced more than 20 scanners
in any year, and therefore, no royalties have been due under this agreement.
Second, the parties agreed to terminate, as of March 31, 1995, the existing
Development Agreement and substitute in its place a new collaborative research
agreement pursuant to which the parties would jointly conduct research and
development over a three year period directed toward the electron beam
technology used in the Company's C-150 product. Both Siemens and Imatron have
irrevocable, perpetual, royalty free, fully paid licenses covering the electron
beam technology developed under the collaborative research, subject to the
following terms and conditions:
(a) During the term of the MOU, a complete copy of which was filed as
Exhibit 10.80 to the Company's 1994 Report on the Form 10-K, either
Party may sublicense, transfer or assign its rights in the electron beam
technology or use the same, in whole or in part, to develop or
manufacture medical products for third parties with prior written
consent of the other Party.
(b) Imatron may not grant to any third party any license in the field of
medical imaging under any or all of the electron beam technology during
the term of the MOU and for three years thereafter.
(c) Either Party may sublicense the technology to its parent, subsidiaries
or 50% or more owned affiliates.
(d) Either Party may sublicense, assign or transfer the technology as part
of its sale of the assets or business relating to the C-150.
(e) With regard to manufacturing C-150 scanners, the C-150 system can only
be manufactured by Siemens after fifty scanners are manufactured, sold,
transferred and/or delivered to Siemens by Imatron in any fiscal year;
or upon default or refusal of Imatron at any time to perform its
obligations to Siemens with respect to the design, manufacture, service,
support, supply of products and parts in order for Siemens to meet its
obligations to third parties.
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Pursuant to the collaborative research agreement, Siemens agreed to fund a
maximum aggregate of $15 million of Imatron-managed research and development
over the three years, subject to addressing certain mutually agreed upon goals
and objectives. No milestones or other performance related results were tied to
the payment of funds by Siemens. The Company recognized revenue ratably over the
three year period as its commitment to perform research and development under
the agreement was incurred ratably over the same period.
The Company was not obligated to return the amount funded by Siemens. However,
Siemens had the right to terminate the collaborative research upon three months
written notice in the event objectives agreed upon by both parties had not
achieved reasonable progress.
The Company's obligations under this agreement were as follows:
(a) Imatron was responsible for managing and performing all collaborative
research conducted under the MOU.
(b) The primary goals of Imatron include cost reductions, improved quality,
performance enhancement and upgradeability.
(c) Imatron funds an amount equal to 50% of Siemens' contribution for the sole
purpose of conducting the collaborative reasearch.
(d) Imatron provides Siemens detailed accounting on the use of monies
contributed pursuant to the agreement.
Third, Siemens was appointed Imatron's exclusive distributor for the Company's
C-150 Ultrafast CT scanner in the United States, Canada, Europe, and India for a
three year period effective April 1, 1995, and ending March 31, 1998. Siemens
agreed to use its best efforts to distribute the Company's C-150 product in its
exclusive markets subject to no minimum purchase obligations.
In April 1997, Imatron and Siemens entered into a service support agreement,
whereby the Company will provide customer services for C-150 scanners sold by
Siemens. For an agreed-upon amount, Imatron will provide all pre-installation
site planning, installation and application support, as well as, warranty and
post-warranty services, as a subcontractor to Siemens. Revenues for warranty
services are recognized over the life of the contracts, while other service
revenues are recognized upon completion of work.
On April 1, 1998, Imatron's obligations and Siemens' contribution under the MOU
terminated and Imatron assumed worldwide distribution for its C-150 scanners.
COMPETITION
In the non-cardiac imaging applications market (comprised principally of
hospital radiology departments), the Company's principal competition is from
current manufacturers of conventional CT scanners, including General Electric
Company, Siemens Corporation, Elscint, Picker International, Inc., Philips
Medical Systems, Toshiba Medical Corporation and others. Non-invasive diagnostic
imaging techniques such as ultrasound, radioisotope imaging, digital subtraction
angiography, and magnetic resonance imaging are also partially competitive with
the Company's scanners. Each of the companies named above, as well as ATL,
Acuson and ADAC Laboratories, markets equipment using one or more of these
technologies. All of these companies have greater financial resources and larger
staffs than those of the Company and their products are, in most cases,
substantially less expensive than the Ultrafast CT scanner.
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The Company believes that in order to compete successfully against these
competitors, it must continue to demonstrate that the Ultrafast CT scanner is
both an acceptable substitute for conventional CT scanners in areas of the body
where motion is not a limitation, and that the Ultrafast CT is a valuable
cardiac diagnostic tool capable of producing unique and useful images of the
heart. Although the Company believes that the Ultrafast CT can produce general
purpose images of a quality and resolution as good as, or superior to, images
produced by "state of the art" conventional CT scanners, it lacks certain
features that many competing premium scanners offer.
Also, the Company believes that customers and potential customers expect a
continuing development effort to improve the functionality and features of the
scanner. As a result, the Company continually seeks to develop product
enhancements and improve product reliability. Imatron's future success may
depend on its ability to complete certain product enhancement and reliability
projects currently in progress, as well as on its continued ability to develop
new products or product enhancements in response to new products that may be
introduced by other companies. There can be no assurance that Imatron will be
able to continue to improve product reliability or introduce new product models
and enhancements as required to remain competitive.
Other factors, in addition to those described above, that a potential purchaser
might consider in the decision to replace a conventional CT scanner with an
Ultrafast CT scanner include purchase price, patient throughput capacity,
anticipated operating expenses, estimated useful life, and post-sale customer
service and support. The Company believes that its scanner is competitive with
respect to each of these factors.
MANUFACTURING
The Company manufactures its scanner at its South San Francisco, California,
headquarters facility. To date, the typical manufacturing cycle has required
approximately five months from the authorization of manufacturing to the
delivery of a scanner.
Many of the components and sub-assemblies used in the scanner have been
developed and designed by Imatron to its custom specifications, and are
obtainable from limited or single sources of supply. In view of the customized
nature of many of these components and sub-assemblies, there may be extended
delays between their order and delivery. Delays in such delivery could adversely
affect Imatron's present and future production schedules. The Company has made
and continues to make inventory investments to acquire long lead time components
and sub-assemblies to minimize the impact of such delays. In recent years, the
Company has developed alternative sources for many of its scanner subcomponents
and continues its programs to qualify new vendors for the remaining critical
parts. There can be no assurance that such actions will not adversely affect the
Company's production schedule and its ability to deliver products in a timely
manner.
GOVERNMENT REGULATION
Amendments to the Federal Food, Drug, and Cosmetic Act ("Amendments") enacted in
1976, and regulations issued or authorized thereunder, provide for regulation by
the FDA of the marketing, manufacturing, labeling, packaging, sale and
distribution of "medical devices," including the Company's scanner. Among these
regulations are requirements that medical device manufacturers register their
manufacturing facilities with the FDA, list devices manufactured by them, file
various reports and comply with specified Good Manufacturing Practice ("GMP")
regulations. The FDA enforces additional regulations regarding the safety of
equipment utilizing x-rays, which includes CT scanners. Various states also
impose similar regulations. The Amendments also impose certain requirements
which must be met prior to the initial marketing of medical devices introduced
into commerce after May 28, 1976. Other requirements imposed on medical device
manufacturers include a pre-market notification process commonly known as the
510(k) application to market a new or modified medical device. Additionally, and
specifically, if required by the FDA, a pre-market approval ("PMA") may be
required. This process is potentially expensive and time consuming and must be
completed prior to marketing a new medical device. The Company has received
appropriate clearances from the FDA to market the C-150 Ultrafast CT scanner.
The Company believes that it is presently in substantial compliance with the GMP
requirements and other regulatory issues promulgated by the FDA.
In October 1997, the Company received the 510(K) market clearance from the FDA
for cardiac specific applications included on the UltraAccess workstation. These
applications include 3-D "Calcium Scoring" and cardiac perfusion. In November
1997, the Company received 510(K) market clearance from the FDA for its new 3456
Channel Dual Slice Detector Array C-150 Ultrafast CT scanner.
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The FDA also regulates the safety and efficacy of radiological devices. Although
the Company believes it is in compliance with all applicable radiological health
regulations established by the FDA, there can be no assurance that the Ultrafast
CT scanner will continue to comply with all such standards and regulations that
may be promulgated. In any event, compliance with all such requirements can be
costly and time consuming, and can have a material adverse effect on the
development of the Company's business and its future profitability.
The Federal government and certain states have enacted cost-containment measures
such as the establishment of maximum fee standards in an attempt to limit the
extent and cost of governmental reimbursement of allowable medical expenses
under Medicare, Medicaid and similar governmental programs. A number of states
have adopted, or are considering the adoption, of similar measures. Such
limitations have led to a reduction in, and may further limit funds available
for, the purchase of diagnostic equipment such as the Company's scanner and in
the number of diagnostic imaging procedures performed in hospitals and other
medical institutions such as HeartScan's coronary artery disease risk assessment
centers.
The Company's primary customers operate in the highly regulated healthcare
industry. Existing and future governmental regulations could adversely impact
the market for the Company's Ultrafast CT scanner and the Company's business.
The Company's operations are also subject to regulation by other federal, state,
and local governmental entities empowered to enforce pertinent statutes and
regulations, such as those enforced by the Occupational Safety and Health Agency
("OSHA") and the Environmental Protection Agency ("EPA"). In some cases, state
or local regulations may be more strict than regulations imposed by the Federal
government. The Company believes that it is in substantial compliance with
California regulations applicable to its business. In January 1997, the FDA
conducted routine inspections of Imatron's manufacturing operations. The
inspection concluded without Notices of Observations. Imatron frequently
provides field modifications or updates of components and software to
operational sites. Imatron voluntarily advised the FDA during these inspections
that certain field corrections were ongoing. The FDA concurred with Imatron's
decision to field upgrade certain sites and assigned recall numbers Z304/307-7
and Z-289/299-7. There has been no recalls or notices of observations by the FDA
in 1998.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements, in some
countries, to complex clearance and production controls in others. As a result,
the processes and time periods required to obtain foreign marketing approval may
be longer or shorter than those necessary to obtain FDA approval. These
differences may affect the efficiency and timeliness of international market
introduction of the Company's products, and there can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in foreign countries.
In January 1995, CE mark certification procedures became available for medical
devices for countries in the European Union ("EU"). The successful completion
would allow certified devices to be placed on the market in all EU countries. In
order to obtain the right to affix the CE mark to its products, medical device
companies must obtain certification that its processes meet European quality
standards, including certification that its design and manufacturing facility
complies with ISO 9001 standards. After June 1998, medical devices may not be
sold in EU countries unless they display the CE mark. In May 1998, Imatron
received the CE Marking, which indicates that the Ultrafast CT scanner meets the
safety requirements for marketing in all EU countries. In addition, the Company
successfully obtained registration under the ISO 9001 standards in December
1997. The inability or failure of the Company or its international distributors
to comply with varying foreign regulations or the imposition of new regulations
could restrict or, in certain countries, result in the prohibition of the sale
of the Company's business.
HeartScan's activities are subject to extensive regulation, generally by state
and local governmental entities. Although HeartScan believes it is in
substantial compliance with all applicable regulations, there can be no
assurance that its business will continue to comply with all such standards and
regulations that may be established. In any event, compliance with all such
requirements can be costly and time consuming, and may have materially adverse
effects on the development of HeartScan's business and its future profitability.
HeartScan's operations are also subject to regulation by other federal, state,
and local governmental entities empowered to enforce pertinent statutes and
regulations, such as those enforced by the FDA, OSHA, and the EPA. Changes in
governmental regulations or new regulations adopted in the future may materially
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adversely affect Imatron's business. In some cases, state or local regulations
may be stricter than regulations imposed by the Federal government.
PATENTS AND LICENSES
Imatron relies heavily on proprietary technology and intellectual property which
it attempts to protect through patents and trade secrets.
In February 1981, the Company was granted the exclusive use, for five years, and
non-exclusive use thereafter, of certain technology and a patent pending, owned
by the University of California ("UC") under the terms of a license agreement
between UC and Emersub, a wholly-owned subsidiary of a former principal
shareholder of the Company, and a sublicense agreement between Emersub and
Imatron Associates (the predecessor to the Company), respectively. Under the
continuing sublicense agreement, as amended, Imatron will make payments to
Emersub equal to 2.125% of net sales of new C-150 scanners sold by Imatron in
exchange for the Company's exclusive use of Patent #4,352,021, "X-ray
Transmission Scanning System and Method and Electron Beam X-ray Scan Tube for
Use Therewith", through the remaining life of such patent. The Company's
Chairman of the Board, Dr. Douglas P. Boyd, receives 6% of all of the royalties
paid by Emersub to UC. Loss by Imatron of its rights under the patent as a
result of termination of its sublicense from Emersub, or the underlying license,
could have a material adverse effect upon Imatron's business and future
prospects. UC cancelled the license to Emersub on October 8, 1997. Imatron has
agreed to pay UC royalties in the amount of $174,515 for scanners sold from that
date through December 31, 1998. UC has agreed to grant the Company a license for
the remaining life of the patent on substantially the same terms as the Emersub
license agreement. Royalty expense related to the sublicense agreement for 1998,
1997, and 1996 were $137,775, $165,330, and $91,470, respectively.
Development of portions of the technology covered by the UC patent and
sublicensed to Imatron has been funded in substantial part through research
financing made available to UC by the National Institutes of Health. As a result
of such financing, it is possible that the U.S. Government may assert certain
claims in such UC patents, including the right to a royalty-free license for
governmental use.
In addition, Imatron holds thirty-three U.S. Patents of its own (each with a
remaining life in excess of a year) and has filed three U.S. patent applications
covering various integral components of the scanner including, among others, its
electron beam assembly and its x-ray detector, and has filed applications
corresponding to several of these patents and applications in various European
Patent Convention countries, Canada, and Japan. There can be no assurance that
any such applications will result in the issuance of a patent to the Company.
Imatron's patents and patent applications have not been tested in litigation and
no assurance can be given that patent protection will be upheld or will be as
extensive as claimed. Furthermore, no assurance can be given as to the Company's
ability to finance litigation against parties which may infringe upon such
patents or parties which may claim that the Company's scanner infringes upon
their patents. However, the agreement signed by the Company and Siemens
Corporation in March 1991 allows Siemens Corporation to enter litigation in
favor of Imatron. Pursuant to the Memorandum of Understanding with Siemens (see
"Transactions With Siemens Corporation"), the Company transferred five patents
to Siemens, two of which cover features of the Company's C-150 scanner, in
complete consideration of the cancellation by Siemens of the $4.0 million notes
payable to the Company. The transferred patents were as follows:
1. U.S. 4,521,901 - Scanning Electron Beam Computed Tomography Scanner with
Ion Aided Focusing.
2. U.S. 4,531,226 - Multiple Electron Beam Target for use in X-Ray Scanner.
3. U.S. 4,535,243 - X-Ray Detector for High Speed X-Ray Scanning System.
4. U.S. 4,736,396 - Tomosynthesis using High Speed CT Scanning System.
5. U.S. 5,193,105 - Ion Controlling Electrode Assembly for a Scanning Electron
Beam Computed Tomography Scanner.
As part of the agreement, Siemens granted to the Company a non-exclusive,
irrevocable, perpetual license to the five patents. The license is subject to a
royalty of $20,000 for each new C-150 unit (or other EBT unit produced by
Imatron after April 1, 1995), commencing with the 21st C-150 (or other Imatron
EBT) unit produced in any year and continuing thereafter for ten years after
such first quarter in which such 21st unit is produced. To date, Imatron has not
produced more than 20 scanners in any year and, therefore, no royalties have
been due under this agreement.
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In the event some or all of the Company's patent applications are denied and/or
some or all of its patents held invalid, the Company would be prevented from
precluding its competitors from using the protected technology set forth in such
patent applications or patents. Because the Company's products involve
confidential proprietary technology and know-how, the Company does not believe
such a loss of patent rights would have a materially adverse effect upon the
Company.
The Company also believes that many of its proprietary technologies are better
protected as trade secrets or copyrights than by patents. Moreover, although
protection of the Company's existing proprietary technologies is important,
other factors such as product development, customer support, and marketing
ability are also important to the development of the Company's business.
EMPLOYEES
As of February 10, 1999, the Company had 180 employees, including 50 employees
in service, 17 in sales/marketing, 52 scientists and engineers in research and
development, 43 employees in manufacturing, and 18 employees in finance and
administration. HeartScan had 24 employees, including 20 employees in
operations, 2 in sales and marketing, and 2 employees in corporate
administration. None of the employees are represented by a labor union and no
work stoppages or strikes have occurred. The Company believes that it has good
labor relations with its employees.
CERTAIN FACTORS
In evaluating the Company and its business, the following factors should be
given careful consideration, in addition to the information mentioned elsewhere
in this Form 10-K:
OPERATING HISTORY
Imatron was incorporated in February 1983, and incurred losses each quarter from
inception through December 31, 1990. Its first recorded profitable year was the
year ended December 31, 1991 during which a $4,000,000 payment for the licensing
of technology to Siemens Corporation was received. The Company incurred
additional net losses in both 1992 and 1993. In 1994, the Company incurred its
first year of net income from continuing operations amounting to $3,221,000
partially offset by $911,000 of net losses incurred by discontinued operations
of HeartScan. In 1998, 1997, and 1996, the Company incurred net losses of
$14,781,000, $11,422,000, and $13,737,000, respectively. The net losses were
partially a result of the operating losses incurred by discontinued operations
of HeartScan which amounted to $4,507,000, $6,428,000, and $4,573,000, in 1998,
1997, and 1996, respectively. The net losses recorded reflect non-cash minority
interest expense of $874,000, $1,744,000 and $3,272,000 recorded in 1998, 1997
and 1996, respectively, as a result of the accounting treatment relative to its
convertible Series A Preferred Stock having "beneficial conversion features."
There is no assurance that Imatron can return to profitable operations in the
future.
In the past, Imatron has funded its losses primarily though the sale of
securities in two public offerings and a number of private placements, through
the exercise of options and warrants, through the 1991 license for medical uses
of its electron-beam technology to Siemens Corporation, and through revolving
lines of credit. In 1995, the Company raised $9,882,000 (net of offering costs)
in two offerings of Common Stock to certain institutional investors. In 1996,
the Company received $16,672,000 through the sale of shares of common stock and
the exercise of warrants and stock options for shares of common stock. Also in
1996, HeartScan raised $14,798,000 (net of offering costs) for use exclusively
to develop its operations (see note 10 to the Notes to the Consolidated
Financial Statement). As of December 31, 1998, the Company has a consolidated
accumulated deficit of $97,497,000.
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The Company's liquidity is affected by many factors, including the normal
ongoing operations of the business and other factors 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 existing at December 31, 1998 together with the
estimated proceeds from ongoing sales of products and services and divestiture
of the HeartScan operations in 1999 will provide the Company with sufficient
cash for operating activities and capital requirements through December 31,
1999.
NEED FOR ADDITIONAL FINANCING
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.
MATERIAL DEPENDENCE UPON KEY PERSONNEL
The Company has been, and will continue to be, materially dependent upon the
technical expertise of its engineering and management personnel. The loss of a
significant number of such personnel would have a materially adverse effect upon
the Company's business and future prospects. The Company does not maintain
key-man life insurance.
HIGH COST OF SCANNER
The distributor list price of Imatron's Ultrafast CT scanner is significantly
higher than that of commercially available conventional CT scanners, and higher
than the price of "top-of-the-line" scanners. Such pricing may limit the market
for Imatron's product. Potential customers' budgetary limitations, including
those imposed by government regulation, may often compel the purchase of lower
cost, conventional CT scanners.
LIMITED CLINICAL DEMONSTRATION OF CERTAIN ADVANTAGES OF THE COMPANY'S SCANNER
The Company's scanner has been used in a clinical environment since April 1983.
Clinical use of the C-100 XL scanner model began in February 1989. The C-150
Ultrafast CT scanner was first used in 1992. 87 C-150, C-100 and C-150L scanners
are currently installed in a clinical setting. The Company believes that market
acceptance of the Ultrafast CT scanner continues to depend in substantial part
upon the clinical demonstration of certain asserted technological advantages and
diagnostic capabilities. There is no assurance that these asserted technological
advantages and diagnostic capabilities will result in the development of a
significant market for the Ultrafast CT that will allow the Company to operate
profitably.
THIRD-PARTY REIMBURSEMENT OF COST OF CT SCANS
FDA clearance to market does not guarantee or imply reimbursement by third-party
payers such as Medicare, Medicaid, Blue Cross/Blue Shield or other private
health insurers. Medicare and Medicaid reimburse for procedures that are
generally accepted or that have been proven safe and effective. The Health Care
Financing Administration ("HCFA"), which oversees Medicare and Medicaid payment
policies, will not authorize payment for procedures which are considered to be
experimental. HCFA has determined that diagnostic examinations of the head and
other parts of the body performed by CT scanners are covered if the contractor
who administers the local Medicare program finds that medical and scientific
literature and opinion support the effective use of a scan for the particular
condition.
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FY 1998 IMATRON INC. FORM 10-K/A
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PRODUCT LIABILITY RISKS
As a manufacturer and marketer of medical diagnostic equipment, the Company is
subject to potential product liability claims. As a supplier of radiological
diagnostic services, HeartScan is also subject to potential liability claims.
For example, the exposure of normal human tissue to x-rays, which is inherent in
the use of CT scanners for diagnostic imaging, may result in potential injury to
patients subjecting the Company to possible liability claims. The Company
presently maintains primary and excess product liability insurance with
aggregate limits of $5.0 million per occurrence. No assurance can be given that
the Company's product liability insurance coverage will continue to be available
or, if available, that it can be obtained in sufficient amounts or at reasonable
cost, or that it will prove sufficient to pay any claims that may arise.
VOLATILITY OF STOCK PRICE
The market prices for securities of advanced technology companies have
historically been highly volatile, including the market price of shares of the
Company's Common Stock. Future announcements by the Company or its competitors,
including announcements concerning technological innovations or new commercial
products, results of clinical testing, changes in government regulations,
regulatory actions, healthcare reform, proprietary rights, litigation, and
public concerns as to the safety of the Company's or its collaborators'
products, as well as period-to-period variances in financial results could cause
the market price of the Common Stock to fluctuate substantially. In addition,
the stock market has experienced extreme price and volume fluctuations that have
particularly affected the market price for many advanced technology companies,
often being unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock.
NO DIVIDENDS ON PREFERRED AND COMMON STOCK
The Company has not paid dividends on its Preferred or Common Stock since
inception. Even if its future operations result in profitability, as to which
there can be no assurance, there is no present anticipation that dividends will
be paid. Rather, the Company expects that any future earnings will be applied
toward the further development of the Company's business.
ITEM 2 - PROPERTIES
The Company's manufacturing, research and development, marketing and
administrative operations occupy approximately 77,065 square feet of leased
space in buildings located in South San Francisco, California, under leases
expiring in February 2004. Under certain future conditions, the facilities could
be expanded to approximately 94,365 square feet.
The Company also leases business and residential properties in Germany under
operating leases expiring in March 2000 and July 2002. The business facility is
being used as a service center for its European customers while the residence is
for expatriates assigned in Germany.
The Company believes its facilities are adequate for its current needs and that
suitable additional or substitute space will be available as needed to
accommodate any future expansion of the Company's operations.
ITEM 3 - LEGAL PROCEEDINGS
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Imatron's shareholders during the
quarter ended December 31, 1998.
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FY 1998 IMATRON INC. FORM 10-K/A
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since April 1985, the Company's Common Stock has traded on the Nasdaq National
Market System under the Nasdaq symbol "IMAT."
The following table sets forth, for the periods indicated, the range of high and
low sales prices, all as reported by Nasdaq. These prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
1998 1997
--------------------- ---------------------
Quarter High Low High Low
- --------- --------- --------- --------- ---------
First $ 3.03 $ 2.25 $ 3.38 $ 1.88
Second 4.00 2.25 3.00 1.59
Third 2.81 1.13 2.94 2.34
Fourth 2.59 0.81 5.31 2.25
As of February 10, 1999, there were approximately 6,700 holders of record of the
Company's common stock. On February 10, 1999, the closing price of the Company's
common stock on Nasdaq was $1.44.
DIVIDEND INFORMATION
The Company has paid no cash dividends on its Common Stock since incorporation
and anticipates that, for the foreseeable future, it will retain any earnings
for use in its business.
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
IMATRON INC.
SELECTED FINANCIAL INFORMATION
(in thousands, except per share amounts)
OPERATING INFORMATION
Year Ended December 31 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues from continuing operations $ 30,660 $ 37,317 $ 24,823 $ 26,374 $ 33,464
Operating income (loss) from continuing
operations $ (9,535) $ (3,915) $ (8,065) $ (3,693) $ 1,460
Income (loss) from continuing operations $ (9,400) $ (3,250) $ (5,892) $ 163 $ 3,221
Loss from discontinued operations $ (4,507) $ (6,428) $ (4,573) $ ( 2,612) $ (911)
Net income (loss) $(14,781) $(11,422) $(13,737) $ ( 2,449) $ 2,310
Basic and diluted income (loss) per share
from continuing operations $ (0.11) $ (0.04) $ (0.08) $ ( 0.00) $ 0.05
Number of shares used
in per share calculations 83,941 78,461 74,406 57,598 62,102
</TABLE>
<TABLE>
BALANCE SHEET INFORMATION
At December 31 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital $12,813 $26,003 $33,042 $14,252 $ 8,741
Total assets 31,982 43,165 47,488 27,459 21,173
Long term obligations
including capital lease
obligations 103 121 182 235 4,992
Total liabilities 12,991 11,840 9,962 11,234 14,303
Minority interest 331 14,255 12,323 -- --
Preferred stock -- -- -- -- 2,602
Shareholders' equity 18,660 17,070 25,203 16,225 6,870
</TABLE>
The Company did not pay any cash dividends on its Common Stock during any of the
periods presented above.
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FY 1998 IMATRON INC. FORM 10-K/A
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, working capital decreased to $12,813,000 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 2.1:1 at
December 31, 1998 from 3.6:1 at December 31, 1997.
The Company's total assets decreased to $31,982,000 compared to December 31,
1997 total assets of $43,165,000. Cash and cash equivalents decreased to
$1,445,000 in 1998 from $8,400,000 in 1997 as a result of the net loss sustained
by the Company resulting from a decrease in scanner shipments and the
termination of research and development funding from Siemens. Cash used in
continuing operations was $7,893,000 for twelve months ended December 31, 1998
compared to $5,568,000 during the same period in 1997. Cash was used to fund the
operating activties resulting from net loss from operations and increased
inventory. The use of cash from operations was partially offset by increases in
accrued liabilities. The increase in inventory resulted from a decrease in
scanner shipments to fifteen in 1998 from eighteen during the same period in
1997. Inventory also increased due to scanner orders that were delayed for
shipment. 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 $499,000 for the twelve months
ended December 31, 1998 compared to cash used amounting to $2,426,000 due to
decreased operating losses of HeartScan amounting to $4,507,000 for the twelve
months of 1998 compared to $6,428,000 for the same period in 1997.
The Company's financing activities for 1998 included purchases of
securities available for sale and capital equipment . The Company purchased
$642,000 of equipment during the year, primarily consisting of computer and test
equipment. In addition, significant items affecting cash flows during fiscal
1998 included maturities of marketable securities of $1,065,000. Items affecting
cash flows during fiscal 1997 included maturities of marketable securities of
$14,880,000 and purchases of securities available for sale and capital equipment
amounting to $8,982,000 and $1,018,000. Key financing activitites in 1998 and
1997 included $1,446,000 and $1,235,000, respectively, raised through employee
participation in the Company's stock option and purchase plans and exercise of
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 December 31, 1998 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.
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RESULTS OF CONTINUING OPERATIONS
1998 vs 1997
Overall revenues for the twelve months ended December 31, 1998 of $30,660,000
decreased $6,657,000 or 18% compared to revenues of $37,317,000 for the same
period in 1997. Net product revenues decreased to $22,547,000 in 1998 from
$27,368,000 in 1997 due to fifteen scanners shipped in 1998 compared to eighteen
in 1997. Certain Asian countries are experiencing banking and currency
difficulties that have led 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 two
shipments to Japan in 1998 from eight shipments to Japan, China, Singapore and
Malaysia in 1997. Weak sales in Asia were partially offset by an increase in
sales to United States customers as a result of the termination of the exclusive
distribution rights to Siemens in April 1, 1998. The Company sold eight scanners
for domestic sites while Siemens sold one in 1998. In 1997, Siemens sold two
scanners in the United States. Service revenues increased 39% to $6,863,000 in
1998 from $4,949,000 in 1997 due to an increase in scanners under service
contract. The increase resulted primarily from the service support agreement
entered into with Siemens. Development contract revenue decreased to $1,250,000
in 1998 from $5,000,000 in 1997 due to the terms of the three year Memorandum of
Understanding entered into with Siemens expiring as of April 1, 1998.
Total cost of revenues as a percent of revenues for the twelve months of 1998
was 76% as compared with 63% in 1997. Product cost of revenues as a percent of
product revenues increased to 75% in 1998 from 72% in 1997 due to shipment of
fifteen scanners compared to eighteen shipments in 1997. Service cost of
revenues as a percent of service revenue increased to 93% in 1998 from 79% in
1997 due to an increase in overhead expenses to support the scanner service
contracts under the Siemens service agreement and other new scanner sites. 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 Imatron Japan, Inc. to ensure the continued service for its 31 scanners
purchased from the Company.
Operating expenses for the twelve months of 1998 decreased 4% to $16,901,000, or
55% of revenues, compared to $17,583,000, or 47% of revenues in 1997. Research
and development expenses of $7,869,000 in 1998 decreased from $9,713,000 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 $4,456,000 in 1998 from
$3,749,000 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 $4,576,000 in 1998 from $4,121,000 in 1997 due primarily to an
increase in investor relations expenses offset by a decrease in the bad debt
provision relating to certain distributors.
Other income decreased to $155,000 for the twelve months of 1998 from $692,000
in the comparable period 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 $874,000 and $1,744,000
recorded as return to minority interest expense for the twelve months ended
December 31, 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 10 to the Notes to the Condensed Consolidated
Financial Statements).
================================================================================
18
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
1997 vs 1996
Total revenues for the year ended December 31, 1997, of $37,317,000 increased
$12,494,000 or 50% compared to 1996 revenues of $24,823,000. Net product
revenues increased to $27,368,000 in 1997 from $16,163,000 in 1996 due to
shipment of eighteen scanners in 1997 as compared to ten in 1996. Net product
revenues in 1997 and 1996 include sales under sale-leaseback arrangements
amounting to $927,000 and $1,774,000 in 1997 and 1996, respectively. Service
revenues increased to $4,949,000 in 1997 from $3,660,000 in 1996 due to an
increase in scanners under service contracts. The increase primarily resulted
from the service support agreement entered into with Siemens. Development
contract revenue of $5,000,000 represents non-refundable payments 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 entered into in 1995.
Total cost of revenues as a percent of revenues for 1997 was 63% as compared
with 71% in 1996. The change in the cost of revenue as a percentage of revenue
for scanners to 72% in 1997 from 90% in 1996 was a result of a mix in the sales
prices of scanners to customer requirements. Although the cost of a scanner
remains constant for all scanner sales, the sales price varies depending on the
customer. In particular, sales to Siemens, Imatron Japan, Inc. and third-party
leasing companies (leasing scanners back to HeartScan) have a lower gross margin
than sales to other parties. The decrease in the cost of revenue as a percentage
of revenue for scanners is due to the increase in scanner sales to customers
other than distributors to seven in fiscal year 1997 from three in fiscal year
1996 offset by shipments of ten scanners to Siemens, Imatron Japan, Inc. and
third-party leasing companies in 1997 from seven in 1996. Service cost of
revenues as a percent of service revenue decreased to 79% in 1997 from 86% in
1996 due to an increase in gross margin on spare parts sold.
Total operating expenses of $17,583,000 increased $2,400,000 or 16% compared to
1996 expenses of $15,183,000. Research and development expenses of $9,713,000
increased from $8,318,000 in 1996 due to increases in headcount and materials
for projects undertaken in 1997. Additionally, the Company recorded non-cash
charges of $750,000 for warrants issued to TeraRecon for achieving certain
milestones in connection with the development of an image reconstruction system
and compensation expense of $150,000 for extending a stock option exercise
period. No such expenses were recorded in 1996. Selling expenses increased to
$3,749,000 from $3,014,000 in 1996 primarily due to increases in headcount and
expenses related to studies conducted promoting the benefits of the Company's
product. Administrative expenses increased to $4,121,000 from $3,851,000 due
primarily to increases in bad debt expense. Bad debt expense increased to
$1,380,000 in 1997 from $1,080,000 in 1996. The increase of $300,000 in 1997 was
primarily the result of reserves created for receivables over 90 days related to
spare parts sold to customers. At December 31, 1997, Imatron Japan, Inc. had a
total reserve of $1,323,000 against the Imatron Japan, Inc. receivables of
$1,438,000. The economic crisis in Japan has continued to limit the Company's
ability to pursue collection of these amounts.
Other income decreased to $692,000 in 1997 from $2,236,000 primarily due to the
income recognized in 1996 for the sale of the Company's interest in InVision
Technologies amounting to $1,756,000. Interest expense paid in 1997 and 1996 was
for capitalized lease obligations.
The Company incurred a non-cash charge to income of $1,744,000 and $3,272,000
recorded as a non-cash return of minority interest in 1997 and 1996,
respectively, in connection with certain beneficial conversion features granted
to the holders of the HeartScan convertible Series A Preferred Stock (see Notes
10 and 17 to the Notes to the Consolidated Financial Statements).
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 16 to the Company's 1998 Consolidated Financial
Statements).
During the twelve months of 1998 and 1997, the Company reported losses from
discontinued operation of $4,507,000 and $6,428,000, 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.
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19
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
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 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 is scheduled to begin in March
1999. The Company anticipates the conversion from ASK to MK to start in June
1999 and fully implemented by August 1999. The Company estimates the cost for
the conversion to be less than $700,000.
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 "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.
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.
================================================================================
20
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
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 $300,000 has been incurred through December 31,
1998. 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 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
December 31, 1998, 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 five scanners that have been
accounted for as capital leases with a total obligation of $103,000 as of
December 31, 1998.
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.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements and Consolidated Financial Statement
Schedule listed in Item 14 (a) 1 and 2.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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21
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
PART III
ITEM 10 - EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages and positions are set forth
below. Unless otherwise indicated, officers are full-time employees and serve at
the discretion of the Board of Directors.
Name Age Position
------------------- --- -----------------------------------------
Dr. Douglas P. Boyd 57 Chairman of the Board,
Chief Technology Officer
S. Lewis Meyer 54 Chief Executive Officer
Terry Ross 51 President
Gary H. Brooks 50 Vice President, Finance and Administration,
Chief Financial Officer, Secretary
o Dr. Douglas Boyd is a founder of Imatron and has held several positions
with the Company since its inception in 1983 including Chief Executive
Officer, President, Chief Technical Officer, and Director. Dr. Boyd is
currently Chairman of the Board and Chief Technology Officer. He is also an
Adjunct Professor of Radiology (Physics) at the University of California,
San Francisco, where he spends approximately five percent of his time on
university duties. In addition, Dr. Boyd is a Director for InVision
Technologies, Inc., a publicly held company engaged in the design and
manufacture of explosives detection computed tomography (CT) scanners for
the baggage, parcel, and freight market. InVision Technologies is a former
Imatron joint venture company which was established in 1990.
Recognized internationally for his pioneering work in the development of
fan-beam CT scanners, Xenon detector arrays, and Electron Beam CT, Dr. Boyd
has been awarded ten U.S. patents. He has published more than 100
scientific papers and is a frequent speaker at university seminars and
other symposia. In 1993 he was awarded the prestigious Conway Safe Sky's
Award for contributions to airline travel safety related to the development
of a CT baggage explosives detection system.
Dr. Boyd received his B.S. in Physics from the University of Rochester in
1963 and a Ph.D. in Physics from Rutgers University in 1968.
o Lewis Meyer was appointed President, Chief Executive Officer and Director
of Imatron in June 1993. From April 1991 until joining the Company, he was
Vice President, Operations of Otsuka Electronics (U.S.A.) Inc., Fort
Collins, Colorado, a manufacturer of clinical magnetic resonance systems
and analytical nuclear magnetic resonance spectrometers. From August 1990
to April 1991, he was a founding partner of Medical Capital Management, a
company engaged in providing consulting services to medical equipment
manufacturers, imaging service providers, and related medical
professionals. Prior thereto, he was President and Chief Executive Officer
of American Health Services Corp. (now Insight Health Services Corp.), a
developer and operator of diagnostic imaging and treatment centers. During
his tenure at American Health Services Corp., it was one of the fifty
fastest growing public companies in the United States.
In addition to his duties as President and Chief Executive Officer of
Imatron, Mr. Meyer serves as a Director for BSD Medical Corp. and Finet
Holdings Corp., publicly held companies engaged in the design and
manufacture of medical hypothermia equipment and electronic real estate and
mortgage banking services, respectively.
Mr. Meyer received his B.S. degree in Physics from the University of the
Pacific, Stockton, California, in 1966, a M.S. degree in Physics from
Purdue University in 1968, and a Ph.D. in Physics from Purdue University in
1971.
================================================================================
22
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
o Terry Ross was appointed President of Imatron in January 1999. From 1989 to
1998, Mr. Ross was President, Chief Executive Officer and Director of
Cemax-Icon, Inc., a medical imaging manufacturer. Prior thereto, he was
Vice President of Sales and marketing of the Company. Mr. Ross also held
executive sales positions at Picker International, Inc. and ADAC
Laboratories, Inc., all of which are medical imaging companies.
o Gary H. Brooks was appointed Vice President of Finance/Administration,
Chief Financial Officer, and Secretary of Imatron in December of 1993.
Prior to joining the Company, Mr. Brooks was Chief Financial Officer and
Director for five years at Avocet, a privately-held, sports electronics
manufacturer located in Palo Alto, California. Prior thereto, he had
progressively responsible positions in accounting and finance at several
Fortune 500 companies including Ford, Rockwell, Bendix, and ITT.
Mr. Brooks also serves as Chief Financial Officer of Imatron's subsidiary,
HeartScan Imaging, Inc.
Mr. Brooks received his B.A. in Zoology in 1970 from the University of
California, Berkeley, and a M.B.A. in Finance and Accounting in 1973 from
the University of California, Los Angeles.
ITEM 11 - EXECUTIVE COMPENSATION
The Summary Compensation Table shows certain compensation information
for each person who served as Chief Executive Officer during the year and the
other most highly compensated executive officers whose aggregate compensation
exceeded $100,000 for services rendered in all capacities during fiscal year
1998 (collectively referred to as the "Named Executive Officers"). Compensation
data is shown for the fiscal years ended December 31, 1998, 1997 and 1996. This
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted, and certain other compensation, if any, whether paid
or deferred.
<TABLE>
Summary Compensation Table
<CAPTION>
Long Term
Annual Compensation All Other
Compensation Awards Compensation(b)
- ------------------------ -------- ------------------- ------------- ------------------- ----------------------
Name and Principal Options/
Position Year Salary($)(a) Bonus SARs
- ------------------------ -------- ------------------- ------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Douglas P. Boyd 1998 182,000 -0- 75,008(c) 4,750
Chairman of the Board 1997 174,300 4,750
1996 166,000 4,700
S. Lewis Meyer 1998 234,000 -0- 100,000(c) 4,750
President and Chief 1997 221,500 4,750
Executive Officer 1996 211,000 75,000(d) 4,750
Gary H. Brooks Vice 1998 144,000 -0- 50,000(c) 4,320
President and Chief 1997 137,000 4,020
Financial Officer 1996 131,000 40,000(e) 3,880
- ------------------------ -------- ------------------- ------------- ------------------- ----------------------
<FN>
(a) Amounts shown include cash and non-cash compensation earned with respect to the year shown above.
(b) Represents the Company's matching contributions to its 401(k) plan.
(c) Represents options granted by the Board of Directors on February 24, 1998 at 100% of the closing price of a share of Company
stock on that date, and subsequently repriced and regranted on October 23, 1998.
(d) Represents portion of a $75,000 bonus payable to Mr. Meyer upon commencement of his employment with the Company.
(e) Represents options granted in March 1996 under the Company's 1993 Stock Option Plan.
</FN>
</TABLE>
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23
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Option Grants in Last Fiscal Year
The following table sets forth the options granted during the last
fiscal year to each of the Named Executive Officers of the Company:
<TABLE>
Option/SAR Grants In Last Fiscal Year
<CAPTION>
====================================================================================================================================
Potential Realizable Value
Individual Grants at Assumed Annual Rates
of Stock Price Appreciation
For Option Term
======================================================================= ============================================================
% Of Total
Number of Options
Securities Granted
Under Options to Employees
Granted in Exercise or
(#) Fiscal Base Price
Year ($/Sh) Market Expiration
Name Price Date 0%($) 5%($)
- ------------------- -------------- ---------------- -------------- ----------- ------------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas P. Boyd 75,008 6% $1.50(a) $1.50(a) 10/23/08(a) -0- 45,800
Gary H. Brooks 50,000 4% $1.50(a) $1.50(a) 10/23/08(a) -0- 30,500
S. Lewis Meyer 100,000 8% $1.50(a) $1.50(a) 10/23/08(a) -0- 61,100
- ------------------- -------------- ---------------- -------------- ----------- ------------------ ---------- -----------
<FN>
(a) Ten-year options were granted on February 24, 1998 with an exercise price of $2.56, which was 100% of the market price of the
stock on that date. On October 23, 1998, all of those options were cancelled, regranted and repriced with an exercise price of
$1.50, which was 100% of the market price of the stock on October 23, 1998.
</FN>
</TABLE>
In October 1995, the Company's majority-owned subsidiary, HeartScan
Imaging, Inc. ("HSI") approved the adoption of the HeartScan Imaging, Inc. 1995
Stock Option Plan (the "HSI Option Plan"). The HSI Option Plan is intended to
advance the interests of HSI by inducing persons of outstanding ability and
potential to join and remain with HSI by enabling them to acquire proprietary
interests in HSI. The HSI Option Plan covers an aggregate of 250,000 shares of
HSI Common Stock. The Option Plan provides for the granting of two types of
options: "incentive stock options" and "nonstatutory stock options." The
incentive stock options (but not the nonstatutory stock options) are intended to
qualify as "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended. Options may be granted under the HSI Option
Plan to all employees including officers, directors (whether or not employees)
and consultants of HSI; provided, however, that incentive stock options may not
be granted to any non-employee director or consultant. HSI's Board of Directors
has the power, subject to the provisions of the HSI Option Plan, to determine
the persons to whom and the dates on which options will be granted, the number
of shares to be subject to each option, the time or times during the term of
each option within which all or a portion of such option may be exercised, and
the other terms of the options. The functions of HSI's Board of Directors under
the HSI Option Plan are presently being administered by the Compensation
Committee of Imatron's Board of Directors.
The maximum term of each option is ten years. Options granted under the
HSI Option Plan generally vest annually over a four-year period.
The exercise price of all nonstatutory stock options granted under the
HSI Option Plan must be at least equal to 85% of the fair market value of the
underlying stock on the date of grant. The exercise price of all incentive stock
options granted under the HSI Option Plan must be at least equal to the fair
market value of the underlying stock on the date of grant.
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24
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
During HSI's last fiscal year, no options were granted under the HSI
Option Plan to any HSI employee nor to any Imatron executive officer.
Outstanding options were previously granted to purchase HSI Common Stock at
either $0.25 pr $0.10 per share, and vested over a four year period starting on
the first anniversary of the grant. An additional 143,998 shares of Common Stock
remain reserved for future issuance to employees under the Plan. It is HSI's
intention to reserve, in the aggregate, approximately 20% of its capital HSI
option stock for grants to employees under the HSI Option Plan and under plans
to be adopted.
Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth the options exercised during the last
fiscal year by Named Executive Officers of the Company:
<TABLE>
Aggregated Options Exercised and Option Values in Fiscal Year 1998
<CAPTION>
- ------------------------- -------------------- ------------------- ------------------------- -------------------------
Number of securities Value of unexercised
underlying unexercised In-the-Money options at
options at year-end(#) year-end ($)
Shares acquired Value
on exercise (#) realized ($) exercisable/ exercisable/
Name unexercisable unexercisable
- ------------------------- -------------------- ------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Douglas P. Boyd 225,000 377,250 0/75,008 0/0
S. Lewis Meyer 600,000 1,200,000 0/100,000 0/0
Gary H. Brooks 100,000 75,500 27,500/62,500 0/0
- ------------------------- -------------------- ------------------- ------------------------- -------------------------
</TABLE>
Compensation of Directors
Aldo Test, a director of the Company, renders consulting services to
the Company on a month-to-month basis for which he received compensation of
$11,100 during 1998, and may be expected to do so in the future. The law firm of
Flehr, Hohbach, Test, Albritton & Herbert, of which Mr. Test is a member,
represents the Company with respect to intellectual property matters and may be
expected to continue to do so in the future. The fees paid to the firm did not
exceed five percent of the law firm's gross revenues for the fiscal year. Terry
Ross, a director of the Company, rendered consulting services to the Company
pursuant to a month-to-month consulting agreement which commenced in November
1993 and terminated as of January 1, 1999 when Mr. Ross was appointed as the
Company's President. In 1998 Mr. Ross received $12,000 pursuant to the
consulting agreement. Admiral McDaniel, a director of the Company since January,
1997 renders consulting services to the Company on a month-to-month basis for
which he received compensation of $63,237 during 1998, and may be expected to do
so in the future.
Non-Employee Director Options. In connection with their services to the
Company, directors who are not employees of the Company have periodically
received stock options under the 1991 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan") to purchase shares of Common Stock. The directors and
shareholders approved the Directors' Plan in 1991 in order to attract and retain
highly qualified non-employee directors by providing each non-employee director
with an opportunity to purchase the Company's stock and to provide incentives
for such persons to exert maximum efforts on behalf of the Company. Subject to
provisions relating to adjustments upon changes in stock, the Directors' Plan
covered an aggregate of 550,000 shares of the Company's Common Stock.
Under the 1991 Directors' Plan, the exercise price of the options was
85% of the fair market value of the Common Stock on the date of grant as quoted
on the NASDAQ National Market System. Typically, the options granted to
directors vested 25% per year starting with the first anniversary of the date of
grant, and had a term of five years. Each option terminated prior to the
expiration date if the optionee's service terminated as a non-employee director,
or subsequently as an employee of the Company. The 1991 Directors' Plan was
administered by the Board of Directors. The Board was authorized to suspend or
terminate the Directors' Plan at any time.
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25
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
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Effective January 1, 1998, the Board amended and restated the
Director's Plan to modify certain provisions. The 1998 Amended and Restated
Directors' Stock Option Plan ("Restated Directors' Plan') was approved by the
shareholders at its meeting held in July, 1998.
Options may be granted under the Restated Directors' Plan only to
directors of the Company who are not employees of the Company or any affiliate
of the Company. As with the 1991 Directors' Plan, the Restated Directors' Plan
provides for the automatic grant of options to purchase shares of Common Stock
of the Company to non-employee directors at a price per share equal to 85% of
the fair market value of a share of common stock on the date of grant. Each
person elected for the first time to be a Non-Employee Director automatically
receives an option to purchase 25,000 shares of the Company's Common Stock. The
Restated Directors' Plan also provides that every non-employee director is to
receive an option to purchase 25,000 shares on January 1st of each year if such
director served continuously as such for at least thirty days prior to that
date. These options may vest immediately, or quarterly in four equal
installments over a four year term, as determined by the Board at the time of
grant. The total number of shares of the Company's Common Stock with respect to
which options may be granted under the Restated Directors' Plan is 1,000,000
shares. Unexercised options terminate on the earlier of ten years or three
months following termination of service as a director.
The non-employee directors (Mr. Test, Mr. Guedes until he resigned on
January 25, 1999, Admiral McDaniel and until December 31, 1998 Mr. Ross) are
entitled to receive options to purchase 25,000 shares each under the 1998
Restated Directors' Plan on January 1st of each year. Under that provision,
Messrs. Ross, Test, Guedes and Admiral McDaniel each received 25,000 shares in
fiscal year 1998 at an option price of $2.13 per share. All of these options
vested immediately. In addition, directors who are not officers of the Company
are eligible for reimbursement in accordance with Company policy for their
expenses but not fees in connection with attending meetings of the Board of
Directors and any committees thereof.
Employee Director Compensation. Employees who serve as directors of the
Company (Dr. Boyd, Messrs. Meyer and Couch and effective January 1, 1999 Mr.
Ross) receive no additional compensation for such service. Dr. Boyd and Mr.
Meyer were also Named Executive Officers of the Company during 1998 and their
compensation is reflected in the Summary Compensation Table contained elsewhere
in this statement.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements.
S. Lewis Meyer, President and Chief Executive Officer, is employed by
the Company pursuant to an employment agreement executed when he joined the
Company in June 1993 (filed as Exhibit 10.65 to Annual Report on Form 10-K for
1993). Pursuant to that agreement, in the event of his termination, Mr. Meyer is
entitled to receive six months of compensation at the annual salary rate then in
effect.
Report on Repricing of Options/SARs.
Effective February 24, 1998, the Compensation Committee of the Board of
Directors repriced all options previously granted to employees pursuant to the
Company's 1993 Stock Option Plan to the lesser of the actual grant price or 100%
of the closing price of a price of the Company's common stock on that date,
which price was subsequently determined to be $2.56. This repricing applied to
all employees equally, including Named Executive Officers, to the extent that
they held options previously granted under the 1993 Plan. Pursuant to this
repricing, the Company repriced 760,597 options previously granted to employees.
None of the repriced options were held by Named Executive Officers.
Thereafter, effective October 23, 1998, the Board of Directors approved
a resolution pursuant to which all optionholders, including Named Executive
Officers, were given the option of returning to the Company any outstanding
option having an exercise price of greater than $1.50 for cancellation and
repricing at $1.50, which was 100% of the closing price of a share of the
Company's common stock as of that date. Pursuant to this repricing, the Company
cancelled and regranted 1,158,992 options previously granted to employees, of
which 100,000, 75,008 and 50,000 respectively were granted to Messrs. Meyer,
Boyd and Brooks. Pursuant to the October 23, 1998 repricing option, the vesting
schedule with respect to any options cancelled and thereupon regranted for a ten
year term at an exercise price of $1.50 began anew with a new original grant
date of October 23, 1998.
================================================================================
26
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
<TABLE>
TEN-YEAR OPTION/SAR REPRICINGS
<CAPTION>
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
Name Date Number of Market Price Exercise New Exercise Length of
Securities of Stock at Price at time Price Original
Under Options Time of of Repricing Option Term
Repriced Repricing ($)
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Douglas P. Boyd 10/23/98 75,008 $1.50 $2.56 $1.50 2/24/08
Chairman
S. Lewis Meyer, 10/23/98 100,000 $1.50 $2.56 $1.50 2/24/08
Chief Executive
Officer
Gary H. Brooks, 10/23/98 50,000 $1.50 $2.56 $1.50 2/24/98
Chief Financial
Officer
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
</TABLE>
The basis of the regrant to all employees, including to the above Named
Executive Officers, was the opinion of the Compensation Committee that this
method provided employees with the greatest amount of incentive to increase the
value of the Company.
Aldo Test
Terry Ross
William McDaniel
Board Compensation Committee Report on Executive Compensation.
This report is provided by the Compensation Committee of the Board of
Directors (the "Committee") to assist stockholders in understanding the
Committee's objectives and procedures in establishing the compensation of
Imatron's Chief Executive Officer and other executive officers. The Committee,
made up of non-employee Directors, is responsible for establishing and
administering the Company's executive compensation program. None of the members
of the Committee is eligible to receive awards under the Company's incentive
compensation programs.
Imatron's executive compensation program is designed to motivate,
reward, and retain the management talent needed to achieve its business
objectives and maintain its competitiveness in the medical imaging industry. It
does this by utilizing competitive base salaries that recognize a philosophy of
career continuity and by rewarding exceptional performance and accomplishments
that contribute to the Company's success.
Compensation Philosophy and Objective
The philosophical basis of the compensation program is to pay for
performance and the level of responsibility of an individual's position. The
Committee finds greatest value in executives who possess the ability to
implement the Company's business plans as well as to react to unanticipated
external factors that can have a significant impact on corporate performance.
Compensation decisions for all executives, including the named executive
officers and the Chief Executive Officer, are based on the same criteria. These
include quantitative factors that directly improve the Company's short-term
financial performance, as well as qualitative factors that strengthen the
Company over the long term, such as demonstrated leadership skills and the
ability to deal quickly and effectively with difficulties which sometimes arise.
The Committee believes that compensation of Imatron's key executives should:
*Link rewards to business results and stockholder returns;
*Encourage creation of stockholder value and achievement of strategic
objectives;
*Maintain an appropriate balance between base salary and short-and
long-term incentive opportunity;
*Attract and retain, on a long-term basis, highly qualified executive
personnel; and
*Provide total compensation opportunity that is competitive with that
provided by competitors in the medical imaging industry, taking into
account relative company size and performance as well as individual
responsibilities and performance.
================================================================================
27
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Key Elements of Executive Compensation
Imatron's executive compensation program consists of three elements:
Base Salary, Short-Term Incentives and Long-Term Incentives. Payout of
short-term incentives depends on corporate performance measured against annual
objectives and overall performance. Payout of the long-term incentives depends
on performance of Imatron stock, both in absolute and relative terms.
Base Salary
A competitive base salary is crucial to support the philosophy of
management development and career orientation of executives. Salaries are
targeted to pay levels of the Company's competitors and companies having similar
capitalization and revenues, among other attributes. Executive salaries are
reviewed annually.
Short-Term Incentive
Short-term awards to executives are made in cash and in stock to
recognize contributions to the Company's business during the past year. The
bonus an executive receives is dependent on individual performance and level of
responsibility. Assessment of an individual's relative performance is made
annually based on a number of factors which include initiative, business
judgment, technical expertise, and management skills.
Stock Bonus Incentive Plan. In 1988 the shareholders approved the
adoption of the 1987 Stock Bonus Incentive Plan. Under the terms of the Stock
Bonus Plan the Committee may award shares of the Company's Common Stock to
employees, including executive officers. The Company amended the Stock Bonus
Plan in 1996 and has reserved 1,200,0000 of the Company's common shares for
award under that Plan. During fiscal year 1998, 285,250 shares were awarded to
employees pursuant to the Stock Bonus Incentive Plan, none of whom was a Named
Executive Officer.
Long-Term Incentive
Long-term incentive awards provided by shareholder-approved
compensation programs are designed to develop and maintain strong management
through share ownership and incentive awards. During 1998, the Compensation
Committee awarded to the Chief Executive Officer, the Chairman, and the Chief
Financial Officer respectively 100,000, 75,008 and 50,000 options to purchase
Company common stock pursuant to the 1993 Stock Option Plan.
Stock Option Plan. In 1994, the shareholders approved the adoption of
the 1993 Stock Option Plan (which replaced the 1983 Stock Option Plan). In 1995
the directors and shareholders approved an increase in the number of shares
reserved under the Option Plan from 3,000,000 shares to 5,500,000 shares. At the
sole discretion of the Committee, eligible officers and employees periodically
receive options to purchase shares of the Company's Common Stock pursuant to the
Option Plan. The value of the options depends entirely on appreciation of
Imatron stock. Grant of options depends upon quarterly and annual Company
performance, as determined by review of qualitative and quantitative factors.
Employee Stock Purchase Plan. In 1994 the directors and shareholders
approved the adoption of the 1994 Employee Stock Purchase Plan. All employees,
including Named Executive Officers, may purchase shares of the Company's Common
Stock at a discount of 15% from the market price of the shares. The Plan became
effective January 1, 1994.
1998 Compensation
Total revenue, net product revenue, scanner shipments, and total assets
for the year ended December 31, 1998 decreased from the prior fiscal year.
HeartScan Imaging, Inc., its majority-owned subsidiary, sustained losses, albeit
substantially less than those sustained during the prior fiscal year.
Nevertheless, compensation levels during 1998 were principally driven by a
highly competitive market in San Francisco - Silicon Valley, particularly for
personnel with engineering and technical training. As a consequence,
compensation for such personnel increased approximately 3% to 5%. Based on the
Company's performance, the Board awarded no cash or stock bonuses and only
modest cost-of-living salary increases during the year to the Named Executive
Officers. Stock Options were granted to the Named Executive Officers, as well as
to other employees of the Company, based on the employee's level of
responsibility and other factors.
================================================================================
28
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
1998 Chief Executive Officer Compensation
On March 1, 1996 Mr. Meyer's base salary was increased from $195,000 to
$205,000. Effective January 1, 1997, his base salary was increased to $215,250.
Effective March 1, 1998 it was increased to $228,000. All of these adjustments
reflect modest cost of living increases. The Committee believes that the base
salary and other terms and conditions of his employment are consistent with the
foregoing philosophy and objectives and reflect the scope and level of his
responsibilities.
Members of the Compensation Committee
William McDaniel
Terry Ross
Aldo Test
Performance Graph
The following graph compares the total return performance of the
Company for the periods indicated with the performance of the NASDAQ Index
(presented on a dividends reinvested basis) and the performance of the Hambrecht
& Quist Technology Index. The Company's shares are traded on the NASDAQ National
Market System under the symbol "IMAT". The Hambrecht & Quist Technology Index is
comprised of the publicly traded stocks of 200 technology companies and include
companies in the electronics, medical and related technology industries. The
total return indices reflect reinvested dividends and are weighted on a market
capitalization basis at the time of each reported data point.
Performance Graph
(The following table represents a graph in the printed piece.)
Years 1993 1994 1995 1996 1997 1998
- ----- ---- ---- ---- ---- ---- ----
Imatron Inc. 100 219 400 663 463 275
NASDAQ Stock Market 100 98 138 170 209 293
H&Q Technology Index 100 120 180 223 262 407
ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables, based in part upon information supplied by
officers, directors and principal shareholders, set forth certain information
regarding the ownership of the Company's voting securities as of March 31, 1999
by (i) all those known by the Company to be beneficial owners of more than five
percent of any class of the Company's voting securities; (ii) each director;
(iii) each Named Executive Officer; and (iv) all executive officers and
directors of the Company as a group. Unless otherwise indicated, each of the
shareholders has sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws where applicable.
Security Ownership of Certain Beneficial Owner(aa)
Name and Address of Amount of Direct
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
- --------------- ----------------------- -------------------- ----------------
Common Marukin Corporation(bb) 5,471,617 6.0%
- --------------- ----------------------- -------------------- ----------------
(aa) Security ownership information for beneficial owners is taken from
statements filed with the Securities and Exchange Commission pursuant
to Sections 13(d), 13(g) and 16(a) and information made known to the
company.
(bb) Marukin Corporation, 6, Rokuban-Cho Chiyoda-Ku, Tokyo 10
Security Ownership of Directors and Executive Officers
The table below presents the security ownership of the Company's Directors and
Named Executive Officers.
================================================================================
29
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
<TABLE>
<CAPTION>
Name of Beneficial Owner Amount and Nature of Percent of Class(b)
Title of Class Beneficial Ownership(a)
- --------------------------- ---------------------------------- ------------------------------- -----------------------
<S> <C> <C> <C>
Common Douglas P. Boyd 2,065,177(3) 2.3%
Common Gary H. Brooks 157,797(4) *
Common John L. Couch 34,625(5) *
Common Jose Filipe Guedes 62,500(e) *
Common William J. McDaniel, M.D. 82,500(6) *
Common S. Lewis Meyer 629,058(7) *
Common Terry Ross 101,250(8) *
Common Aldo Test 126,250(9) *
Common All Directors and Executive 3,259,157(10) 3.6%
Officers as a Group
- --------------------------- ---------------------------------- ------------------------------- -----------------------
<FN>
* Does not exceed 1% of the referenced class of securities.
(a) Ownership is direct unless indicated otherwise.
(b) Calculation based on 90,503,777 shares of Common Stock outstanding as of
March 31,1999.
(c) Includes 2,055,801 shares owned directly and 9,376 shares issuable upon the
exercise of stock options that are exercisable as of March 31, 1999 or that will
become exercisable within 60 days thereafter.
(d) Includes 121,547 shares owned directly and 36,250 shares issuable upon the
exercise of stock options that are exercisable as of March 31, 1999 or that will
become exercisable within 60 days thereafter.
(e) All shares are issuable upon the exercise of stock options that are
exercisable as of March 31, 1999 or that will become exercisable within 60 days
thereafter.
(f) Includes 20,000 shares owned directly and 62,500 shares issuable upon the
exercise of stock options that are exercisable as of March 31, 1999 or that will
become exercisable within 60 days thereafter.
(g) Includes 616,558 shares owned directly and 12,500 shares issuable upon the
exercise of stock options exercisable as of March 31, 1999 or that will become
exercisable within 60 days thereafter.
(h) Includes 32,500 shares directly and 68,750 shares issuable upon the exercise
of stock options exercisable as of March 31, 1999 or that will become
exercisable within 60 days thereafter.
(i) Includes 20,000 shares owned directly and 106,250 shares issuable upon the
exercise of stock options exercisable as of March 31, 1999 or that will become
exercisable within 60 days thereafter.
(j) Percentage of beneficial ownership assumes the exercise of the aforesaid
options by officers and directors.
</FN>
</TABLE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
S. Lewis Meyer, President and Chief Executive Officer, is employed by
the Company pursuant to an employment agreement executed when he joined the
Company in June 1993 (filed as Exhibit 10.65 to Annual Report on Form 10-K for
1993). Pursuant to that agreement, in the event of his termination, Mr. Meyer is
entitled to receive six months of compensation at the annual salary rate then in
effect. (See Item 11, above).
================================================================================
30
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Aldo Test, a director of the Company, is a member of the law firm of
Flehr, Hohbach, Test, Albritton & Herbert, which represents the Company with
respect to intellectual property matters and may be expected to continue to do
so in the future. The fees paid to the firm did not exceed five percent of the
law firm's gross revenues for the fiscal year.
S. Lewis Meyer, pursuant to authorization of the Board of Directors,
borrowed $336,000 from the Company in June 1998 pursuant to a promissory note
bearing 5.6% simple interest, with interest payable quarterly beginning July 1,
1998. The purpose of the loan was to enable Mr. Meyer to exercise 600,000
warrants expiring in June 1998 granted in connection with his employment in June
1993. The loan is secured by the 600,000 shares of common stock he purchased
upon exercise of the warrants.
Gary H. Brooks, pursuant to authorization of the Board of Directors,
borrowed $37,000 from the Company in December 1998 pursuant to a promissory note
bearing 5.6% simple interest, with interest payable quarterly beginning January
1, 1999. The purpose of the loan was to enable Mr. Brooks to exercise options to
purchase 100,000 shares of the Company's common stock expiring in December 1998
granted in connection with his employment in December 1993. The loan is secured
by the 100,000 shares of common stock he purchased upon exercise of the options.
John L. Couch, pursuant to authorization of the Board of Directors,
borrowed $15,250 from the Company in December 1998 pursuant to a promissory note
bearing 5.6% simple interest, with interest payable quarterly beginning January
1, 1999. The purpose of the loan was to enable Mr. Couch to exercise options to
purchase 25,000 shares of the Company's common stock expiring in December 1998
granted in connection with his employment. The loan is secured by the 25,000
shares of common stock he purchased upon exercise of the options.
PART IV
ITEM 14 - EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Consolidated Financial Statements - See "Index to Consolidated
Financial Statements" attached hereto and made a part hereof.
2. Financial Statement Schedule - Schedule II - Valuation and qualifying
accounts. All other schedules are omitted as they are not applicable,
or the required information is shown in the financial statements or
the notes thereto.
3. Exhibits - The exhibits listed on the accompanying "Index to
Exhibits" are filed or are incorporated herein by reference as part
of this report.
(b) Form 8-K Reports: None
================================================================================
31
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 30, 1999 IMATRON INC.
-----------------------------------
By: /s/ S. Lewis Meyer
-----------------------------------
S. Lewis Meyer
Chief Executive Officer & Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------- -------------------------------------- ----------
/s/ Douglas P. Boyd Director, Chairman of the Board
- ---------------------
Douglas P. Boyd April 30, 1999
/s/ William J. McDaniel Director
- ---------------------
William J. McDaniel April 30, 1999
/s/ John L. Couch Director
- ---------------------
John L. Couch April 30, 1999
/s/ S. Lewis Meyer Director, Chief Executive Officer
- --------------------- (Principal Executive Officer)
S. Lewis Meyer April 30, 1999
/s/ Terry Ross Director, President
- ---------------------
Terry Ross April 30, 1999
/s/ Aldo J. Test Director
- ---------------------
Aldo J. Test April 30, 1999
/s/ Gary H. Brooks Chief Financial Officer, Vice President,
- --------------------- Finance and Administration, Secretary
Gary H. Brooks (Principal Financial Officer and
Principal Accounting Officer) April 30, 1999
================================================================================
32
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Index to Consolidated Financial Statements
STATEMENT PAGE
------------------------------------------------------------- --------
Report of KPMG LLP, Independent Auditors 26
Report of Ernst & Young LLP, Independent Auditors 27
Consolidated Balance Sheets as of December 31, 1998, and 1997 28
Consolidated Statements of Operations for the years ended 29
December 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity for the years 30
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended 31
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements 33
================================================================================
33
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Report of KPMG LLP, Independent Auditors
The Board of Directors and Stockholders
Imatron Inc.:
We have audited the consolidated balance sheets of Imatron Inc. and subsidiary
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years then ended. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed in the index at Item
14(a)2. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Imatron Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
San Francisco, California
February 12, 1999
================================================================================
34
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Independent Auditors' Report
The Board of Directors and Stockholders
Imatron Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Imatron Inc. for the year ended December
31, 1996 listed in the Index at Item 14 (a). These consolidated financial
statements and schedule as it relates to the year ended December 31, 1996 are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Imatron Inc. for the year ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 1996, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 17 of the Notes to the Consolidated Financial Statements,
the Company has restated its 1996 consolidated financial statements with regard
to accounting for convertible securities having beneficial conversion features.
ERNST & YOUNG LLP
San Francisco, California
February 14, 1997, except for Note 17,
as to which the date is April 10, 1998
================================================================================
35
<PAGE>
<TABLE>
FY 1998 IMATRON INC. FORM 10-K/A
====================================================================================================================================
<CAPTION>
IMATRON INC.
Consolidated Balance Sheets
(In thousands)
December 31,
-----------------------------
ASSETS 1998 1997
- ------
--------- ----------
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,445 $ 8,400
Short-term investments -- 180
Accounts receivable (net of allowance for doubtful accounts of $3,272
and $2,490 at December 31, 1998 and 1997):
Trade accounts receivable 7,228 9,267
Accounts receivable from joint venture 659 115
Inventories 14,433 12,926
Prepaid expenses 825 397
Net current assets of discontinued operations -- 4,697
--------- ---------
Total current assets 24,590 35,982
Property and equipment, net 2,275 2,394
Other assets 1,631 1,214
Long-term net assets of discontinued operations 3,486 3,575
--------- ---------
Total assets $ 31,982 $ 43,165
========= =========
LIABLITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,515 $ 2,962
Other accrued liabilities 7,978 6,961
Capital lease obligations - due within one year 64 56
Net current liabilities of discontinued operations 220 --
--------- ---------
Total current liabilities 11,777 9,979
Deferred income on sale leaseback transactions 875 1,376
Deferred income on service contract 300 420
Capital lease obligations 39 65
--------- ---------
Total liabilities 12,991 11,840
--------- ---------
Minority interest - notes 10 and 17 331 14,255
--------- ---------
Shareholders' equity
Common stock, no par value; 150,000 shares authorized; 88,295 and
78,815 shares issued and outstanding in 1998 and 1997, respectively 107,475 90,728
Additional paid-in capital 9,340 9,290
Deferred compensation (170) (232)
Notes receivable from stockholders (488) --
Accumulated deficit (97,497) (82,716)
--------- ---------
Total shareholders' equity 18,660 17,070
--------- ---------
Total liabilities and shareholders' equity $ 31,982 $ 43,165
========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
====================================================================================================================================
36
</TABLE>
<PAGE>
<TABLE>
FY 1998 IMATRON INC. FORM 10-K/A
====================================================================================================================================
<CAPTION>
IMATRON INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended December 31,
-------------------------------------------
1998 1997 1996
-------- -------- ---------
(Restated)
<S> <C> <C> <C>
Revenues
Product sales $ 22,547 $ 27,368 $ 16,163
Service 6,863 4,949 3,660
Development contracts 1,250 5,000 5,000
-------- -------- --------
Total revenue 30,660 37,317 24,823
-------- -------- --------
Cost of revenues
Product sales 16,931 19,747 14,545
Service 6,363 3,902 3,160
-------- -------- --------
Total cost of revenues 23,294 23,649 17,705
-------- -------- --------
Gross profit 7,366 13,668 7,118
Operating expenses
Research and development 7,869 9,713 8,318
Marketing and sales 4,456 3,749 3,014
General and administrative 4,576 4,121 3,851
-------- -------- --------
Total operating expenses 16,901 17,583 15,183
-------- -------- --------
Operating loss (9,535) (3,915) (8,065)
Interest and other income 155 692 2,236
Interest expense (20) (27) (63)
-------- -------- --------
Loss from continuing operations before provision for income taxes (9,400) (3,250) (5,892)
Provision for income taxes -- -- --
-------- -------- --------
Loss from continuing operations (9,400) (3,250) (5,892)
Loss from discontinued operations (4,507) (6,428) (4,573)
Non cash return to minority interest (874) (1,744) (3,272)
-------- -------- --------
Net loss $(14,781) $(11,422) $(13,737)
======== ======== ========
Net loss per common share:
Loss from continuing operations - basic and diluted $ (0.11) $ (0.04) $ (0.08)
======== ======== ========
Loss from discontinued operations - basic and diluted $ (0.05) $ (0.08) $ (0.06)
======== ======== ========
Net loss - basic and diluted $ (0.18) $ (0.15) $ (0.18)
======== ======== ========
Number of shares used in basic and diluted per share calculations $ 83,941 $ 78,461 $ 74,406
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
====================================================================================================================================
37
</TABLE>
<PAGE>
<TABLE>
FY 1998 IMATRON INC. FORM 10-K/A
====================================================================================================================================
<CAPTION>
IMATRON INC.
Consolidated Statements of Shareholders' Equity
(In thousands)
Common Stock Additional Deferred Accum-
---------------------------- Paid-in Compen- Notes ulated
Shares Amount Capital sation Receivable Deficit Total
-------------- ------------ ------------ --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 68,835 $ 72,282 $ 1,500 $ -- $ $ (57,557) $ 16,225
Common stock and warrants sold
in a private placement, net
of offering costs 4,559 11,348 -- -- -- -- 11,348
Common stock issued for
employee stock purchase
plans, stock bonus, and the
exercise of warrants and
employee stock options 4,410 5,324 -- -- -- -- 5,324
Common stock issued for services 115 269 -- -- -- -- 269
Deferred compensation from
issuance of stock options by
consolidated subsidiary -- -- -- (143) -- -- (143)
Amortization of deferred compensation -- -- -- 27 -- -- 27
Issuance of subsidiary's
convertible Series A
preferred stock -- -- 5,890 -- -- -- 5,890
Net loss -- -- -- -- -- (13,737) (13,737)
-------------- ------------ ------------ --------- ----------- ----------- ----------
Balances at December 31, 1996
(Restated) 77,919 89,223 7,390 (116) -- (71,294) 25,203
Common stock issued for
employee stock purchase
plans, stock bonus and the
exercise of warrants and
employee stock options 896 1,505 -- -- -- -- 1,505
Deferred compensation from
issuance of stock options by
consolidated subsidiary -- -- -- (186) -- -- (186)
Amortization of deferred compensation -- -- -- 70 -- -- 70
Warrants issued for services -- -- 1,750 1,750
Compensation expense related to
the extension of the stock
option exercise period -- -- 150 -- -- -- 150
Net loss -- -- -- -- (11,422) (11,422)
-------------- ------------ ------------ --------- ----------- ----------- ----------
Balances at December 31, 1997 78,815 90,728 9,290 (232) -- (82,716) 17,070
Common stock issued for
employee stock purchase
plans, stock bonus and the
exercise of warrants and 1,984 1,949 -- -- -- -- 1,949
employee stock options
Conversion of subsidiary's convertible
series A preferred stock to
company's common stock 7,496 14,798 -- -- -- -- 14,798
Amortization of deferred compensation -- -- -- 62 -- -- 62
Non-cash expense related to
non-cash warrants issued for -- -- 50 -- -- -- 50
services
Notes receivable from officers
for exercise of stock options -- -- -- -- (488) -- (488)
Net loss -- -- -- -- -- (14,781) (14,781)
-------------- ------------ ------------ --------- ----------- ----------- ----------
Balances at December 31, 1998 88,295 $ 107,475 $ 9,340 $ (170) $ (488) $ (97,497) $ 18,660
============== ============ ============ ========= =========== =========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
====================================================================================================================================
38
</TABLE>
<PAGE>
<TABLE>
FY 1998 IMATRON INC. FORM 10-K/A
====================================================================================================================================
<CAPTION>
IMATRON INC.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31
-------------------------------------------
1998 1997 1996
-------- -------- --------
(Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,781) $(11,422) $(13,737)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 780 665 614
Net loss from discontinued operations 4,507 6,428 4,573
Amortization of deferred compensation 62 70 27
Non-cash return to minority interest 874 1,744 3,272
Non-cash compensation expense for extension of stock option
exercise period -- 150 --
Warrant issued for services 50 750 --
Common stock issued for services 503 270 269
Provision for bad debt 782 1,381 171
Loss (gain) on disposal of assets 20 2 (43)
Changes in operating assets and liabilities:
Accounts and notes receivable 713 (5,397) 712
Inventories (1,507) (2,533) (1,456)
Prepaid expenses (428) 1,198 (1,083)
Other assets (417) (814) 152
Accounts payable 553 501 (324)
Other accrued liabilities 1,017 1,062 330
Deferred income (621) 377 152
-------- -------- --------
Net cash used in operating activities: (7,893) (5,568) (6,371)
Net cash provided by (used in) discontinued operations 499 (2,426) (15,604)
-------- -------- --------
(7,394) (7,994) (21,975)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (642) (1,018) (1,118)
Purchases of available-for-sale securities (885) (8,982) (6,078)
Maturities of available-for-sale securities 1,065 14,880 --
Maturities of held-to-maturity securities -- -- 1,000
-------- -------- --------
Net cash (used in) provided by investing activities: (462) 4,880 (6,196)
-------- -------- --------
Cash flows from financing activities:
Payments of obligations under capital leases (57) (61) (51)
Payment of notes payable -- -- (992)
Proceeds from issuance of warrant -- 1,000 --
Proceeds from issuance of common stock 1,446 1,235 16,672
Loans to stockholders (488) -- --
Proceeds from issuance of stock of discontinued operations -- 2 14,798
-------- -------- --------
Net cash provided by financing activities 901 2,176 30,427
Net (decrease) increase in cash and cash equivalents (6,955) (938) 2,256
Cash and cash equivalents, at beginning of year 8,400 9,338 7,082
-------- -------- --------
Cash and cash equivalents, at end of year $ 1,445 $ 8,400 $ 9,338
======== ======== ========
====================================================================================================================================
39
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
====================================================================================================================================
Continued
IMATRON INC.
Consolidated Statements of Cash Flows, continued
(In thousands)
Supplemental Disclosure of Noncash Investing and Financing Activities:
Deferred compensation from common stock option grant of
discontinued operations $ -- $ 186 $ 143
======== ======== ========
HeartScan's conversion of preferred stock to Imatron common stock
$ 14,798 $ -- $ --
======== ======== ========
Equipment acquired under capital leases:
Continuing operations $ 39 $ -- $ 10
======== ======== ========
Discontinued operations $ -- $ 1,500 $ 2,705
======== ======== ========
Cash paid for interest on capital lease obligations:
Continuing operations $ 20 $ 27 $ 59
======== ======== ========
Discontinued operations $ 390 $ 494 $ 523
======== ======== ========
Cash paid for income taxes $ -- $ -- $ --
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
====================================================================================================================================
40
</TABLE>
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
IMATRON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
Imatron Inc., a New Jersey corporation incorporated in 1983, is a
technology-based company principally engaged in the business of designing,
manufacturing, and marketing a high performance computed tomography scanner. The
scanner is used in large and mid-sized hospitals and free standing imaging
clinics. Imatron Inc. provides service, parts, and maintenance to hospitals and
clinics that operate its scanners, as well as medical equipment manufactured by
other companies. In addition, HeartScan Imaging, Inc., Imatron Inc.'s
consolidated subsidiary, operates coronary artery scanning test facilities in
the United States.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Imatron Inc. and
its 94.3% owned subsidiary HeartScan Imaging, Inc. All intercompany accounts and
transactions have been eliminated in consolidation. Due to certain equity
exchange provisions provided to HeartScan Series A preferred shareholders (see
note 10), HeartScan's results of operations have been fully consolidated in the
accompanying consolidated financial statements.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
COMPREHENSIVE INCOME (LOSS)
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 (loss) and its components in a full set of general purpose
financial statements. The Company adopted SFAS 130 as of January 1, 1998. The
Company, however, does not have any components of comprehensive income (loss) as
defined by SFAS 130 and therefore, for the years ended December 31, 1998 1997
and 1996, comprehensive income (loss) is equivalent to the Company's net loss.
SEGMENT INFORMATION
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 adopted SFAS 131 as of January 1, 1998.
The Company has two reportable segments, the manufacturer of scanners and the
operator of coronary artery scanning test facilities.
================================================================================
41
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
NEW ACCOUNTING STANDARDS
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.
CONCENTRATIONS OF RISK
The Company's primary customers operate in the healthcare industry. The
healthcare industry is highly regulated. Both existing and future governmental
regulations could adversely impact the market for the Company's Ultrafast CT
scanner and the Company's business. The Company's operations are also subject to
regulation by other federal, state, and local governmental entities empowered to
enforce pertinent statutes and regulations, such as those enforced by the
Occupational Safety and Health Agency and the Environmental Protection Agency.
The Company sells its products in the United States, Europe, Canada, and India;
and through Imatron Japan, Inc. in Japan, as well as through other distributors
in the Pacific rim. The Company generally requires cash deposits or irrevocable
letters of credit for scanners ordered and maintains allowances for potential
credit losses. There have been no losses arising from the sale of scanners.
Spare parts are sold on terms to distributors and end-users.
The Company's revenues are principally derived from the Ultrafast CT scanner.
Many of the components and sub-assemblies used in the scanner have been
developed and designed by Imatron to its custom specifications and are
obtainable from limited or single sources of supply. In view of the customized
nature of many of these components and sub-assemblies, there may be extended
delays between their order and delivery. Delays in such delivery could adversely
affect Imatron's present and future production schedules. The Company has made
and continues to make inventory investments to acquire long lead time components
and sub-assemblies to minimize the impact of such delays. In recent years, the
Company has developed alternative sources for many of its scanner subcomponents
and continues its programs to qualify vendors for the remaining critical parts.
CASH EQUIVALENTS
Cash equivalents consist of liquid instruments purchased with a maturity date of
three months or less and money market funds.
FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified all purchases of investments as available-for-sale.
Available-for-sale securities are carried at amounts which approximate fair
value, with unrealized gains and losses reported as a separate component of
other comprehensive income (loss), if material. Fair values of investments are
based on quoted market prices. Short-term investments at December 31, 1997
consist of certificates of deposit. There were no short-term investments at
December 31, 1998.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in other income. The cost of securities sold
is based on the specific identification method.
The carrying amounts reported in the balance sheet for receivables, accounts
payable, accrued liabilities and capital lease obligations approximate fair
value due to their short-term maturities.
================================================================================
42
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates cost on
a first-in, first-out basis) or market. Provisions are made in each period for
the estimated effects of excess and obsolete inventories.
The company policy is to reserve 100% on obsolete inventories, defined as parts
which are no longer used in production, upgrades and repairs. Parts that are not
defined as obsolete are classified into different subsections. The reserve
percentages for each subsection represent the total value of parts in each
subsection that have the potential to be obsolete in the next 12 months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a straight line
method over their estimated useful lives. Equipment under capital leases, except
for scanner equipment and leasehold improvements, are amortized on a
straight-line method over the lesser of their estimated useful lives or the
remaining term of the related leases.
Estimated useful lives are as follows:
Machinery and equipment 3 - 5 years
Furniture and fixtures 3 - 5 years
Leasehold improvements 5 years
Scanner equipment under a capital lease is amortized over the term of the lease
(five years), using the units-of-production method (number of scans) based on
the estimated usage of the equipment. Upon purchase of the scanner, the Company
produces a projection of its anticipated scans for a particular scanner at a
particular location. The average projected scans for all centers by year is as
follows:
Year Budgeted Scans
---- ---------------------
1 2,530
2 6,160
3 7,216
4 7,920
5 7,920
---------------------
31,746
=====================
Consistent with the schedule above, depreciation is recorded at the higher of
actual or budgeted scans so that the scanner is fully depreciated at the end of
five years.
LONG-LIVED ASSETS
The Company accounts for long-lived assets under, SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
================================================================================
43
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
REVENUE RECOGNITION
Revenues related to product sales are recognized upon shipment to the customer
or to a customer designated location, at which time title and risk of ownership
passes. The Company accrues for estimated installation and warranty costs at the
time of sale. Revenues related to service are recognized ratably over the
relevant contractual period or as the service is performed. Service revenue
billed but unearned is included on the consolidated balance sheets as other
accrued liabilities. Revenues related to development contracts are recognized
ratably over the contract (see note 8). Revenues from clinics are recognized
when services are performed for the clinic customer.
SALE LEASEBACK ARRANGEMENT
The Company sold one scanner in 1997 and two scanners in 1996 to third-party
leasing companies. HeartScan, in turn, entered into leasing arrangements with
these third-party leasing companies to obtain use of these scanners in its
clinics. The provisions of these leasing arrangements include monthly rental
payments over a 5-year term with a guarantee of the payments by Imatron.
HeartScan accounts for these leases as capital leases. Imatron recognized
revenue equal to its scanner cost and has deferred the profit on its sales to
the leasing companies. The Company is amortizing its deferred profit to product
sales over the five-year term of the HeartScan leases. Imatron recognized
$501,000, $501,000 and $428,000 of deferred profit for these leases for the
years ended December 31, 1998, 1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
ADVERTISING COSTS
Advertising and promotion costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are
recognized for tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
balance sheet date based on enacted tax laws and statutory tax rates expected to
apply in the periods in which the differences are expected to affect taxable
income.
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.
STOCK-BASED COMPENSATION
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," and has elected to continue to account for stock-based
compensation using methods prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
Additionally, the Company accounts for deferred compensation in accordance with
FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans".
================================================================================
44
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Note 2 - FINANCIAL INSTRUMENTS
Investments were as follows:
December 31,
---------------------------
1998 1997
----------- -----------
(In thousands)
Money market mutual funds $ 1,113 $ 924
Certificate of deposit 189 180
Commercial paper 143 7,476
----------- -----------
Total investments 1,445 8,580
Less amounts classified as cash and cash equivalents (1,445) (8,400)
----------- -----------
Short-term investments $ -- $ 180
=========== ===========
Note 3 - INVENTORIES
Inventories were as follows:
December 31,
---------------------------
1998 1997
----------- -----------
(In thousands)
Purchased parts and sub-assemblies $ 2,863 $ 3,212
Service parts 1,883 1,398
Work-in-progress 3,177 3,611
Finished products 6,510 4,705
----------- -----------
$ 14,433 $ 12,926
=========== ===========
Note 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment, at cost, were as follows:
December 31,
---------------------------
1998 1997
----------- -----------
(In thousands)
Machinery and equipment $5,697 $ 5,537
Furniture and fixtures 1,234 1,027
Leasehold improvements 2,153 2,181
----------- -----------
9,084 8,745
Less accumulated depreciation and amortization (6,809) (6,351)
----------- -----------
$2,275 $ 2,394
=========== ===========
================================================================================
45
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Note 5 - OTHER ACCRUED LIABILITIES
Other accrued liabilities were as follows:
December 31,
---------------------------
1998 1997
----------- -----------
(In thousands)
Warranty and product upgrades $2,175 $2,322
Customer deposits 841 1,954
Employee compensation 1,090 735
Deferred service revenues 1,619 663
Other 2,253 1,287
----------- -----------
$7,978 $6,961
=========== ===========
Note 6 - LINE OF CREDIT
As of December 31, 1997, the Company had $5,000,000 available under a line of
credit secured by foreign receivables that expired in August 1998. No amounts
were outstanding as of December 31, 1997. Interest under the line of credit was
computed based on the average daily loan balance at a rate equal to prime plus
0.25%.
Note 7 - RELATED PARTY TRANSACTIONS
JOINT VENTURE COMPANY
In 1994, the Company formed a joint venture, Imatron Japan, Inc. ("Joint
Venture") with two unrelated parties. Imatron holds a 24% interest in the Joint
Venture, which is carried at no value in the accompanying consolidated balance
sheets. The Company expensed the $20,000 investment upon payment. The Joint
Venture agreement between Imatron and Imatron Japan, Inc. does not require
additional funding by Imatron. Imatron is prepared to abandon its interest in
the Joint Venture, which is being funded by the other Joint Venture partners.
The Company recognized revenues of $2,800,000, $4,648,000 and $8,726,000 in
1998, 1997, and 1996, respectively, from sales to the Joint Venture and has
$1,982,000 and $1,438,000 in accounts receivable from the Joint Venture at
December 31, 1998 and 1997, respectively. All scanner sales to Imatron Japan,
Inc. are sold under irrevocable letters of credit without a right of return.
POSITRON CORPORATION
In conjunction with the execution of a letter of intent and the January 25, 1999
consummation of a purchase business combination (see Note 18) with Positron
Corporation ("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 December 31, 1998, Imatron advanced to Positron $600,000 under
this credit facility which has been included in other assets.
================================================================================
46
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
NOTES RECEIVABLE FROM OFFICERS
At December 31, 1998, the Company held three notes receivable amounting to
$336,000, $115,000 and $37,000 from the Company's Chief Executive Officer, the
Chairman of the Board, and the Chief Financial Officer, respectively. These
notes arose from transactions in 1998, whereby the Company provided loans with a
term of one year for the purchase of 925,000 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.
Note 8 - COLLABORATION AGREEMENTS
SIEMENS CORPORATION
For the period from March 31, 1995 to March 31, 1998, the Company and Siemens
Corporation ("Siemens") operated under a 1995 Memorandum of Understanding
whereby Siemens provided $15,000,000 to the Company's C-150 Evolution Ultrafast
CT scanner research and development program paid to the Company in quarterly
non-refundable payments. The results of the collaborative research were jointly
owned by the parties and cross licensed. For the period from March 31, 1995 to
March 31, 1998 Siemens retained exclusive distribution rights in certain
geographical regions for sales of the C-150/Evolution scanner.
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 Seimens'
customers under an April 1997 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.
TERARECON INC.
On July 22, 1997, the Company and TeraRecon Inc., a technology company that
produces high speed image processing devices for medical imaging systems,
entered into a development agreement whereby TeraRecon will provide Imatron with
a real-time image reconstruction system for use in conjunction with Imatron's
Ultrafast CT scanner. Upon completion and when delivered, the RTR-2000 system
will be exclusive to Imatron's Ultrafast CT scanner and will expand its current
applications to include new three-dimensional, CT flurography or real-time
viewing of computerized tomography (CT) images. It is an accessory to the base
scanner which certain customers may find useful. It will not render any existing
equipment obsolete.
In consideration for the successful development and delivery of RTR-2000
systems, the Company has agreed to issue an aggregate of 6,000,000 warrants to
purchase the Company's common stock at $4.50 per share. The warrants will be
issued in installments based on TeraRecon achieving certain milestones in
connection with the development of image reconstruction systems. In addition,
TeraRecon has agreed to pay the Company an aggregate of $2,000,000 for 4,000,000
of the 6,000,000 warrants and to make royalty payments to Imatron equal to 3% of
net sales of CT scanners with RTR-2000 systems sold to third parties.
On October 21, 1997, the Company issued a total of 3,000,000 warrants to
TeraRecon upon the successful delivery of 4 Prototype I units. Pursuant to the
development agreement, TeraRecon paid the Company $1,000,000 for the warrant to
purchase 2,000,000 shares of the Company's common stock at $4.50 per share. In
March 1998, the Company issued another warrant to TeraRecon to purchase
1,000,000 shares of the Company's common stock at $4.50 per share at no charge
for the delivery of the first Prototype II unit.
================================================================================
47
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
In February 1999, the Company and TeraRecon agreed to modify the development
agreement by releasing TeraRecon from its obligation to purchase 2,000,000 stock
purchase warrant for $1,000,000. In addition, TeraRecon has agreed to develop a
more stable, reliable, and easier-to-maintain image reconstruction system at no
additional cost to Imatron and upgrade five units of the current RTR-2000
systems for no more than $25,000 per unit. Imatron has agreed to cancel the 3%
royalty payment per unit per the original agreement.
As Imatron did not receive a license in the TeraRecon technology nor is there
any future alternative uses to the prototypes purchased by Imatron, in
accordance with SFAS No. 2, "Accounting for Research and Development Costs," a
$50,000 and $750,000 charge to research and development expense was recognized
in 1998 and 1997, respectively, upon TeraRecon meeting the agreed-upon
milestones. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's recorded research and development expense was based
on the fair market value of the warrants at the time of issuance using an option
pricing model less any cash received.
GENERAL ELECTRIC MEDICAL SYSTEMS
On July 1, 1998, the Company entered into a non-exclusive distributor agreement
with GE Medical Systems (GEMS) 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 GEMS provides
financing options for customers purchasing the equipment. The contract has a
term of two years with an option to extend for an additional year at GEMS's sole
discretion. This agreement does not constitute a licensing or transfer of any of
Imatron's intellectual property to GEMS. The Company has agreed to pay GEMS a
commission on all sales directly resulting from the Company's corporate alliance
with GEMS.
Note 9 - COMMITMENTS and CONTINGENCIES
OPERATING LEASES
The Company leases its present facilities under various operating leases
expiring between July 1998 and December 2005. Future minimum rental payments
under the leases as of December 31, 1998, are as follows (in thousands):
1999 $ 1,173
2000 1,223
2001 1,261
2002 1,310
2003 1,385
Thereafter 232
================
Total $ 6,584
================
Rent expense for operating leases totaled $972,000, $914,000 and $819,000 in
1998, 1997, and 1996, respectively.
CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under non-cancelable lease agreements. In
addition, HeartScan leases five scanners for its clinics, payments of which are
guaranteed by Imatron. The equipment leased by Imatron and HeartScan are
accounted for as capital leases. As of December 31, 1998, equipment under the
capital lease arrangements and included in property and equipment aggregated
$275,000. Accumulated amortization related to this equipment totaled $182,000 as
of December 31, 1998.
================================================================================
48
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Future minimum lease payments under capital lease obligations at December 31,
1998, are as follows (in thousands):
1999 $ 74
2000 18
2001 10
2002 10
2003 7
---------------
Total minimum payments 119
Less amounts representing interest (16)
---------------
Total principal 103
Less portion due within one year (64)
===============
Long-term portion 39
===============
Deferred income on sale-leaseback transactions amounted to $1,491,000 and
$1,992,000 at December 31, 1998 and 1997, respectively.
Interest paid on long-term obligations including capital lease obligations was
$20,000, $27,000 and $63,000 in 1998, 1997, and 1996, respectively.
LICENSE AGREEMENTS
In February 1981, the Company was granted the exclusive use for five years and
nonexclusive use thereafter of certain technology and a patent pending owned by
the University of California ("UC") under the terms of license and sublicense
agreements between UC and Emersub Incorporated ("Emersub"), a wholly owned
subsidiary of Emerson Radio Corp. and Imatron Associates (the predecessor to the
Company). In June 1986, the license and sublicense agreements were amended to
extend the Company's exclusive use of the technology through the remaining life
of the patent #4,352,021, "X-ray Transmission Scanning System and Method and
Electron Beam X-ray Scan Tube for Use Therewith" in exchange for modified annual
royalty payments to Emersub equal to 2.125% of net sales of certain components
of the C-150 Ultrafast scanner. The Company is obligated to make annual royalty
payments through January 7, 2000. Charges to operations for 1998, 1997, and 1996
were $158,000, $179,350 and $91,470, respectively.
Pursuant to the 1995 Memorandum of Understanding with Siemens, the Company
transferred five patents to Siemens, two of which cover features of the
Company's C-150 scanner. Siemens has granted to the Company a non-exclusive,
irrevocable, perpetual license to the five patents. The license is subject to a
royalty of $20,000 for each new C-150 unit (or other EBT unit produced by
Imatron after April 1, 1995), commencing with the 21st C-150 (or other Imatron
EBT) unit produced in any year and continuing thereafter for ten years after
such first quarter in which such 21st unit is produced. To date, Imatron has not
produced more than 20 scanners in any year and, therefore, no royalties have
been due under this agreement.
Note 10 - CAPITAL STOCK
COMMON STOCK
In 1996, Imatron sold 4,500,000 shares of common stock and issued five-year
warrants to purchase 2,000,000 shares of common stock at an average price of
$3.45 per share, netting proceeds of $11,348,000.
On July 7, 1997, the Company filed an amendment to its Certificate of
Incorporation. The amendment, which was approved by the Board of Directors on
April 30, 1997, and by the shareholders at the annual meeting on June 30, 1997,
increases the number of authorized shares of the Company's Common Stock from 100
million shares to 150 million.
================================================================================
49
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
HEARTSCAN PREFERRED STOCK
HeartScan has authorized 1,000,000 shares of .001 par value preferred stock.
There are 200,000 issued and outstanding shares at December 31, 1998 and 1997 of
which 100,000 shares have been designated "Series A Preferred Stock" and 100,000
have been designated "Series B Preferred Stock."
The holders of outstanding shares of Series A and B Preferred Stock are entitled
to receive dividends in preference to the payment of any dividends on HeartScan
common stock. Before any dividend may be paid on the common stock, a dividend in
an amount equal to or greater than the dividend proposed to be paid on the
common shares must be paid to the Series A and B Preferred Stock holders. To
date, no dividend has been distributed to the holders of preferred stock.
Each share of Series A and B Preferred Stock is entitled to ten votes.
Each share of Series A and B Preferred Stock is convertible into ten shares of
HeartScan common stock at any time but conversion is mandatory upon the
successful completion of a HeartScan initial public offering. Additionally, the
Series A Preferred Stock is convertible 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) a two-year period following closing of the Preferred Stock offering (June
26, 1998); or b) a HeartScan initial public offering. If there is no HeartScan
initial public offering by June 26, 1998, Series A Preferred Stock 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 the conversion. Conversion may occur beginning June 26,
1998 and for each date that is three months thereafter to and including June 26,
2000.
Imatron was the holder of the Series B Preferred Stock at December 31, 1998 and
1997.
The Series A Preferred Stock was sold on June 26, 1996 in a private placement
offering at $160 per share which realized net proceeds to the Company of
$14,798,000. The investment by the Series A Preferred Stock holders has been
accounted for as a minority interest holding in HeartScan with $5,890,000 of the
proceeds being allocated to paid-in capital for the intrinsic value of the
Imatron beneficial conversion feature (see Note 17). Minority interest expense
of $874,000, $1,744,000 and $3,272,000 has been recognized for the amortization
of the beneficial conversion feature for 1998, 1997 and 1996, respectively.
On June 26, 1998 and October 1, 1998, shareholders holding 94,331 and 5,669
shares, respectively, converted their Series A Preferred shares into 7,496,000
shares of Imatron common stock.
As of December 31, 1996, 30,002 warrants to purchase one share each of HeartScan
Common Stock were issued in connection with the above-mentioned private
placement. These warrants are exercisable at $16.00 per share and expire in June
2001.
================================================================================
50
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
WARRANTS
A summary of the Company's outstanding warrants as of December 31, 1998, 1997
and 1996 and changes during the years then ended is presented below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Warrants to Purchase Weighted Average Range of
Common Shares Exercise Price Expiration Dates
-------------------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 3,567 1.40 1996 -1999
Issued 2,826 3.25
Exercised (3,222) 1.28
Cancelled -- --
------ ---- -----------
Outstanding at December 31, 1996 3,171 3.17 1997 - 2000
====== ==== ===========
Issued 3,277 4.34
Exercised (284) 1.98
Cancelled -- -- --
------ ---- -----------
Outstanding at December 31, 1997 6,164 3.85 1998 - 2002
====== ==== ===========
Issued 1,130 4.22
Exercised (213) 1.82
Cancelled -- -- --
------ ---- -----------
Outstanding at December 31, 1998 7,081 3.97 1999 - 2002
====== ==== ===========
<FN>
Charges to operations relating to the issuance of these warrants totaled
$50,000, $750,000 and $0 in 1998, 1997 and 1996, respectively.
</FN>
</TABLE>
COMMON STOCK RESERVED
At December 31, 1998, the Company has reserved shares of common stock for future
issuances as follows (in thousands):
Stock option plans 3,962
Stock options outside the plans 1,500
Stock purchase plan 345
Stock warrants 7,081
Stock bonus plans 388
-------
Total 13,276
=======
Note 11 - STOCK-BASED COMPENSATION
STOCK BONUS PLAN
In February 1987, the Company adopted the 1987 Stock Bonus Plan which was
approved by the shareholders. The stock bonus plan was adopted to reward and to
provide incentive to participants for services. The total number of common
shares that may be granted is 1,200,000, with no more than 400,000 shares
awarded in any fiscal year. The Company granted 285,250, 97,655 and 19,409
shares under the plan in 1998, 1997, and 1996, respectively. Accordingly, the
Company recorded compensation expense equal to the fair value of the stock
issued amounting to $460,000, $261,000 and $69,000 in 1998, 1997 and 1996,
respectively.
================================================================================
51
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
EMPLOYEE STOCK PURCHASE PLAN
In March 1994, the Company adopted an employee stock purchase plan covering most
employees. Under the plan, employees may contribute up to 10% of their
compensation to purchase shares of the Company's common stock at the lesser of
85% of the stock's fair market value at the beginning of the initial offering
period or end of each three-month interim offering period. The maximum number of
shares offered under the Plan is 1,800,000 shares of common stock. A total of
188,863, 193,208 and 228,222 shares were issued at weighted average purchase
price of $1.76, $2.06 and $1.44 per share in 1998, 1997, and 1996, respectively.
The weighted average fair value of the purchase rights associated with the
employee stock purchase plan were $0.29, $0.34 and $0.00 in 1998, 1997 and 1996,
respectively.
STOCK OPTION PLANS
At December 31, 1997, Imatron has two and HeartScan has one stock option plan,
which are described below. The Company applies APB No. 25 and related
interpretations in accounting for its plans.
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company has accounted for its employee
stock options and employee stock purchase plan under the fair value method of
that Statement. The fair value of options was estimated at the date of grant
using an option pricing model with the following weighted-average assumptions:
1998 1997 1996
--------- -------- --------
Expected stock price volatility 80.20% 80.20% 80.20%
Risk-free interest rate 5.50% 6.27% 6.25%
Expected life - years 7.53 3.54 3.64
Expected dividend yield 0.00% 0.00% 0.00%
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Had the Company
elected to recognize compensation expense based on the fair value of the options
granted at grant dates as prescribed by SFAS 123, net loss and basic and diluted
loss per share would have been increased to the pro forma amounts indicated in
the table below (in thousands except per share amounts):
1998 1997 1996
-------- -------- --------
Net loss - as reported ($14,781) ($11,422) ($13,737)
Net loss - pro forma ($15,763) ($12,516) ($14,156)
Basic and diluted-net loss per share-as reported ($0.18) ($0.15) ($0.18)
Basic and diluted-net loss per share-pro forma ($0.19) ($0.16) ($0.19)
The weighted average fair value of options granted in 1998, 1997 and 1996 were
$1.92, $2.57 and $2.63 per share, respectively. The weighted average remaining
contractual life of all options at December 31, 1998, is 5.47 years.
The pro forma effect on net loss is not representative of the pro forma effect
on net income in future years because it does not take into consideration pro
forma compensation expense related to grants prior to 1995, and the compensation
expense that will be recognized in future years as the vesting options become
exercisable.
DIRECTOR STOCK OPTION PLAN
In June 1991, the Company adopted a non-employee Directors' Stock Option Plan
for the directors of Imatron. The Directors Plan provides for the automatic
grant of non-statutory options to non-employee directors. The Directors Plan
initially covered 250,000 shares of the Company's common stock. In June 1993 an
amendment to the non-employee Directors Plan was approved increasing the number
of shares to 550,000.
================================================================================
52
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
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 550,000 to 1,000,000
shares.
All stock options under the Directors Plan are granted at 85% of the common
stock's fair market value at the grant date. Options granted under the plan
generally vest immediately with an option for the Company to repurchase the
shares and expire ten years from the grant date.
EMPLOYEE STOCK OPTION PLAN
In March 1983, the Company adopted a stock option plan which provides for the
granting of incentive stock options to employees and non-statutory stock options
to non-employee directors, and certain consultants. The shareholders approved
the plan, as amended, in March 1984. In 1993 the original plan ("1983 Plan")
terminated and a new plan ("1993 Plan") was approved. The terms of the 1993 Plan
are consistent with the terms of the 1983 Plan. During 1995, the shareholders
approved an increase in the number of shares reserved for the 1993 Plan from
3,000,000 to 5,500,000.
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.
On October 23, 1998, the Company made an offer to its employees to cancel and
re-grant at October 23, 1998, all outstanding options with exercise prices
greater than $1.50. Outstanding options to purchase 1,158,992 shares at exercise
prices ranging from $1.78 to $2.56 were re-granted and repriced at $1.50, the
closing price at October 23, 1998.
With respect to the October 23, 1998 option repricing, employees were given 4
weeks to execute an agreement to obtain the lower priced options. The Company
considered this offering period and concluded that it had an immaterial effect
on compensation expense required to be recorded. There was no such repricing
"window" for the February 24, 1998 option exchange.
All incentive stock options are granted at the common stock's fair market value
at the grant date and non-statutory stock options are granted at not less than
85% of the common stock's fair market value at the grant date. Options granted
prior to 1998 under the plan generally vest evenly over four years following the
grant date and expire five years from the grant date. Options granted in 1998
generally vest evenly over four years and expire 10 years subsequent to the date
of grant.
================================================================================
53
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
A summary of the activity under the Imatron stock option plans is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------------------------
Shares Exercise Aggregate
Available Number of price per exercise
for Grant shares share price
------- ------- ------------- -------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 2,672 3,385 $0.43 - $1.22 $ 2,739
Options expired (6) -- $0.51 - $0.56 (3)
Options granted (514) 514 $2.06 - $5.00 1,060
Options exercised -- (940) $0.51 - $2.06 (795)
Options canceled 102 (102) $0.56 - $1.22 (93)
------- ------- ------------- -------
Balances at December 31, 1996 2,254 2,857 $0.43 - $5.00 $ 2,908
Options expired (14) -- $ 0.56 (8)
Options granted (1,219) 1,219 $1.78 - $3.31 3,129
Options exercised -- (305) $0.48 - $2.63 (274)
Options canceled 83 (83) $0.56 - $2.63 (171)
------- ------- ------------- -------
Balances at December 31, 1997 1,104 3,688 $0.43 - $5.00 $ 5,584
Shares reserved for issuance 450 -- -- --
Options granted (1,254) 1,254 $1.28 - $2.56 2,774
Options exercised -- (1,280) $0.37 - $2.63 (724)
Options canceled 178 (178) $0.61 - $3.31 (411)
Options repricing:
Options canceled -- (1,920) $1.78 - $2.56 (4,988)
Options re-granted -- 1,920 $1.50 - $2.56 3,685
------- ------- ------------- -------
Balances at December 31, 1998 478 3,484 $0.61 - $5.00 5,920
======= ======= ============= =======
</TABLE>
The following table summarizes information concerning Imatron's outstanding and
exercisable options as of December 31, 1998 (in thousands, except per share
amounts):
<TABLE>
Options Outstanding Options Exercisable
------------------------------------- ------------------------------
Weighted Weighted
Average Weighted Average
Remaining Average Number
Range of Number of Shares Contractual Life Exercise of Exercise
Exercise Prices Price Shares Price
- ------------------------ ---------------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$0.61 - $2.00 2,431 6.24 $1.34 870 $1.09
$2.01 - $3.50 978 3.80 $2.36 516 $2.30
$3.51 - $5.00 75 2.59 $4.66 63 $4.79
---------------- ---------------- ----------------- -------------- ------------
3,484 5.47 $1.70 1,449 $1.68
================ ================ ================= ============== ============
</TABLE>
Options for 1,448,685, 2,185,394 and 1,588,533 shares of the Company's common
stock were exercisable under the plans at December 31, 1998, 1997, and 1996 at
an aggregate exercise price of $2,435,529, $2,527,620 and $1,460,599,
respectively.
================================================================================
54
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
In October 1995, HeartScan approved the adoption of the HeartScan Imaging, Inc.
1995 Stock Option Plan ("HSI Stock Option Plan") which provides for the granting
of incentive stock options to employees and nonstatutory stock options to
employees, nonemployee directors, and certain consultants. All incentive stock
options are granted at the common stock's fair market value at the grant date,
and nonstatutory stock options are granted at not less than 85% of the common
stock's fair market value at the grant date. Options granted under the plan
generally vest annually over four years following the grant date and have a
maximum term of ten years.
A summary of the activity under the HSI Stock Option Plan is as follows (in
thousands, except per share amounts):
<TABLE>
Shares Number of Aggregate Aggregate
available for shares Price per exercise
grant outstanding share price
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 138 113 $0.001 $--
Shares granted (75) 75 $0.10 $8
Options exercised -- (73) $0.001 --
----------------- ---------------- ---------------- ----------------
Balances at December 31, 1996 63 115 $0.07 $8
Shares reserved 250 -- -- --
Options granted (154) 154 $0.25 $38
Options exercised -- ( 39) $0.04 $( 2)
----------------- ---------------- ---------------- ----------------
Balances at December 31, 1997 159 230 $0.19 $44
Options exercised -- (9) $0.05 --
Options canceled 48 (48) $0.25 $(12)
----------------- ---------------- ---------------- ----------------
Balances at December 31, 1998 207 173 $0.18 $32
================= ================ ================ ================
</TABLE>
The following table summarizes information concerning HeartScan's outstanding
and exercisable options as of December 31, 1998 (in thousands, except per share
amounts):
<TABLE>
Options Outstanding Options Exercisable
-------------------------------------- ----------------------------------
Weighted Weighted
Average Weighted Average
Remaining Average Number
Range of Number of Contractual Exercise of Exercise
Exercise Prices Shares Life Price Shares Price
- ----------------------- -------------- --------------- ------------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.10 - $0.25 173 7.68 $0.18 131 $0.16
-------------- --------------- ------------------- ---------------- --------------
173 7.68 $0.18 131 $0.16
============== =============== =================== ================ ==============
</TABLE>
At December 31, 1996, options to purchase 18,750 shares of HeartScan common
stock were exercisable at an aggregate exercise price of $1,875.
At December 31, 1997, there were 88,815 shares of HeartScan common stock
exercisable at an aggregate exercise price of $489,813.
Certain options were granted to an officer of the Company outside of the HSI
Stock Option plan with exercise prices less than the fair market value of the
stock at the date of grant. The difference between the exercise price and fair
market value of HeartScan's common stock at the date of issue of the stock
options totaling $329,000 has been recorded as deferred compensation and a
component of stockholders' equity. Of this amount, $62,000, $70,000 and $27,000
have been recognized as compensation expense in 1998, 1997 and 1996,
respectively. The remaining $168,000 will be recognized as an expense as the
shares vest over a period of up to four years.
================================================================================
55
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Note 12 - RETIREMENT SAVINGS PLAN
RETIREMENT SAVINGS PLAN
In 1987, the Company established a qualified retirement plan under the
provisions of section 401(K) of the Internal Revenue Code, in which eligible
employees may participate. Substantially all participants in this plan are able
to defer compensation up to the annual maximum amount allowable under the
Internal Revenue Service regulations. The Plan was amended in 1994 to provide
for employer contributions equal to 50% of every dollar of employee
contribution, with a maximum of 6% of employee wages. The Company contributed
approximately $281,000, $259,000 and $212,000 in 1998, 1997, and 1996,
respectively.
Note 13 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, are as follows (in thousands):
<TABLE>
1998 1997
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $31,135 $ 26,890
Federal credit carryforwards 1,767 970
Expenses not currently deductible for tax purposes 7,041 6,478
Deferred revenue previously taxed 376 394
Other 264 265
---------------- ----------------
Deferred tax assets 40,763 34,997
Valuation allowance (37,353) (32,081)
---------------- ----------------
Net deferred tax assets 3,410 2,916
---------------- ----------------
Deferred tax liabilities:
State income taxes 1,066 764
Other 2,344 2,152
---------------- ----------------
Deferred tax liabilities 3,410 2,916
---------------- ----------------
Net deferred taxes $ -- $--
================ ================
</TABLE>
The net change in the valuation allowance was $5,272,000, $3,243,000 and
$6,431,000 for 1998, 1997 and 1996, respectively, principally resulting from net
operating loss carryforwards.
The reconciliation of income tax attributable to continuing operations
calculated at the U.S. federal statutory rate to the effective tax rate is as
follows:
1998 1997 1996
---------- ---------- ---------
Federal statutory rate (34%) (34%) (34%)
Valuation allowance 34% 34% 34%
========== ========== =========
Effective tax rate 0% 0% 0%
========== ========== =========
================================================================================
56
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Due to the issuance of preferred stock which occurred June 26, 1996, utilization
of the net operating loss and tax credit carryforwards for the Company and its
subsidiary, HeartScan, will be subject to separate return limitations.
At December 31, 1998, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $70,445,000 and
$9,745,000, respectively. Additionally, the Company has research and development
and alternative minimum tax credit carryforwards of approximately $1,767,000 at
December 31, 1998. The net operating loss and the research and development tax
credit carryforwards expire in various years from 1999 through 2018. In
addition, HeartScan has net operating loss carryforwards for federal and state
income purposes of approximately $17,966,000 and $4,201,000 respectively. The
net operating loss carryforwards expire in various years from 1999 through 2018.
Pursuant to the Tax Reform Act of 1986, annual utilization of the Company's net
operating loss and tax credit carry forwards may be limited if a cumulative
change in ownership of more than 50% is deemed to occur within any three-year
period.
Note 14 - NET LOSS PER SHARE
The computation of basic and diluted loss per share for both continuing and
discontinued operations for the years ended December 31, 1998, 1997 and 1996 are
as follows:
<TABLE>
1998 1997 1996
---------------- ---------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Loss from continuing operations $ (9,400) $ (3,250) (5,892)
================ ================ =============
Loss from discontinued operations $ (4,507) $ (6,428) $ (4,573)
================ ================ =============
Net loss $ (14,781) $ (11,422) $ (13,737)
================ ================ =============
Weighted average common shares - basic and diluted 83,941 78,461 74,406
================ ================ =============
Basic and diluted loss per share:
Loss from continuing operations $ (0.11) $ (0.04) $ (0.08)
================ ================ =============
Loss from discontinued operations $ (0.05) $ (0.08) $ (0.06)
================ ================ =============
Net loss $ (0.18) $ (0.15) $ (0.18)
================ ================ =============
Antidilutive options and warrants not included in calculation 986 3,114 2,608
================ ================ =============
</TABLE>
Note 15 - ENTERPRISE WIDE SEGMENT DISCLOSURES
The Company operates in two industry segments. Imatron operates in one industry
segment in which it designs, manufactures, services and markets a computed
tomography scanner and HeartScan Imaging, Inc., operates centers that perform
the coronary artery scan procedures. The Company is currently selling its
interests in HeartScan (see Note 16).
================================================================================
57
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
Foreign based revenues relate to the sale of scanners by the Company. The
scanner sales price varies depending on the customer requirements. In
particular, sales to Siemens, Imatron Japan, Inc. and third-party leasing
companies have a lower gross margin than sales to third parties. The following
table represents the scanner sales by significant geographic areas (in
thousands):
1998 1997 1996
---------- ---------- ----------
United States ( a ) $ 12,931 $ 2,803 $ 2,747
Europe ( b ) 2,326 5,064 1,748
Japan ( c ) 2,800 4,200 7,150
Asia Pacific ( d ) -- 10,896 1,500
South Africa -- 2,130 --
Dubai 1,837 -- --
Brazil 1,880 -- --
---------- ---------- ----------
Total scanner sales (e) 21,774 25,093 13,145
Sale leaseback profit recognized 501 501 428
Upgrade sales 272 1,774 2,590
---------- ---------- ----------
Total product sales $ 22,547 $ 27,368 $ 16,163
========== ========== ==========
(a) Sales to third-party leasing companies under the sale-leaseback transactions
amounted to $1,774,000 in 1996. Sales to Siemens amounted to $800,000 and
$1,603,000 in 1998 and 1997, respectively.
(b) Sales to Siemens amounted to $926,000, $4,137,000 and $1,748,000 in 1998,
1997 and 1996, respectively. Sales to third-party leasing companies under
the sale-leaseback transactions amounted to $927,000 in 1997.
(c) Sales to an affiliated customer, Imatron Japan, Inc.
(d) Sales to customers in China, Malaysia, Singapore and Korea.
(e) All sales are denominated in US currency, therefore, there is no foreign
currency risk.
Note 16 - 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 December 31, 1998 and 1997 balance sheets.
HeartScan statements of operations data are as follows (in thousands):
1998 1997 1996
----------- ----------- ------------
Revenues $3,996 $2,542 $1,293
Costs and expenses (8,503) (8,970) (5,866)
----------- ----------- ------------
Loss before income taxes (4,507) (6,428) (4,573)
Provision for income taxes -- -- --
----------- ----------- ------------
Loss from discontinued operations $ (4,507) $ (6,428) $ (4,573)
=========== =========== ============
HeartScan statements of operations include costs of sales of $602,000, $436,000
and $366,000 in 1998, 1997 and 1996, respectively, related to transactions with
Imatron.
================================================================================
58
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
A summary of the net assets of discontinued operation is as follows:
<TABLE>
December 31,
-----------------------------------------
1998 1997
------------------ ------------------
(In thousands)
<S> <C> <C>
Cash and cash equivalents $1,273 $6,025
Accounts receivable - net and other current assets 327 334
Other current liabilities (92) (94)
Lease obligations - current (1,728) (1,568)
------------------ ------------------
Net current assets (liabilities) of discontinued operation $ (220) $4,697
------------------ ------------------
Property, plant and equipment, net 6,381 7,966
Other assets 5 5
Lease obligations - long-term portion (2,900) (4,396)
------------------ ------------------
Long-term net assets of discontinued operation $3,486 $3,575
================== ==================
</TABLE>
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 will be included in the "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 sale of the
Pittsburgh, Houston, and Washington, D.C. centers of HeartScan is expected to
close in the first quarter of 1999.
Note 17 - RESTATEMENT
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 (see note 10). Thus, the Company did not believe a
discount should be recognized on a contingently issuable security. Furthermore,
at the time of agreeing to the terms of the transaction the $5 per share
immediate conversion price was above the market price of the Company's common
stock but at the time the HeartScan preferred stock was actually issued, the
market price had increased to $5.75 and thereafter, it dropped below $5 again.
Accordingly, the Company did not believe that any calculation of the discount
should include the impact of this short-term market fluctuation.
================================================================================
59
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
In December 1997, the staff of the SEC gave a speech further refining its March
1997 announcement. Based on discussions with the staff of the SEC in April 1998,
the staff concluded that the Company should retroactively apply its announcement
because it should be applied to contingently issuable securities and, as
discussed in the December speech, the portion attributable to the discount that
could have been obtained immediately on conversion (even though the shares had
not been registered yet) should be recognized on the day the preferred shares
were issued. The balance of the discount based on a market value of $5.75 per
common share is being recognized over two years from the date of issuance.
The consolidated financial statements for the year ended December 31, 1996 have
been restated to give effect to the accounting treatment described above. The
restatement resulted in the recognition of a minority interest charge of
$3,272,000 (including $2,400,000 as of the date of the preferred shares were
issued) in the consolidated statement of operations increasing the Company's net
loss from $10,465,000 to $13,737,000.
The restatement of the previously issued 1996 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.
Note 18 - SUBSEQUENT EVENTS
On January 6, 1999 (closing date), the Company acquired Caral Manufacturing
("Caral") for $1,600,000. Caral, a major vendor, manufactures custom-made parts
for the scanners which is the most expensive component of the scanner. The
purchase price consisted of $275,000 in cash and 629,339 restricted shares of
Imatron common stock valued at $825,000 or $1.3109 per share and other
acquisition related expenses of approximately $50,000, consisting primarily of
payments of legal fees. In addition, Imatron will issue Caral, shares of Imatron
common stock equivalent to $500,000 in six months from the closing date should
the average stock price remain or fall below $1.3109. The price is determined as
the average closing bid price of Imatron common stock on June 21 through July 2,
1999 (average stock price). If the value of the 629,339 shares issued to Caral
on closing date, based on the average stock price, plus the cash payment of
$275,000 is below $1,100,000, Imatron will issue Caral additional shares based
on the average stock price, equivalent to $500,000 minus 50% in excess of
$1,100,000. In no case will the value of the additional shares issued be more
than $500,000.
The acquisition will be accounted for using the purchase method of accounting,
and accordingly, the operating results of Caral will be included in the
Company's consolidated financial statements from January 6, 1999 forward. The
purchase price will be allocated to the underlying assets and liabilities based
on their respective estimated fair values at the date of acquisition. The
estimated fair value of assets acquired was $703,000 and liabilities assumed was
$320,000. The excess of the aggregate purchase price over the fair market value
of net assets acquired will be classified as goodwill, and amortized on a
straight line method over 15 years.
On January 25, 1999, the Company acquired a controlling interest in Positron
representing 9,000,000 shares of common stock for $100. Imatron is working with
third-party equity financing groups in an attempt to re capitalize Positron and
support its re-entry into the medical imaging market. The acquisition will be
accounted for using the purchase method of accounting, and accordingly, the
operating results of Positron will be included in the Company's consolidated
financial statements from January 25, 1999 forward. The purchase price will be
allocated to the underlying assets and liabilities based on their respective
estimated fair value at the date of acquisition. The estimated fair value of
assets acquired was $860,000 and liabilities assumed was $7,190,000 as of
December 31, 1998. The excess of the aggregate purchase price over the fair
market value of net assets acquired will be classified as goodwill and amortized
on a straight line basis over 15 years.
================================================================================
60
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
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 note 16). 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, is estimated to be approximately $400,000
which will be recorded in the first quarter of 1999.
================================================================================
61
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
SCHEDULE II
<TABLE>
<CAPTION>
IMATRON INC.
Valuation and Qualifying Accounts and Reserves
(In thousands)
Balance at
Description the beginning Charged to Balance at
of the period costs and end of the
expenses Deductions period
<S> <C> <C> <C> <C>
Balances for the year ended December 31, 1996:
Allowance for doubtful accounts receivable $ 171 $ 1,080 $ (141) $ 1,110
Inventory reserves 2,666 319 -- 2,985
Reserve for warranty 1,352 917 (918) 1,351
Balances for the year ended December 31, 1997:
Allowance for doubtful accounts receivable 1,110 1,380 -- 2,490
Inventory reserves 2,985 475 (101) 3,359
Reserve for warranty 1,351 1,714 (1,275) 1,790
Balances for the year ended December 31, 1998:
Allowance for doubtful accounts receivable 2,490 1,155 (373) 3,272
Inventory reserves 3,359 520 (175) 3,704
Reserve for warranty 1,790 1,575 (1,373) 1,992
</TABLE>
================================================================================
62
<PAGE>
FY 1998 IMATRON INC. FORM 10-K/A
================================================================================
IMATRON INC.
Index of Exhibits
Exhibit SEC
Number Description Page No.
(See Footnotes)
3.1 (1) Certificate of Incorporation of the Company, as amended, as of
March 31, 1983.
3.3 (2) Certificate of Amendment of Certificate of Incorporation filed
with the New Jersey Secretary of State on June 17, 1988.
3.4 (2) Certificate of Amendment of Certificate of Incorporation filed
with the New Jersey Secretary of State on July 26, 1988.
3.5 (3) Certificate of Correction of Certificate of Amendment of
Certificate of Incorporation filed with the New Jersey
Secretary of State on February 7, 1989.
3.6 (4) Certificate of Amendment of Certificate of Incorporation filed
with the New Jersey Secretary of State on March 29, 1990.
3.7 (5) Certificate of Amendment of Certificate of Incorporation filed
with the New Jersey Secretary of State on December 7, 1990.
3.8 (6) Certificate of Amendment of Certificate of Incorporation filed
with the New Jersey Secretary of State on July 7, 1997.
3.9 (7) Bylaws, as amended April 30, 1992.
4.1 (8) Form of Warrant issued to investors in Private Offering
concluded October 19, 1995.
4.2 (9) Form of Warrant issued to investors in Private Offering
concluded May 24, 1996.
4.3 (10) Form of Warrant issued to Gary Post on March 8, 1996.
4.4 (10) Form of Warrant issued to investors in HeartScan Private
Offering concluded June 24, 1996.
4.5 Form of Warrant issued to TeraRecon Inc. on October 15, 1997.
4.6 Form of Warrant issued to TeraRecon Inc. on October 21, 1997.
4.7 Form of Warrant issued to investors in connection with a Private
Offering which concluded January 28, 1997
<PAGE>
Exhibit SEC
Number Description Page No.
(See Footnotes)
10.1 (1) Sublicense Agreement between the Company and Emersub
Incorporated dated February 1, 1981.
10.2 (11) Amendment to Sublicense Agreement between Registrant and Emersub
Incorporated dated June 30, 1986.
10.3 (4) License Agreement dated as of September 13, 1988 between the
Company and EMI Limited
10.4 (23) 1997 Stock Bonus Incentive Plan
10.5 (3) Amendment dated July 20, 1987 to Lease dated August 23, 1983 by
and between the Company and Diodati Property Trust and
Patrician Associates, Inc.
10.6 (7) Polly Force Distribution Agreement
10.7 (13)* Basic Agreement between the Company and Siemens Corporation
dated March 14, 1991
10.8 (13) Loan Agreement between the Company and Siemens Corporation dated
March 14, 1991
10.9 (13)* Exclusive Importer Agreement dated November 12, 1990 between the
Company and Mitsui & Co., Ltd.
10.10 (13)* Distributorship Agreement dated November 12, 1990 among the
Company, Mitsui & Co., Ltd. and PASCO Corporation
10.11 (13) Common Stock Purchase Agreement dated October 15,1990 between
the Company and PASCO Corporation
10.12 (14) 1991 Non-Employee Director's Stock Option Plan
10.13 (15) Lease Agreement between the Company and J. Grant Monahon, James
S. Keagy and Jeffrey H. Stevenson, as Trustees of AEW #79 Trust
for the premises located at 389 Oyster Point Boulevard, South
San Francisco, California, dated November 1, 1991
10.14 (15) Amendment No. 1 to Lease Agreement between the Company and J.
Grant Monahon, James S. Keagy and Jeffrey H. Stevenson, as
Trustees of AEW #79 Trust for the premises located at 389
Oyster Point Boulevard, California, dated June 15, 1992
10.15 (15) Second amendment to Sublicense Agreement between the Company and
Emersub Incorporated dated October 1, 1990
10.16 (15) Agreement dated October 31, 1991, to terminate Lease Agreement
dated August 23, 1983
<PAGE>
Exhibit SEC
Number Description Page No.
(See Footnotes)
10.17 (15) Release and Settlement Agreement between the Company and Arthur
P. Gould & Co. dated July 27, 1992
10.18 (16) Right of first refusal and option agreement between the Company
and FI.M.A.I. Holding, S.A. dated January 22, 1993
10.19 (16)* Amendment No.1 to Basic Agreement between the Company and
Siemens Corporation dated September 30, 1992
10.20 (16) Amendment No.1 to loan agreement between the Company and
Siemens Corporation dated December 31, 1992
10.21 (16) Amendment No.2 to loan agreement between the Company and
Siemens Corporation dated March 12, 1993
10.22 (16) Mortgage and Security Agreement dated as of March 12, 1993
between Imatron Inc. and Siemens Corporation
10.23 (16)* Patent License Agreement dated as of March 12, 1993 between
Imatron Inc. and Severson & Werson, A Professional
Corporation
10.24 (16) Escrow Holder Agreement dated as of March 12, 1993 by and among
Imatron Inc., Siemens Corporation and Severson & Werson, A
Professional Corporation
10.25 (16)* Sole License Agreement dated as of March 12, 1993 between
Imatron Inc. and Siemens Corporation
10.26 (16) C-150 License Agreement dated as of March 12, 1993 between
Imatron Inc. and Siemens Corporation
10.27 (16)* License Agreement dated as of March 12, 1993 between Imatron
Inc. and Siemens Corporation
10.28 (16) Amendment No. 2 to Lease Agreement between the Company and J.
Grant Monahon, James S. Keagy and Jeffrey H. Stevenson,
as Trustees of AEW #79 Trust for the premises located at 389
Oyster Point Boulevard, California dated December 31, 1992
10.29 (16) Termination Agreement dated December 9, 1992, terminating
Stockholders Agreement dated August 13,1990, between the
Company and FI.M.A.I Holding, S.A.
10.30 (16) Amendment No.1 dated February 23, 1993, to Release & Settlement
Agreement
10.31 (16) Form of Registration Rights Agreement between the Company and
investors in Private Offering concluded September 15,1992
10.32 (17) 1993 Stock Option Plan, as amended to date
10.33 (18) 1994 Employee Stock Purchase Plan, as amended to date
<PAGE>
Exhibit SEC
Number Description Page No.
(See Footnotes)
10.34 (19) Settlement Agreement dated December 10, 1993 between the
Company and Mitsui & Co., ltd.
10.35 (19) Transition Agreement dated December 10, 1993 between the
Company and Mitsui & Co., Ltd.
10.36 (20) Amendment No. 2 to Basic Agreement dated December 14, 1993
between the Company and Siemens Corporation.
10.37 (20) Amendment to Loan Agreement and Waiver dated December 14, 1993
between the Company and Siemens Corporation.
10.38 (21) Executive Employment Agreement dated as of June 11, 1993
between the Company and S. Lewis Meyer.
10.39 (21) Warrant Agreement dated June 7, 1993 between the Company and S.
Lewis Meyer.
10.40 (21) Employment Agreement dated December 15, 1993 between the
Company and Gary H. Brooks.
10.41 (21) Employment Agreement dated October 1, 1993 between the Company
and Dale Grant.
10.42 (21) Agreement and Joint Company Agreement between the Company, Tobu
Land System Company and Kino Corporation dated January 7, 1994
10.43 (21) Distributorship Agreement between the Company and Imatron Japan
K. K. dated February 3, 1994.
10.44 (21) First Amendment to Distributorship Agreement between the
Company and Imatron Japan K. K. dated February 8, 1994.
10.45 (21) Memorandum of Understanding dated February 2, 1994 between the
Company and Siemens AG, Medical Engineering Group.
10.46 (21) Memorandum of Understanding dated February 2, 1994 between
Company and Siemens AG, Medical Engineering Group (Evolution
Upgrade project and distribution agreement).
10.47 (21) Letter Agreement dated March 7, 1994 from FI.M.A.I. Holding S.A.
10.48 (22)* Amendment No. 3 to Basic Agreement dated March 1, 1994 between
the Company and Siemens Corporation.
10.49 (22)* Amendment No. 4 to Basic Agreement dated as of October 20, 1994
between the Company and Siemens Corporation.
<PAGE>
Exhibit SEC
Number Description Page No.
(See Footnotes)
10.50 (22)* Amendment No. 5 to Basic Agreement dated as of November 17, 1994
between the Company and Siemens Corporation.
10.51 (22)* Amendment No. 6 to Basic Agreement dated as of December 28,
1994 between the Company and Siemens Corporation and related
Letter Agreement dated December 29, 1994.
10.52 (22)* Amendment No. 7 to Basic Agreement dated as of February 28,
1995 between the Company and Siemens Corporation.
10.53 (22)* Memorandum of Understanding dated March 31, 1995 between the
Company and Siemens Corporation.
10.54 (24) Development Agreement dated July 22, 1997 between the Company
and TeraRecon Inc.
10.55 (25) Stock Purchase Agreement between the Company, HeartScan
Imaging, Inc., and investors in a Private Offering which
concluded June 24, 1996.
10.56 (10) Form of Warrant Purchase Agreement between the Company and
investors in the Private Offering which concluded June 24, 1996.
10.57 (26) Agreement for Service Support dated February, 1997 between the
Company and Siemens Medical Systems, Inc.
10.58 (26) Warrant Purchase Agreement between the Company and TeraRecon
Inc. dated October 15, 1997
10.59 (26) Warrant Purchase Agreement between the Company and TeraRecon
Inc. dated October 21, 1997
10.60 (27) Loan agreement between the Company and Positron Corporation
dated May 1, 1998, with schedules and exhibits.
10.61 (27) Sales Representation Agreement dated July 1, 1998.
10.62 Employment Agreement dated January 4, 1999 between the Company
and Terry Ross.
11.0 Computation of Per Share Earnings.
23.1 Consent of KPMG LLP.
23.2 Consent of Ernst & Young LLP.
_______________
* Confidential Treatment Request granted by the Securities and
Exchange Commission.
<PAGE>
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
filed with the Commission on June 1, 1983 (File No. 2-84146) and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-8
filed with the Commission on February 3, 1989 (File No. 33-26833) and
incorporated herein by reference.
(3) Filed as an Exhibit to the Form 8 Amendment Number 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1988
filed with the Commission on May 2, 1989 and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Annual Report Form 10-K for the
Fiscal year ended December 31, 1989 and incorporated herein by
reference.
(5) Filed as an Exhibit to the Company's Registration Statement Form S-3
filed on January 24, 1991 (File No. 33-38676) and incorporated herein
by reference.
(6) Filed as an Exhibit to the Company's Registration Statement on Form 8-K
filed with the Commission on July 17, 1997 and incorporated herein by
reference.
(7) Filed as an Exhibit to Post-Effective Amendment Number 1 to the
Company's Registration Statement Form S-3 filed with the Commission
on May 5, 1992 (File No. 33-32218) and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company's Registration Statement on Form S-3
filed on May 10, 1996 (Registration No. 333-3529) and incorporated
herein by reference.
(9) Filed as an Exhibit to the Company's Registration Statement on Form S-3
filed on June 25, 1996 (Registration No. 333-6749) and incorporated
herein by reference.
(10) Filed as an Exhibit to the Company's Registration Statement on Form S-3
filed on September 6, 1996 (Registration No.333-11515) and
incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-1
filed with the Commission on September 11, 1986 (File No. 33-8668) and
incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1983 and incorporated herein by
reference.
(13) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 and incorporated herein by
reference.
(14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 and incorporated herein by
reference.
(15) Filed as an Exhibit to the Company's Amendment No.1 to Post-Effective
Amendment No.1 to Form S-3 (file No. 33-32218) filed with the
Commission on August 7, 1992 and incorporated herein by reference.
(16) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December, 1992 and incorporated herein by reference.
<PAGE>
(17) Filed as an Exhibit to the Company's Registration Statement on Form S-8
filed on August 3, 1993 (Registration No. 33-66992).
(18) Filed as an Exhibit to the Company's Registration Statement on Form S-8
filed on November 16, 1993 (Registration No. 33-71786).
(19) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
on January 26, 1994 and incorporated herein by reference.
(20) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
on February 4, 1994 and incorporated herein by reference.
(21) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31 1993, and incorporated herein by
reference.
(22) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31,1994 and incorporated herein by
reference.
(23) Filed as an Exhibit to the Company's Registration Statement on Form S-8
filed on October 30, 1996 (Registration No.333-15081) and incorporated
herein by reference.
(24) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
on July 22, 1997 and incorporated herein by reference.
(25) Filed as an Exhibit to the Company's Current Report of Form 8-K filed
on July 1, 1996 and incorporated herein by reference.
(26) Filed on an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by
reference.
(27) Filed as an Exhibit to the Company's Registration Statement on Form S-3
filed on May 6, 1998 (Registration No. 333-51963).
(28) Filed on an Exhibit to the Company's Current Report on Form 8-K filed
July 20, 1998 and incorporated herein by reference.
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Imatron Inc.:
We consent to incorporation by reference in the registration statements (File
Nos. 333-11515, 333-6749, 333-3529, 333-647, 33-63123 and 333-51963 on Form S-3
and File Nos. 333-15081, 333-9989, 222-61179, 33-71786, 33-66992, 33-66952,
33-40391, 33-28662 and 33-26833 on Form S-8) of Imatron Inc. of our report dated
February 12, 1998, relating to the consolidated balance sheets of Imatron Inc.
and subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended, and the related schedule, which report appears in the December 31,
1998, annual report on Form 10-K of Imatron Inc.
KPMG LLP
San Francisco, California
March 31, 1999
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in:
o Form S-3 (Registration No. 333-51963) dated May 6, 1998 and related
Prospectus
o Form S-8 (Registration No. 333-15081) dated October 30, 1996 pertaining to
Imatron Inc. Stock Bonus Incentive Plan
o Form S-3 (Registration No. 333-11515) dated September 6, 1996 and related
Prospectus
o Form S-8 (Registration No. 333-9989) dated August 12, 1996 pertaining to
Imatron, Inc. 1994 Employee Stock Purchase Plan
o Form S-3 (Registration No. 333-6749) dated June 25, 1996 and related
Prospectus
o Form S-3 (Registration No. 333-3529) dated May 10, 1996 and related
prospectus
o Form S-3 (Registration No. 333-647) dated February 2, 1996 and related
prospectus
o Form S-3 (Registration No. 33-63123) dated October 2, 1995 and related
prospectus
o Form S-8 (Registration No. 33-61179) dated July 20, 1995 pertaining to 1993
Stock Option Plan
o Form S-8 (Registration No. 33-71786) dated November 15, 1993 pertaining to
1994 Employee Stock Purchase Plan
o Form S-8 (Registration No. 33-66992) dated August 3, 1993 pertaining to
1993 Stock Option Plan
o Form S-8 (Registration No. 33-66952) dated August 3, 1993 pertaining to
1991 Non-Employee Directors' Stock Option Plan
o Form S-8 (Registration No. 33-40391) dated May 6, 1991 pertaining to
Director Stock Option Grant
o Form S-8 (Registration No. 33-28662) dated May 11, 1989 pertaining to 1983
Stock Option Plan
o Form S-8 (Registration No. 33-26833) dated February 3, 1989 pertaining to
1984 Employee Stock Participation Plan
of our report dated February 14, 1997, except for Note 17 as to which the date
is April 10, 1998, with respect to the consolidated financial statements and
schedule of Imatron, Inc. included in the Annual Report on Form 10K/A for the
year ended December 31, 1996.
ERNST & YOUNG LLP
San Francisco, California
March 30, 1999
<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>
<CIK> 0000720477
<NAME> Imatron Inc.
<MULTIPLIER> 1,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,445
<SECURITIES> 0
<RECEIVABLES> 11,159
<ALLOWANCES> (3,272)
<INVENTORY> 14,433
<CURRENT-ASSETS> 24,590
<PP&E> 9,084
<DEPRECIATION> (6,809)
<TOTAL-ASSETS> 31,982
<CURRENT-LIABILITIES> 11,777
<BONDS> 0
0
0
<COMMON> 107,475
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 31,651
<SALES> 22,547
<TOTAL-REVENUES> 30,660
<CGS> 23,294
<TOTAL-COSTS> 40,195
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (9,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,400)
<DISCONTINUED> (4,507)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,781)
<EPS-PRIMARY> (0.18)
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</TABLE>
